NFT stands for “Non-Fungible Token.” It first appeared in 2012 and has become a larger part of both investment and art markets. NFTs come in a variety of shapes, styles, and aesthetics to meet everyone’s investment interests.
If you’re looking into NFTs, the whole process can seem complicated. In reality, it’s a lot easier to understand than you’d think! Here are 10 things you should know before you start investing in the NFT market.
1. What are NFTs?
Non-Fungible Tokens are unique, one-of-a-kind digital assets that can be sold and purchased like real items, but they do not exist in the real world. For example, if you purchase an NFT of a dog, that dog only exists in the digital world. Each NFT transaction will have a record of that transaction attached to it.
NFTs are similar to cryptocurrencies like bitcoin. What makes it different is you cannot trade one NFT for another. When you buy it, that NFT is yours and yours alone.
Since each NFT has a record of who bought and sold it, you can prove it belongs to you. Even if someone screenshots the image, that NFT is your property.
2. How Does the NFT Market Work?
Artwork, images, memes, clothing, and anything you can create a digital version of make up the NFT market. People will take these digital items and tokenize them.
Once tokenized, each NFT has a blockchain assigned to it. Blockchains keep a record of everyone who has bought or sold the NFT, like a digital ledger. Hundreds of computers maintain these records, which prevents anyone from stealing an NFT from someone else.
Someone will place an NFT on the market. You can then buy that from the seller, and then you own that NFT. The worth of the transaction depends on the seller and buyer.
3. How to Make Money with NFTs
There are lots of different ways to make money off of NFTs.
Many artists will sell a digital version of their art as an NFT. This opens their work up to digital art collectors and can bring in a profit they might not otherwise see. Many NFTs can be set up, so if the buyer resells that digital artwork, the artist can get a cut of that sale because they are the original creator.
The main way to make money with NFTs is by selling something. You can sell anything from artwork to a tweet, as long as you are the original owner of that item.
If you buy an NFT, you can always try to resell it for a higher price to turn a profit. If you do this, you need to be careful. The NFT market has highs and lows like any investment market, and demand for what you’re selling can shift on a whim.
4. The Most Expensive and Popular NFTs
Beeple’s Everyday series is one of the highest-priced NFTs on the market. It is a digital mosaic of images that Beeple created over a 5,000 day period. Beeple made these images in 3D, exported them, and built a mosiac in a digital environment.
This NFT sold for $69 million. Beeple is still creating more days and selling them for high prices. It’s considered one of the most expensive works ever created by a living artist.
CryptoPunks is another example of popular NFTs. CryptoPunks are a series of unique collectible characters that you can purchase. The lowest-priced character you can purchase is worth $418,923.95.
5. Risks of the NFT Market
There are risks to keep in mind when it comes to the NFT market. There is a stigma around artists who produce NFTs because of the environmental impact they can have. This stigma can cause the public to view artists negatively.
Like any investment market, the demand and how much you can buy/sell an NFT will fluctuate. While the NFT itself may not change the value like a bitcoin, the amount you can get when you resell it can change. The demand for NFTs is the largest driver of price changes.
6. NFTs and the Environment
NFTs are digital files, so you might think their environmental impact will be low.
Ethereum is used to create a lot of NFTs. The Ethereum blockchain that keeps a record of the NFT’s history requires heavy-duty computers to run. These heavy-duty computers produce high levels of carbon that contribute to climate change.
NFTs are a small part of the digital market that uses Ethereum to run. But for some, just being a small part causes too much damage when the exchange and usage are optional.
Some companies are trying to move away from Ethereum based blockchains for NFTs. Proof of State systems requires little to no electricity to function, and therefore, have less of an environmental impact. But, many eco-friendly NFT systems can be less secure than the Ethereum ones and require a larger investment to guarantee security.
7. Are My NFT Exchanges Taxed?
The United States does tax NFT transactions. NFTs are collectibles, so they are taxed the same as any other collectible. This means you are taxed when you buy the NFT, receive a cryptocurrency payment for the NFT, and when you convert the cryptocurrency back into tangible currency.
The reason NFTs and cryptocurrencies are taxed is that it is seen as a property, like if you bought stocks in the stock market. If you sell that NFT, any gain you made from it is taxed.
Like other collectible, if you hold your NFT for less than a year, it will be taxed as ordinary income at a Federal tax rates that could be as high as 37%. If you own it for more than a year, then it could still be taxed as high as 28%.
8. Anything Can be Made into an NFT
Like we said before—anything can be an NFT. As long as you own the rights to it, you can make it an NFT. But, how do you tokenize something?
Many sites will tokenize the image for you. Sometimes these sites have a small fee, but they can be free. Having a site tokenize it for you is the easiest way to go.
Once you upload the image, it will be “minted,” or have a blockchain assigned to it. You can assign a price and it will be ready to sell.
9. How to Buy NFTs
If someone is selling an NFT, they will usually have a page you can go to purchase it. Many people who sell NFTs will want you to purchase them with another digital currency, like Bitcoin. Others will have you use the physical currency.
Some of the most popular NFT marketplaces include Binance and Crypto. Binance allows you to buy and sell any type of cryptocurrency or NFT in minutes.
If you want a place that highlights NFTs then Crypto is a great site to check out. Crypto hosts a selection of high-quality NFTs you can purchase.
10. NFT Investment Security
Some investors theorize that NFTs are part of a bubble, given the recent buying frenzy. Many NFTs are going up in price, but if the market changes, the value of your NFT could go down and you could lose money.
On the upside, your data is secure and encrypted when you buy an NFT. There’s a blockchain entry to back it up. However, the amount that an NFT marketplace will protect your information can vary from investment site to investment site.
Better quality sites have higher levels of protection for your information. Make sure you look into how your seller/buyer options secure your data.
Be an Early Investor in the NFT Market
Investing in the NFT market is easy. NFTs represent a new class of digital assets that are available to everyone.
While it is unclear how NFTs will evolve over time, it is clear that this technology will change the future of finance as we know it.