NFTs: Are they the future?
NFTs or Non-Fungible Tokens, are one of the latest developments in digital ownership, developed from the same technology behind crypto-currencies like Bitcoin. If you’ve ever bought something that came with a certificate of authenticity, NFTs are kind of like that. The term “fungible” essentially means that something can be readily exchanged for a pre-determined monetary value. In that sense, crypto-currencies are fungible, because each one has a specific (albeit fluctuating) level of worth.
So, what is an NFT, really?
A non-fungible token is data derived from blockchain, which is where the similarity to crypto-currency comes in. NFTs are essentially used to represent real-world objects, like paintings, video games, songs, books, or practically anything else.
With the advent of digitized media, these things are essentially in infinite supply. So, in a sense, NFTs are designed to create a form of digital scarcity, by essentially being the equivalent of a marker for the “original” version of whatever the NFT is supposed to represent.
Why are some NFTs so valuable?
Whereas virtual currencies like Bitcoin are worth a certain amount at any given moment, non-fungible tokens, as the name suggests, don’t necessarily have any inherent value of their own. But some NFT holders have made massive sums of money by auctioning off these tokens. High-profile examples include the musician Grimes, who actioned off several pieces of NFT art for around $6 million, and digital artist Mike Winklemann, whose NFT comprised of 5,000 drawings sold for almost $70 million.
The idea is that anything, be it an image, movie, song, meme, or anything else, can only have one NFT. So, if you want to be the “original” owner of something, you need its NFT. High-selling non-fungible tokens are essentially the modern-day equivalent of buying an original run Amazing Spiderman Issue #1 as an investment.
For artists, NFTs provide a non-physical space to display their artwork for sale. Whereas before artists had to rent galleries to display their work, NFTs allow them to sell virtually, and keep all of their profits.
Buying and selling non-fungible tokens
If you’re interested in starting an NFT collection, you’ll need a virtual wallet, and most likely, some crypto-currency. Popular currencies include Bitcoin, Doge Coin, Kraken, and many more. Their values tend to fluctuate, so you’ll need to do your own research to figure out the best virtual currencies to invest in.
Once you’ve got your crypto-currency lined up, you’ll need to choose an NFT seller. Much like crypto-currencies themselves, there are quite a few NFT sellers around, such as Rarible or Foundation. But be careful, because different NFT sellers have different levels of buyer protection. Some, like Foundation, rely on community upvotes to parse trustworthy sellers from the masses.
Across many of these sites, plenty of people have fallen prey to scammers and impersonators. So, if you’re planning to invest in NFTs, use common sense and keep an eye out. If you’re planning to sell, you’ll also need to choose somewhere reliable. If your chosen marketplace is like Foundation, you may have to go through the process of slowly earning positive feedback before you get seen as a reliable NFT seller.
Remember that profits from NFTs are generally susceptible to Capital Gains Tax. But also remember that, because NFTs are relatively new (originating in 2014), the law around them is still subject to change. In some instances, NFTs have been taxed as collectibles, meaning they don’t benefit from preferential long-term gains rates.
And finally, like stock, or art, or anything else, NFTs are an investment. There’s no guarantee that a non-fungible token will increase in value, as it’s only worth what others are willing to pay for it. NFTs from high-profile artists are more likely to accrue value, but remember that it’s far from predictable.
To sum up…
So, if you’ve really got your heart set on trading in non-fungible tokens, remember:
• Research any crypto-currency heavily before you invest in it.
• Make sure you’re using a reputable NFT trading site.
• If you’re selling NFTs, don’t expect a huge response right away. There’s no shortcut to building a good reputation!
• Remember that NFTs are taxed as an investment.
• Be aware of the risks of investing in Non-Fungible Tokens.
NFTs are just the latest technological development that people are looking at with dollar signs in their eyes. And, much like the actual gold rushes of yester-year, getting involved is high-risk, high-reward. There’s no guarantee you’ll turn a profit, but those who do could earn hundreds of thousands, or millions of dollars.