Non-fungible tokens (NFT) seem to have exploded out of the ether this year. From art and music to tacos and 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 ready to pop, like dotcom mania or Beanie Babies. Others believe 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 art, music, in-game objects, and videos. They are bought and sold online, often with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.
Although they have been around since 2014, NFTs are gaining popularity now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFTs since November 2017.
NFTs are also generally unique, or at least one of a very limited number, and have unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and CEO of Yellow Umbrella Ventures.
This is in stark contrast to most digital creations, which are almost always endless in supply. Hypothetically speaking, cutting off supply should increase the value of a given asset, assuming it is 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 secured versions of digital art already floating around Instagram.
For example, the famous digital artist Mike Winklemann, better known as “Beeple”, made a composite of 5000 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 high. with 69.3 million dollars.
Anyone can view the individual photos – or even the entire collage of photos online for free. So why are people willing to spend millions on something they can easily screenshot or download?
Because an NFT allows the buyer to own the original item. Not only that, it includes built-in authentication, which acts as proof of ownership. Collectors value these “digital bragging rights” almost more than the item itself.
How is an NFT different from cryptocurrency?
NFT stands for non-fungible token. It’s generally built using the same type of programming as cryptocurrency, such as Bitcoin or Ethereum, but that’s where the similarity ends.
Physical money and cryptocurrencies are “fungible”, meaning they can be traded or exchanged for each other. They are also equal in value – one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a reliable means of transacting on the blockchain.
NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or similar to each other (hence non-fungible). An NBA Top Shot clip, for example, is not equal to EVERYDAYS just because they are both NFTs. (An NBA Top Shot clip isn’t even like 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. You are probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible.
Specifically, NFTs are usually held on the Ethereum blockchain, although other blockchains also support them.
An NFT is created, or “minted”, from digital objects that represent both tangible and intangible items, including:
- Videos and sports highlights
- Virtual avatars and video game skins
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 collectibles, 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 property rights. That’s right: NFTs can only have one owner at a time. NFT’s unique data makes it easy to verify ownership and transfer tokens between owners. The owner or creator may also store specific information in them. For example, artists can sign their artwork by including their signature in an NFT’s metadata.
What are NFTs used for?
Blockchain technology and NFTs provide artists and content creators with a unique opportunity to monetize their merchandise. 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 allows them to keep more of the profit. Additionally, artists can program royalties so that they will receive a percentage of the sale each time their art is sold to a new owner. This is an attractive feature since artists generally do not receive future income after their art is first sold.
Art is not the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned off themed NFT art to raise money for charity. Charmin called its offering “NFTP” (non-fungible toilet paper), and Taco Bell’s NFT art sold out in minutes, with the highest bids at 1.5 Packed Ether (WETH) – equal to $3,723.83 at the time of writing.
Nyan Cat, a 2011-era GIF of a cat with an acidic body, sold for nearly $600,000 in February. And NBA Top Shot generated more than $500 million in sales by the end of March. A single LeBron James highlight NFT fetched more than $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 secured NFTs.
How to buy NFTs
If you want to start your own NFT collection, you need to get some key items:
First, you need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You will likely need to purchase some cryptocurrency, such as Ether, depending on which currencies your NFT provider accepts. You can buy crypto with a credit card on platforms like Coinbase, Kraken, eToro and even PayPal and Robinhood now. You will then be able to move it from the exchange to your selected wallet.
You should keep fees in mind when researching options. Most exchanges take at least a percentage of the transaction when you buy crypto.
Popular NFT Marketplaces
Once you have your wallet set up and funded, there is no shortage of NFT sites to trade. Currently, the largest NFT marketplaces are:
- OpenSea.io: This peer-to-peer platform bills itself as a provider of “rare digital items and collectibles.” 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.
- Rare: Like OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform allow holders to weigh in on 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 “gas” to create NFTs – mean it boasts higher caliber artwork. For example, Nyan Cat creator Chris Torres sold NFT on the Foundation platform. It could also mean higher prices — not necessarily a bad thing for artists and collectors looking to capitalize, assuming demand for NFTs remains at current levels, or even increases over time.
Although these platforms and others host thousands of NFT creators and collectors, make sure you do your research carefully before buying. Some artists have fallen victim to copycats who have listed and sold their work without their permission.
Additionally, the verification processes for creators and NFT listings are not consistent across platforms – some are stricter than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protection appears to be sparse at best, so when trading NFTs, it may be best to keep the old adage “caveat emptor” 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 NFTs are so new, it might 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 cash to spare, it may be worth considering, especially if a chip is important to you.
But remember that an NFT’s value is based solely 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 generally form the basis of investor demand.
All of this means that an NFT can sell for less than you paid for it. Or you might not be able to resell it at all if no one wants it.
Keep in mind that NFTs may also be subject to taxation, as may the cryptocurrencies used to purchase the NFTs. The Indian Budget 2022 proposed to impose withholding tax on the transfer of virtual digital assets – which should include NFTs and cryptocurrencies – with effect from 1 July. A tax deduction at source is also proposed. It remains to be seen how the taxation will work, which means you may want to check in with a tax professional when considering adding NFTs to your portfolio.
That said, approach NFTs just as you would any investment: do your research, understand the risks – including that you could lose all your investment rupees – and if you decide to take the plunge, go ahead with a healthy dose carefully.
