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NFTs: what are they and how do you use them?

NFTs: what are they and how do you use them?

The market for non-fungible tokens (NFTs) has surged to $2.5 billion so far this year, up from $13.7 million this time last year. NFTs broke their sales record on May 3rd, with $102 million single-day sales.

If you are unfamiliar with the concept, NFTs are crypto assets that represent unique or “one-of-a-kind” items or collectibles. Simply put, NFTs are a digital certificate of ownership for unique assets, whether they are tangible or intangible, virtual or physical. Therefore, when people trade NFTs, they trade the ownership of an asset, not the asset itself.

What do NFTs stand for?

NFTs have been around since 2014 but because they are becoming an increasingly popular way of selling and buying digital art, you may have only heard of them recently.

Indeed, NFTs are most used to trade artwork such as music and paintings… But they are also used to trade sports videos, highlights and collectibles. Even Twitter’s first ever tweet (by co-founder Jack Dorsey: “just setting up my twttr”) was sold at an NFT auction for over $2.9 million.

Other examples include:

  • Digital artist Beeple sold his “Everydays: the first 5000 Days” artwork for $69.3 million at a Christie’s auction. “Crossroads”, another artwork of his, sold for $6.6 million.
  • A rotating gummy bear video “Not forgotten, but gone” was sold for $1 million.
  • CryptoPunk characters have also sold online for several millions: CryptoPunk #33100 for $7.58 million, CryptoPunk #7804 for $7.57 million and CryptoPunk #6965 for $1.54 million.
  • The New York Times sold its column about NFTs as an NFT. It sold for $540,000.

You may wonder what the point of NFTs is when some of these items (tweets, videos, etc…) can be viewed or accessed online for free. Well, NFTs do not simply give access to an item, they allow buyers to own the original item – what many refer to as digital “bragging rights”. This is precisely how the NBA used NFTs – they sold ownership of game highlights, even though they were accessible on YouTube and other social media platforms.

How do NFTs work?

NFTs are based on the same technology as cryptocurrencies such as Bitcoin or Ethereum. Unlike (crypto)currencies, NFTs are not interchangeable. NFTs represent unique assets and cannot simply be exchanged the same way one Bitcoin can be exchanged for another Bitcoin or one Pound for another Pound.

However, even though NFTs are not a currency, they can still be traded. NFT ownership is recorded on a blockchain (usually Ethereum) which allows an NFT to be traded as a “stand-in” for the item it represents. Trading NFTs ultimately boils down to trading certificates of ownership, not the actual assets.

How to buy NFTs?

The process of acquiring NFTs is quite straightforward:

  1. You need a digital wallet to store NFTs and cryptocurrencies.
  2. You then need to buy some cryptocurrency in order to make your purchase.
  3. Visit NFT marketplace sites and make your purchases.

If you are still unsure on how to get started, here are a few sites you will find useful to:

Should you invest in NFTs?

Now that we know what and how, the question is: should you? The answer to that is simple: it’s up to you. Whether you want to support artists, or their work is meaningful to you; or if you have money to spend and like “owning” things, then go right ahead.

However, there are many factors to consider before investing in NFTs:

  • An NFT’s value is solely based on what people are willing to pay for it. Demand therefore plays a crucial role in determining how much an asset is worth. This means an NFT can be sold for less than it was bought for, or not even sold at all if there aren’t any buyers.
  • Like cryptocurrencies, NFTs are also subject to capital gains taxes.
  • The cryptocurrencies used to make your purchase may also be taxed if their value has increased since they were purchased.

With all this in mind, investing in NFTs isn’t an obvious strategic choice if your motives are to make a profit down the road. You may want to check with a tax expert before adding NFTs to your portfolio.

Last Update on 09/07/21

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