JFor many, the concept of an NFT is an enigma. Are they an investment? To collect? Expensive fashion? Scam? The answer: probably all of the above.
Non-fungible tokens take many forms. The most common NFTs to date are two-dimensional digital art, but an NFT can refer to any digital property – an image, video, audio file, even a tweet. Although no one is certain about the value of NFTs in the coming years, many experts agree that the market has great potential for growth. From February 2021 to February 2022, the number of active users on OpenSea (registered users who have made at least one NFT transaction) has increased from around 15,000 to more than 500,000.
A handful of big companies are expected to enter the market soon, including Niantic (the software development company responsible for Pokemon Go), Twitter, Meta (formerly Facebook), and Epic Games. “NFTs will become a normal part of our lives,” says Adam Draper, founder of Boost VC, a venture capital firm. They will simply recreate the way we do many everyday things, he says, and allow us “to exchange value, create events, fund art and build community.”
Why do NFTs exist?
NFTs were initially born from the synthesis of blockchain – the technology behind cryptocurrencies – and digital files. NFTs are valuable because they create scarcity among otherwise infinitely available digital assets. They have already sparked an evolution in art collecting, and the universe of both physical and digital assets transformed into NFTs is growing rapidly. NFTs have recently been minted to aid in the authentication of fine liquor, verifying, for example, the authenticity of a $200,000 bottle of single malt Scotch.
Who creates them and who buys them?
Anyone with access to technology can create an NFT. After the Russian invasion of Ukraine, an NFT of the Ukrainian flag raised over $6.7 million for the country’s defenses. Paris Hilton recently created an NFT collage of the fondest memories of her and her new husband. The market was dominated by buyers with big money. The most expensive known NFT – “Everydays: The First 5,000 Days”, a digital work by American artist Mike Winkelmann (known as Beeple) – sold for $69.3 million in March 2021.
Connor Gu, a New York-based technology analyst, became interested in NFTs because he thought he might eventually publish NFTs of his late grandfather’s works. His grandfather was a prominent painter in China who founded an art academy. A cryptocurrency enthusiast, Gu bought Ethereum when the price was low, then bought his first NFTs in December 2021. “Most NFT projects are risky and will likely go to zero,” Gu says. “But there are a few winners. My strategy is to focus on a few collections that I know well.
How to buy an NFT?
Most NFTs are traded on online marketplaces designed to serve the market, such as Rarible and OpenSea, but NFTs are becoming available in more familiar places. For example, the NBA’s Top Shot sells NFT video clips of its star players. And the New York Stock Exchange hit its first round of NFTs in April 2021, commemorating the first trades of six “notable” listings.
Typically, NFTs are only bought and sold with cryptocurrency, and Ethereum is the most commonly used cryptocurrency. There are a number of exchanges where you can buy ethereum, both centralized and decentralized (peer to peer). You will also likely need to create a digital wallet, if you don’t already have one, to purchase an NFT.
Once you have chosen your crypto, you need to go to an NFT market to buy an NFT. When you have found the verified NFT you want to buy, you link your wallet to the market and make your purchase. The NFT will appear in your digital wallet once the transaction is complete. It is quite easy to verify that the purchase you are making is the NFT you are looking for. For someone unfamiliar with the technology, however, it might be worth hiring a developer to make sure the code is vetted.
When you buy art or a collectible, you put it on the wall or on a shelf. How do you view and share NFTs?
People often flaunt them in their icon photo on social media. To do this, you usually need to link the digital wallet associated with an NFT to your social media account. There have been a few traditional gallery shows of NFT collections, but the true NFT version of the gallery takes many forms, well beyond social media. Your wallet is public, so anyone can see which NFTs you own. And when you buy an NFT from the popular Bored Ape collection, for example, you join a community of other NFT owners, all with special access to communications from NFT Issuers about upcoming projects as well as exclusive events.
How much does an NFT cost?
You can spend hundreds of thousands of dollars to follow the latest digital trend. The average selling price of a CryptoPunk image, one of the first NFTs to hit the market, rose from around $100,000 in July to nearly $500,000 in November last year. Many of the NFTs from one of the most successful collections, Bored Ape Yacht Club, start at around $300,000, and some have sold for millions of dollars.
But the typical price range last year was $100 to $1,000, according to NonFungible.com. You may also have to pay an acquisition fee. OpenSea, the largest NFT marketplace, charges 2.5% per transaction. Others, like SuperRare, charge even more. NFT sellers may also be subject to fees when selling an NFT on certain marketplaces.
Can you make money from the NFT market?
May be. NFT creators often earn a percentage each time their NFT is resold, thanks to smart contracts. Smart contracts are digital contracts that describe the terms of an NFT sale, including the percentage of the sale the original issuer will receive in the future whenever there is a new transaction. Because every transaction is recorded on the blockchain, these contracts are very easy to insure. Someone can also issue an NFT with no intention of selling it and forfeit income on future transactions.
There is also enormous volatility in the NFT market, especially among the most searched NFTs. “NFTs are risky because they have two volatility levers,” says Gu. Sellers raise the prices of their NFTs when the price of ethereum drops, he says.
Can you explain the technology?
To understand the concept of an NFT, start with the meaning of fungible vs not fungible. A dollar bill is fungible because it is interchangeable with other dollar bills. NFTs are not interchangeable and each NFT has a unique digital signature.
This unique digital signature, or code, is stored on the blockchain. Blockchain, the technology behind cryptocurrencies, is a digital ledger or record of transactions. It is available to everyone and, significantly, it is also immutable, says Dr. Merav Ozair, blockchain expert and professor of fintech at Rutgers Business School. “Usually a ledger is centralized; it belongs to someone. But with blockchain, it doesn’t matter who you are, as long as you have access to the internet, you can access it,” says Ozair.
Because an NFT is a token created on the blockchain, it has all the functionality of the blockchain. “It’s immutable, trackable, traceable, and transparent because everyone has access to it,” says Ozair. The real source of NFT’s value is the authentication aspect of it, she says. “You can use them to prove the originality of any asset, whether physical or digital.”
What about scams?
The risk of scams, plagiarism and fraud is high. For example, the popularity of Bored Ape Yacht Club NFTs has sparked a slew of plagiarism attempts, says Daniel Yurcho, an NFT and blockchain expert. As with any investment, don’t buy something you don’t understand. Make sure you are purchasing from an accredited marketplace and research the NFT before purchasing.
I’m sure the IRS will want a cut?
Naturally. An NFT is generally treated as a capital asset, which means that any gain or loss you have on a complete disposal (i.e., primarily, a sale) of the asset is treated as a gain or loss. in capital. An NFT likely meets the definition of a collectible under Section 408 of the Internal Revenue Code, according to H&R Block. This affects the amount of tax an investor pays on a disposition. While most long-term capital gains are taxed at a maximum rate of 20%, collectibles can be taxed at a rate of up to 28%. Thus, high-income taxpayers are likely to owe more tax on the sale of a collectible than on the sale of other fixed assets.
Like bitcoin and other cryptocurrencies, NFTs have been criticized for their environmental impacts. Bitcoin mining already generates 38 million tonnes of CO2 per year, more than Slovakia’s carbon footprint, according to the Bitcoin Energy Consumption Index. Since NFTs require the use of power-intensive computing transactions to authenticate and sell digital property, the environmental impact of NFTs is similar.
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