What is an NFT? Description of non-fungible tokens

source: FreePik

This year, non-fungible tokens (NFTs) appear to have exploded from the ether. These digital assets, which range from art and music to tacos and toilet paper, are selling like 17th-century exotic Dutch tulips, with some fetching millions of dollars.

Are NFTs, on the other hand, worth the money—or the hype? Some analysts believe they, like the dotcom mania and Beanie Babies, are about to burst. Others feel that NFTs are here to stay and will forever revolutionise investment.

What is NFT?

NFTs are digital assets that represent real-world objects such as art, music, in-game items, and videos. They are often bought and sold online using cryptocurrencies and  are usually encoded in the same underlying software as many cryptocurrencies. The NFT has been around since 2014 and is now notorious as it is becoming an increasingly popular way to buy and sell digital art. Since November 2017, a staggering $ 174 million has been spent on NFTs. The NFT is also generally unique, or at least  a very limited edition, and has a unique identification code. "In essence, NFTs create digital rarity," said Arry Yu, chair of the Cascadia Blockchain Council of the Washington Technology Industry Association  and executive director of Yellow Umbrella Ventures. 

This is in stark contrast to most digital works, which are almost endlessly available. If supply cuts should increase the value of a particular asset, assuming there is demand. 

However, many NFTs already existed somehow elsewhere, at least in the early days, such as iconic video clips of NBA games and certified versions of digital art  already floating  on Instagram. It was a digital work. 

For example, the famous digital artist Mike Winkelmann, well known as "Beeple," synthesized 5,000 pictures daily  to create perhaps the most famous NFT, "EVERYDAYS: The First 5000 Days." It set a record sales for Christie's. $69.3 million. 

Anyone can view  individual images. You can also view the entire collage of images online for free. So why are people willing to pay millions for what they can scan or download? The NFT allows buyers to own the original item. In addition, it includes a built-in certificate that acts as a proof of ownership. Collectors value these "digital bragging rights" almost more than the objects themselves.

What are NFTs and how do they work?

Most NFTs are, at a high level, part of the Ethereum blockchain. Ethereum, like bitcoin and dogecoin, is a cryptocurrency, but its blockchain also enables these NFTs, which store additional information that allows them to function differently from, say, an ETH coin. It's worth mentioning that various blockchains can use NFTs in their own ways.

How is NFT different from cryptocurrency? 

NFT stands for Nonfungible Tokens. It is usually created using the same type of programming as cryptocurrencies such as Bitcoin and Ethereum, but  the similarity ends here. 

 Physical money and cryptocurrencies are "substitutable". That is, they can be exchanged or exchanged with each other. Their value is the same. One dollar is always worth another dollar. Bitcoin is always the same as another Bitcoin. Crypto's substitutability is a reliable way to execute transactions on the blockchain. 

NFT is different. Each has a digital signature and NFTs cannot be exchanged or equivalent (and therefore not substitutable). For example, NBA top shot clips aren't the same every day just because they're both NFTs. (A NBA top shot clip doesn't necessarily have to be the same as another NBA top shot clip.)

source: FreePik

What is an NFT and How does it work?

NFTs are stored on a blockchain, which is a decentralised public ledger that keeps track of transactions. Most people are familiar with blockchain as the underlying technology that allows cryptocurrencies to exist.

NFTs are most commonly kept on the Ethereum blockchain, although they can also be held on other blockchains.

An NFT is made up of digital objects that represent both tangible and intangible objects, such as:

• Craftsmanship

• Animated GIFs

• Highlights from sports and videos

• Antiques and collectibles

• Video game skins and virtual avatars

• Sneakers by a designer

• Instrumental music

Even tweets are taken into account. Jack Dorsey, a co-founder of Twitter, sold his first tweet as an NFT for more over $2.9 million.

NFTs are essentially digital versions of tangible collector's artefacts. Rather than purchasing an actual oil painting to place on the wall, the couple decided to create their own.

Should You Invest in NFTs?

Is it true that just because you can buy NFTs, you should?

"NFTs are dangerous since their future is unknown, and we don't yet have enough data to gauge their performance," she says. "Because NFTs are so new, it would be worth spending a little amount to test them out for the time being."

Investing in NFTs, in other words, is essentially a personal decision. If you have some extra cash, it's something to think about, especially if the artwork has sentimental value for you.

However, keep in mind that the value of an NFT depends only on the amount that someone else is willing to pay. As such, prices are usually driven by demand, rather than the basic, technical, or economic indicators that normally drive stock prices and, at least in general, form the basis of investor demand. 

 This all means that the NFT may resell for less than you paid. Or, if no one wants it, you can't resell it. 

source: FreePik

 NFTs are also subject to capital gains tax. This is the same as selling a stock for profit. However, because they are considered collectibles,  they may not receive a preferred long-term capital gains rate on the stock, and  even if the IRS has not yet determined which NFT to apply for tax purposes, a higher collectibles tax rate. May be taxed at. Please note that the cryptocurrency used to purchase an NFT may also be taxed if it becomes more valuable after the purchase. So if you're considering adding an NFT to your portfolio, it's a good idea to talk to your tax accountant. 

 Still, approach NFTs  like  any other investment. Do some research to understand the risks, including the risk of losing all the dollars you have invested. If you  take the plunge, be very careful.