There has been big news about NFTs since the announcement of the $69.3 million sale of Beeple’s EVERYDAYS: The First 5000 Days at Christies. The Non-fungible Tokens (NFTs) are exploding out right now, and so you might have heard about them or maybe not.
These digital assets are selling for millions of dollars and range from music, art, toilet paper, tacos and more. Their value is subjective because they exist in digital form, and you can’t exchange a piece of it with something else because nothing like it exists.
Actually, NFTs are traded online using cryptocurrency such as Ethereum. Some of the known NFTs are Portrait of a Young Queen Beyoncé, Nyan Cat, Jack Dorsey, Twitter co-founder’s first tweet ever and more.
You might be amazed why someone spends such a huge amount of dollars for a mere GIF or tweet that they can easily download or screenshot. Surprisingly, people pay that much because NFTs have their own authentication, and so a person who has it has some ownership to show.
This post will give you more information about the hype surrounding these coveted digital tokens of NFT Assets.
What is an NFT?
NFTs have been around since 2014, but they have recently become popular as a means of buying and selling digital artwork. Actually, since 2017, more than $174 million has been used on NFTs.
As mentioned above, non-fungible tokens (NFTs) are basically collectible digital assets. It represents objects such as music, videos, art and in-game items. Like art, NFT is accepted as value holding investment and are bought and sold online using cryptocurrency.
Further, this digital token is a form of cryptocurrency, just like Ethereum and Bitcoin. It’s also different from the two standard coins because of its uniqueness and the fact that you can’t exchange it like-for-like, thus the term non-fungible.
NFT is special than crypto coins because its file has extra information. Although there are varied NFTs types, they can take the form of a music file or a piece of digital art. They comprise anything unique that can be stored digitally and holds value. NFTs are similar to physical collector’s items; however, instead of receiving a canvas of an oil painting that you can hang on the wall, you will receive a JPG file.
NFTs are one of a kind because they have unique identifying codes. These digital tokens create digital scarcity, which is the opposite of other digital creations that are nearly infinite in supply. Limiting the supply of these assets raises their value because of the high demand.
Nowadays, most NFTs are digital creations that exist in different forms elsewhere. This consist of securitized versions of digital art already available on Instagram. For instance, the EVERYDAYS: The First 5000 Days was sold for $69.3 million.
Surprisingly, you can view the entire collage of these NFT assets online and without spending a coin. This raises the question: Why would people spend millions of dollars on an item that one can download or screenshot? The deal here is that NFT collectors own the original item, which has digital-in authentication that is used as proof of ownership. This is what gives owners the digital bragging rights as opposed to having the actual item.
How Do NFTs Work?
Indeed, NFTs exist on an Ethereum blockchain, and these individual tokens store extra information in them. It’s this additional information that is valuable and takes the form of video, music, art, etc. So they are available as videos, Mp3s, JPGs, and GIFs, among others.
On the other hand, NFT assets hold value, and so they are sold and bought just like physical art or any other art type. Then the market and demand set the value of these digital assets. Also, there are several digital NFT art versions in the marketplace, and their copies are valid blockchain members.
A person can make an art print, use, sell and buy it, but it’s not of the same value as NFT. So when you right-click and save an NFT image, don’t brag that you have hacked the system, and soon you will be a millionaire because the downloaded file doesn’t have any information that forms part of the Ethereum blockchain.
What is the Difference between NFT and Cryptocurrency?
NFT assets and cryptocurrencies like Ethereum and Bitcoin are built with the same kind of programming. That is the only similarity. Why so?
Cryptocurrencies and physical money are fungible, or they can be exchanged or traded for one another. This simply means one Bitcoin is equivalent to another Bitcoin and a dollar to a second dollar; thus, making crypto a trusted means completing transactions on the Blockchain.
Things are different when it comes to NFT because each of the tokens has a digital signature, and so you can’t exchange them, thus the term non-fungible. For instance, the Twitter co-founder Jack Dorsey tweet sold at over $2.9 million is not equivalent to EVERYDAYS: The First 5000 Days sold at $69.3 million. However, both are NFTs.
How Do NFTs work?
Blockchain is the backbone of cryptocurrency processes, and NFTs is part of Ethereum blockchain and others. NFTs is created from digital objects representing tangible and intangible items like collectibles, music, art, videos, GIFs, digital sneakers, videogames skins, virtual avatars, sports highlights and tweets.
