What is an NFT? How do NFTs work? – Advisor Forbes INDIA
Non-fungible tokens (NFTs) seem to have exploded this year. From art to music to tacos to toilet paper, these digital assets sell like exotic 17th-century Dutch tulips, some for millions of dollars.
But are NFTs worth the money or the hype? Some experts say they are a bubble about to burst, like the dotcom craze or the Beanie Babies. Others believe that NFTs are here to stay and will change investing forever.
What is an NFT?
An NFT is a digital asset that represents real-world objects such as artwork, music, game items, and videos. They are bought and sold online, often with cryptocurrency, and they are usually encoded with the same underlying software as many cryptos.
Although they’ve been around since 2014, NFTs are gaining notoriety as they become an increasingly popular way to buy and sell digital artwork. A narcotic $174 million has been spent on NFT since November 2017.
NFTs are also usually one of a kind, or at least a very limited run, and have unique identification codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chairman of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.
This is in stark contrast to most digital creations, the supply of which is almost always endless. In theory, cutting the supply should increase the value of a given asset, assuming it is in demand.
But many NFTs, at least in those early days, have been digital creations that already exist in some form elsewhere, like iconic music videos from NBA games or secure versions of digital art that are already circulating on Instagram.
For example, renowned digital artist Mike Winklemann, better known as “Beeple”, created a composite of 5,000 daily drawings to create perhaps the most famous NFT of the moment, “EVERYDAYS: The First 5000 Days”. , which sold at Christie’s for a record $69.3 million.
Anyone can view the individual images, or even the entire collage of images online for free. So why are people willing to spend millions on something they could easily capture or download?
Because an NFT allows the buyer to own the original item. Additionally, it contains built-in authentication, which serves as proof of ownership. Collectors value these “digital bragging rights” almost more than the item itself.
How is an NFT different from a cryptocurrency?
NFT stands for non-fungible token. It’s usually built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends.
Physical silver and cryptocurrencies are “fungible”, meaning they can be traded or exchanged for each other. They are also of equal value: a dollar is always worth another dollar; one bitcoin is always equal to another bitcoin. Crypto’s fungibility makes it a reliable way to transact on the blockchain.
NFTs are different. Each has a digital signature which makes it impossible to trade or equalize NFTs (therefore non-fungible). An NBA Top Shot clip, for example, is not equal to EVERYDAYS simply because they are both NFTs. (An NBA Top Shot clip isn’t even necessarily equal to another NBA Top Shot clip, by the way.)
How does an NFT work?
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You are 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 “minted” from digital objects that represent both tangible and intangible items, including:
- Sports Videos & Highlights
- Virtual avatars and video game skins
Even tweets matter. Twitter co-founder Jack Dorsey sold his very first tweet as an NFT for over $2.9 million.
Essentially, NFTs are like physical, digital-only collectibles. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead.
They also get exclusive property rights. It’s true: NFTs can only have one owner at a time. The unique data of NFTs makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information there. For example, artists can sign their works by including their signature in the metadata of an NFT.
What are NFTs used for?
Blockchain technology and NFTs offer artists and content creators a unique opportunity to monetize their products. For example, artists no longer depend on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also allows them to keep more of the profits. Additionally, artists can schedule royalties so they receive a percentage of sales each time their art is sold to a new owner. This is a nice feature because artists usually don’t receive future income after the first sale of their art.
Art isn’t the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned themed NFT art to raise money for charity. Charmin dubbed its offering “NFTP” (non-fungible toilet paper), and Taco Bell’s NFT art sold out within minutes, with the highest bids hitting 1.5 wrapped ether (WETH), or 3,723, $83 at time of writing.
Nyan Cat, a 2011 GIF of a cat with a pop-tart body, sold for almost $600,000 in February. And NBA Top Shot generated more than $500 million in sales from the end of March. A single LeBron James NFT highlight has grossed over $200,000.
Even celebrities like Snoop Dogg, Lindsay Lohan, Amitabh Bachchan, and Salman Khan are jumping on the NFT bandwagon, releasing unique memories, artwork, and moments as secure NFTs.
How to buy NFTs
If you want to start your own NFT collection, you will need to acquire some key items:
First, you will need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You will likely need to purchase a cryptocurrency, such as Ether, depending on the currencies accepted by your NFT provider. You can buy crypto using a credit card on platforms like Coinbase, Kraken, eToro, and even PayPal and Robinhood now. You can then move it from the exchange to the wallet of your choice.
You’ll want to keep fees in mind when researching options. Most exchanges charge at least a percentage of your transaction when you buy crypto.
Popular NFT Markets
Once you’ve set up and funded your wallet, there’s no shortage of NFT sites. Currently, the largest NFT marketplaces are:
- OpenSea.io: This peer-to-peer platform advertises itself as a provider of “digital items and rare collectibles”. To get started, all you need to do is create an account to browse NFT collections. You can also sort the pieces by sales volume to discover new artists.
- Rare: Similar to OpenSea, Rarible is a democratic and open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform allow holders to influence features such as fees and community rules.
- Foundation: Here, artists must receive “upvotes” or an invitation from other creators to post their art. The community’s exclusivity and cost of entry – artists also have to buy “petrol” to hit NFTs – means it can boast higher caliber artwork. For example, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform. It can also mean higher prices – not necessarily a bad thing for artists and collectors looking to capitalize, assuming demand for NFT stays at current levels, or even increases over time.
Although these and other platforms are home to thousands of NFT creators and collectors, be sure to do your research before buying. Some artists have fallen victim to imitators who have listed and sold their work without their permission.
Additionally, verification processes for creators and NFT listings are not consistent across all platforms – some are stricter than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protections seem to be sparse at best, so when buying NFTs, it may be best to keep the old adage “caveat emptor” (let the buyer beware) in mind.
Should you buy NFTs?
Just because you can buy NFTs, does that mean you should? It depends, says Yu.
“NFTs are risky because their future is uncertain, and we don’t yet have much history to judge their performance,” she notes. “Since NFT is so new, it may be worth investing small amounts to try it out for now.”
In other words, investing in NFTs is a largely personal decision. If you have the cash to spend, it may be worth considering, especially if a piece makes sense to you.
But keep in mind that the value of an NFT is entirely based on what someone else is willing to pay for it. Therefore, demand will drive price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least usually form the basis of investor demand.
All of this means that an NFT can be resold for less than what you paid. Or you may not be able to resell it if no one wants it.
Keep in mind that NFTs may also be subject to tax, just like the cryptocurrencies used to purchase the NFT. India’s 2022 budget proposed to impose a withholding tax on the transfer of virtual digital assets – which is expected to include NFTs and cryptocurrencies – from July 1. A tax deduction at source is also offered. It remains to be seen how the taxation will work out and that means you may want to seek advice from a tax professional when considering adding NFTs to your portfolio.
That said, approach NFTs as you would any investment: do your research, understand the risks, including the fact that you could lose all your investment rupees, and if you decide to take the plunge, proceed with a fair amount of caution.