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What You Need to Know About Non-Fungible Tokens (NFTs) and Why They're Booming Worldwide?

18 October 21

Written by : Jaqueline Susanto

 

NFT stands for Non-Fungible Token. It’s an alienesque term that seems unusual to say out loud, but you can think of them as a digital certificate of authenticity.

Before we go too far, let me first explain the difference between The Fungible & Non-Fungible Token.

Fungible means it can be swapped for something else. So just like a ten dollar USD note is pretty well the same as the next ten dollar USD note, one bitcoin or BTC is the same as any other BTC. They are identical for all intents and purposes and can be swapped for each other — they are fungible.

Non-fungible, by contrast, essentially means unique. This is a one off item and whatever it contains, art or anything else, cannot be easily replicated on that blockchain. NFTs are Non-Fungible Tokens. In real life — classic works of art, antiques, and other historical items are often sold at auctions with a receipt certifying that they are genuine.

NFTs contains built-in authentication, which serves as proof of ownership.

NFTs are giving more power to content creators than ever before, powered by smart contracts on various blockchains. It’s a way to represent anything unique and seems to have exploded out of the flexibility offered by Ethereum — based smart contracts this year.

 

From art and music to tacos and toilet paper, these digital assets are selling like 17th-century exotic Dutch tulips to Lebron James Dunk Holo MMXX ( Series 1) for millions of dollars.

On 19th February, an animated Gif of Nyan Cat — a 2011 meme of a flying pop-tart cat — sold for more than $500,000 (£365,000). A few weeks later, musician Grimes sold some of her digital art for more than $6m. It is not just art that is tokenised and sold. Twitter’s founder Jack Dorsey has promoted an NFT of the first-ever tweet, with bids hitting $2.5m.

Even celebrities like Snoop Dogg and Lindsay Lohan are jumping on the NFT bandwagon, releasing unique memories, artwork and moments as securitized NFTs.

NFTs serve the same purpose as the aforementioned authenticity certificate but are primarily made for digital items. They allow GIFs, videos, jpegs, mp3s, and just about any other file format to be certified as one-of-a-kind. This technology enables a new kind of “ownership” for digital files that wasn’t previously possible.

 

NFTs can be purchased, collected, sold, and even destroyed just like physical items. Thanks to the Blockchain, they come with a transparent transaction and pricing history visible to anyone with an internet connection.

The process of turning your work into an NFT is known as “minting” which refers to the act of creating a new token on the Blockchain that will forever be attached to that content.

When an artist mints a new NFT, they can even attach a built-in commision (usually 10–30%) that they will receive any time that work is resold in the future. Digital art, songs, memes, recipes, and even entire startups are currently listed for sale on NFT marketplaces. There are currently very few restrictions as to what kind of content can be “tokenised” and turned into an NFT.

 

They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying code-base as many cryptos.

Although they’ve been around since 2014, NFTs are gaining notoriety 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 one of a kind, or at least one of a very limited run, and have unique identifying codes. Essentially, NFTs create digital scarcity.

 

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 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 “digital bragging rights” almost more than the item itself. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible).

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 they’ll 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.

Taco Bell’s NFT art sold out in minutes, with the highest bids coming in at 1.5 wrapped ether (WETH) — equal to $3,723.83 at time of writing. However, art isn’t 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.

Keep in mind, an NFT’s 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 there is no demand for it.

NFTs are also subject to capital gains taxes — just like when you sell stocks at a profit. Since they’re 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 in the USA, 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 they’ve 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 risks — including that you might lose all of your investment value— and if you decide to take the plunge, proceed with a healthy dose of caution.

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