Simply put, NFTs are the digital form of the physical collector’s items, and you won’t get an actual oil painting that you can hang on your wall; but instead, you will get a digital file.
Further, each NFT should have one owner at any given time because a collector gets exclusive ownership rights. More so, it’s very easy to verify NFT’s ownership because of their unique data as well as any transfer of the tokens between owners. So NFTs’ creators can store specific information such as inserting their signature in its metadata.
What is NFT Used For?
NFTs and Blockchain technology helps content creators and artists to monetize their wares. Today artists don’t have to sell their art through an auction or galleries because they can sell it as an NFT directly to a consumer. Selling as an NFT is more profitable than through auctions because they don’t have to pay commissions. Still, they can make more money through royalties every time the art, music or video is sold to another person.
As mentioned, there are other types of NFT. For instance. Taco Bell and Charmin are brands that raised funds for charity by auctioning off themed NFT art. Taco Bell sold an art, while Charmin sold non-fungible toilet paper (NFTP). NBA Top Shot, LeBron James highlight, and Nyan Cat are other examples of NFT sold this year.
It’s expected that there will be more NFTs as we advance because even celebrities are going to release their art, music and videos as securitized NFTs.
Why is NFT Important?
NFT is important because it has given people an option to buy and sell digital assets such as digital sports cards, music and art. Unlike cryptocurrency, NFTs have unique identification codes, thus not interchangeable.
For investors, or consumers, NTFs are a greater opportunity to invest in a purely new asset class, and to the content creator, this is a new outlet for their art, music and new revenue stream. Actually, NFTs are more valuable than other items such as albums or tickets.
The increased demand for securitized items has attracted more artists into the NFT bandwagon, and now there are more releases such as the “When You See Yourself” album released by Kings of Leon.
How and Where Can I Buy NFT Tokens?
A person can easily create their own NFT collection if they have a digital wallet to store cryptocurrencies and NFTs. Next is to purchase some cryptocurrency based on the NFT provider base currency; for instance, you can get Ether if that is what they prefer. You can buy them on platforms such as Robinhood, PayPal, eToro, Kraken, and Coinbase using your credit card and then move them to your preferred wallet. In other words, you must have a wallet stuffed with cryptocurrency before shopping for any NTFs.
These exchanges charge some fees when you buy crypto, and so you must keep that in mind when shopping for options. Some of these sites have prohibitively astronomical hidden costs such as gas fees besides the transaction fee, conversions fees in addition to fluctuations in price during the time of the day. However, some sites have better rates than others, thus the need to do your research.
There are several NFT platforms, with some selling specific items while others offering generalized pieces. So you must understand what type of digital asset you’re looking for before creating an account with them.
Also, because of the increased interest in NFT types, creators are releasing them in drops, just like event managers do when they sell tickets at different times. So some early birds will rush to buy when the drop starts while others will wait.
The following are some of the NFT marketplaces with a higher number of NFT collectors and creators.
This is an exclusive platform where artists join through an invitation by another member. Once they are invited and pay the entry fee or purchase gas to mint NFTs (the cost of turning the art into NFT on the Blockchain), then the creator can post their wares. The exclusivity enhances the value of their artwork, and the gas fee that this site charge is the price for the amount of energy needed to complete the transaction.
For instance, Chris Torres is the creator of the Nyan Cat that was sold through this platform. This 2011-era GIF of a cat was sold at around $600,000, which is a higher price and a good thing for an artist working to monetize their art. So collectors are likely to make more money going forward if the demand level for NFTs continues going up.
You can create an account with this peer-to-peer platform and browse for rare digital items and collectibles. There are many ways of searching for NFT pieces on this platform, such as sales volume, which will lead you to new artists.
Like OpenSea, this is an open marketplace that gives content creators and artists the opportunity to sell NFTs. This democratic platform offers RARI tokens and allows NFT holders to give their opinion about the fees, community rules and other features.
Other platforms are SuperRare, Nifty Gateway, VIV3, NFT ShowRoom, Axie Marketplace, and BakerySwap.
