What Is An NFT?
Non-fungible tokens (NFTs) seem to be everywhere these days. From art and music to tacos and toilet paper, these digital assets are selling like 17th-century exotic Dutch tulipsโsome for millions of dollars.
But are NFTs worth the moneyโor the hype? Some experts say theyโre a bubble poised to pop, like the dot-com craze or Beanie Babies. Others believe NFTs are here to stay, and that they will change investing forever.
What Is an NFT?
An NFT is a digital asset that can come in the form of art, music, in-game items, videos, and more. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.
Although theyโve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. The market for NFTs was worth a staggering $41 billion in 2021 alone, an amount that is approaching the total value of the entire global fine art market.
NFTs are also generally one of a kind, or at least one of a very limited run, and have unique identifying codes. โEssentially, NFTs create digital scarcity,โ says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.
This stands in stark contrast to most digital creations, which are almost always infinite in supply. Hypothetically, cutting off the supply should raise the value of a given asset, assuming itโs in demand.
But many NFTs, at least in these early days, have been digital creations that already exist in some form elsewhere, like iconic video clips from NBA games or securitized versions of digital art thatโs already floating around on Instagram.
Famous digital artist Mike Winklemann, better known as โBeeple,โ crafted a composite of 5,000 daily drawings to create perhaps the most famous NFT of 2021, โEVERYDAYS: The First 5000 Days,โ which sold at Christieโs for a record-breaking $69.3 million.
Anyone can view the individual imagesโor even the entire collage of images online for free. So why are people willing to spend millions on something they could easily screenshot or download?
Because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value those โdigital bragging rightsโ almost more than the item itself.
How Is an NFT Different from Cryptocurrency?
NFT stands for non-fungible token. Itโs generally built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but thatโs where the similarity ends.
Physical money and cryptocurrencies are โfungible,โ meaning they can be traded or exchanged for one another. Theyโre also equal in valueโone dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Cryptoโs fungibility makes it a trusted means of conducting transactions on the blockchain.
NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). One NBA Top Shot clip, for example, is not equal to EVERYDAYS simply because theyโre both NFTs. (One NBA Top Shot clip isnโt even necessarily equal to another NBA Top Shot clip, for that matter.)
How Does an NFT Work?
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. Youโre probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible.
Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well.
An NFT is created, or โmintedโ from digital objects that represent both tangible and intangible items, including:
- Grafic art
- GIFs
- Videos and sports highlights
- Collectibles
- Virtual avatars and video game skins
- Designer sneakers
- Music
Even tweets count. Twitter co-founder Jack Dorsey sold his first ever tweet as an NFT for more than $2.9 million.
Essentially, NFTs are like physical collectorโs items, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead.
They also get exclusive ownership rights. NFTs can have only one owner at a time, and their use of blockchain technology makes it easy to verify ownership and transfer tokens between owners. The creator can also store specific information in an NFTโs metadata. For instance, artists can sign their artwork by including their signature in the file.
What Are NFTs Used For?
Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their wares. For example, artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits. In addition, artists can program in royalties so theyโll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.
Art isnโt the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned off themed NFT art to raise funds for charity. Charmin dubbed its offering โNFTPโ (non-fungible toilet paper), and Taco Bellโs NFT art sold out in minutes, with the highest bids coming in at 1.5 wrapped ether (WETH)โequal to $3,723.83 at time of writing.
Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, sold for nearly $600,000 in February. And NBA Top Shot generated more than $500 million in sales as of late March. A single LeBron James highlight NFT fetched more than $200,000.
Even celebrities like Snoop Dogg and Lindsay Lohan are jumping on the NFT bandwagon, releasing unique memories, artwork and moments as securitized NFTs.
How to Buy NFTs
If youโre keen to start your own NFT collection, youโll need to acquire some key items:
First, youโll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. Youโll likely need to purchase some cryptocurrency, like Ether, depending on what currencies your NFT provider accepts. You can buy crypto using a credit card on platforms like Coinbase, Kraken, eToro and even PayPal and Robinhood now. Youโll then be able to move it from the exchange to your wallet of choice.
Youโll want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy crypto.
Popular NFT Marketplaces
Once youโve got your wallet set up and funded, thereโs no shortage of NFT sites to shop. Currently, the largest NFT marketplaces are:
โขย ย OpenSea.io: This peer-to-peer platform bills itself a purveyor of โrare digital items and collectibles.โ To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.
โขย ย Rarible: Similar to OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.
โขย ย Foundation: Here, artists must receive โupvotesโ or an invitation from fellow creators to post their art. The communityโs exclusivity and cost of entryโartists must also purchase โgasโ to mint NFTsโmeans it may boast higher-caliber artwork. For instance, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform. It may also mean higher prices โ not necessarily a bad thing for artists and collectors seeking to capitalize, assuming the demand for NFTs remains at current levels, or even increases over time.
Although these platforms and others are host to thousands of NFT creators and collectors, be sure you do your research carefully before buying. Some artists have fallen victim to impersonators who have listed and sold their work without their permission.
In addition, the verification processes for creators and NFT listings arenโt consistent across platforms โ some are more stringent than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protections appear to be sparse at best, so when shopping for NFTs, it may be best to keep the old adage โcaveat emptorโ (let the buyer beware) in mind.
Should You Buy NFTs?
Just because you can buy NFTs, does that mean you should? It depends, Yu says.
โNFTs are risky because their future is uncertain, and we donโt yet have a lot of history to judge their performance,โ she notes. โSince NFTs are so new, it may be worth investing small amounts to try it out for now.โ
In other words, investing in NFTs is a largely personal decision. If you have money to spare, it may be worth considering, especially if a piece holds meaning for you.
But keep in mind, an NFTโs value is based entirely on what someone else is willing to pay for it. Therefore, demand will drive the price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least generally form the basis for investor demand.
All this means, an NFT may resale for less than you paid for it. Or you may not be able to resell it at all if no one wants it.
NFTs are also subject to capital gains taxesโjust like when you sell stocks at a profit. Since theyโre considered collectibles, however, they may not receive the preferential long-term capital gains rates stocks do and may even be taxed at a higher collectibles tax rate, though the IRS has not yet ruled what NFTs are considered for tax purposes. Bear in mind, the cryptocurrencies used to purchase the NFT may also be taxed if theyโve increased in value since you bought them, meaning you may want to check in with a tax professional when considering adding NFTs to your portfolio.
That said, approach NFTs just like you would any investment: Do your research, understand the risksโincluding that you might lose all of your investing dollarsโand if you decide to take the plunge, proceed with a healthy dose of caution.