Like any other marketplace, the NFT platforms have fraudsters or impersonators who list art that doesn’t belong to them or without their permission. Further, the verification processes vary from one platform to the other. Rarible and OpenSea don’t require owner verification, and so there is no buyer protection. Therefore, you must be cautious when shopping for your NFTs or working with platforms without stringent verification processes.
Who Uses NFTs?
The NFTs marketplace has different players, and many more new ones are joining it. It started with artists, brands and gamers looking for ways of sharing their wares or giving the public different options of supporting their work.
NFTs are giving artists a chance to make huge money in return for their work. For instance, musicians are selling the originals of their work, short videos clips of their music, as well as their rights.
Brands are using NFTs as another revenue stream, such as what Taco Bell did when it sold its taco-themed GIFs and images in just a few minutes. NBA sold its digital collectible as trading cards with moments of basketball players. This strategy is geared towards diversifying its revenue stream and soon will add virtual accessories, jewellery, and clothing to be used on social media to the list of NFTs.
Additionally, Twitter co-founder Jack Dorsey sold off his first-ever tweet because apparently tweets also hold value. You can purchase 3D assets such as furniture or buy digital real estate. For instance, a digital home ‘Mars House’ designed by Krista Kim, was sold at $500,000 at SuperRare, which described it as the “first digital house in the world.”
Is it Profitable to Invest in NFTs?
The future of NFTs is uncertain, there are also new and with limited historical performance that you can use to judge them, which makes them a risky investment. However, you can’t dismiss them either because you can purchase them in small amounts.
Investing in NFT assets is purely a personal decision. One person might choose to buy NFTs because they have money to spare. Another one may buy a piece because it holds meaning for them.
Further, the value for NFT assets is not fixed or driven by technical, fundamental or economic indicators that usually influence the stock prices; instead, it is determined by what buyers are willing to pay for it. As a result, an NFT holder might be forced to resell it at a lower price than what they paid for it.
Additionally, like stocks, NFTs pays capital gain taxes because they are collectibles. The only difference between the two investment options is that stocks receive preferential long-term capital gains rates, but NFTs don’t. Also, the latter can be subjected to a higher collectible tax rate, and the cryptocurrency you used to pay for the NFT is also subjected to tax if their value has increased since you purchased them. In other words, you must talk to a tax professional before adding NFTs assets to your portfolio.
What Are Some Risks of Investing in NFTs?
Like any other investment option, NFTs have some risks. Because this is a new trend in the market, people have to give it some time in order to understand its worth and so people must invest wisely.
The following are some of the risks associated with NFTs:
- The value and the price of these trendy digital collectibles might go down when the demand decreases. The value of an NFT is determined by what buyers are ready to pay but not any fundamental, economic or technical indicators.
- The authenticity of an NFT piece can also be a big issue. The process of ascertaining that you’re buying from the right owner of the piece is a daunting task. You must search for a credible platform that has a stringent verification process.
- The future of NFTs is uncertain, and no one knows how long this trend will last. However, this avenue has attracted many celebrities and artists such as Snoop Doggy, ASAP Rocky, Lindsay Lohan and more are expected to join it. So people are spending huge amounts to join the trend, but things can slow when they opt for physical items rather than digital ones.
Controversies Surrounding NFTs
While a lot of money is circulating in the NFT market, there is some controversy linked to these trendy digital collectibles especially pertaining to the climate.
Making NFTs requires a significant amount of energy, and protesters are extremely worried about the huge effects of this craze on the environment. The creation of some of these NFTs is consuming as high as 192 kWh.
While artists have promised to make carbon-neutral artwork, the cryptocurrency systems will not allow the verification of such promises. For instance, Bitcoin, Ethereum and others are founded on a proof-of-work system that makes the users’ financial records secure, which still consumes a lot of energy as well.
The impact on the climate is actually what is holding back many brands from joining the NFT bandwagon. However, companies and individuals are expanding their revenue streams, so these NFT controversies will not last forever. Also, the art and design community is hungry for NFTs that are changing hands at astronomical amounts of money. The initial intent for creating NFTs was to give artists the opportunity to assert digital ownership of their art; however, the fact they are becoming more elitist is creating tension.
The buy-in fees for NFTs are prohibitive for many people, and the price of a single art piece is extremely high, causing the public to rate the marketplace as a playground for the superrich investors. It also makes the majority of the artists feel disadvantaged, yet this sphere was created for them to have more control of their work.
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