Everything you need to know about Non-fungible tokens (NFT)

NFTs, also known as Non-Fungible Tokens, are a type of a digital asset like art, music, video games etc. Here is everything to know about them

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Non-fungible tokens
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This year, non-fungible tokens (NFTs) have exploded on the scene. These digital assets are being sold like 17th-century exotic Dutch tulips – some for millions of dollars. They range from art to music to tacos to toilet paper.

NFTs are expensive, but are they worth the hype? Like the dot-com craze or Beanie Babies, some experts say they’re destined to burst. Those who think NFTs will change investing forever believe they are here to stay.

What are non-fungible tokens (NFTs)?

An NFT serves as proof of ownership. This means that they can monetize the ownership rights. Due to the porous nature of the internet, owning an NFT doesn’t necessarily imply exclusive rights since anything digital can be duplicated indefinitely.

Imagine it as the Mona Lisa. There is no way to take the painting home with you – you do not own it. You can go to a museum and see the painting, perhaps even take a picture of it. A painting that hangs on your wall at home is akin to an NFT since it’s all yours and you can do whatever you want with it.

In NFT transactions, which happen entirely online, Bitcoin and Ether are the most common currencies.

NFTs: how do they work?

The majority of NFTs are part of the Ethereum blockchain. ETH is a cryptocurrency, as is bitcoin or dogecoin, but its blockchain also supports these NFTs, which store extra information that makes them different from, say, an ETH coin. Various blockchains can implement their versions of NFTs.

Is there a difference between fungible and non-fungible tokens (NFTs)?

Digital assets include fungible tokens – such as Bitcoin, Ether, Doge, and other cryptocurrencies – and NFTs. While cryptocurrencies are valued for their monetary value, NFTs are valued for their uniqueness, similar to a collector’s item.

Every NFT is unique, so one cannot be swapped for another – just like you can’t swap houses even if you live on the same street or have the same number of rooms.

Authentication of your NFT: how do you do that?

NFTs are easily trackable since they reside on the blockchain. Tracking enables transparency and authenticity verification. Blockchains store the entire history of all of their owners, past, and present.

NFTs are just like any other smart contract.

What are the steps to creating a non-fungible token (NFT)?

It is not as difficult as one might think to create your own NFT. Regardless of whether you want to create a GIF or an image, the overall process is fairly straightforward.

Your first step is to select the artwork – it can be a digital file such as text, music, or video. It should be as unique as possible.

After you choose what you want to sell, you need to decide which blockchain you want to use. Most of the largest NFT platforms support Ethereum, the most commonly used cryptocurrency.

You will need some Ether on hand if you chose Ethereum. This is because listing your NFT on exchange costs money – unless you choose OpenSea.

Creating an OpenSea account and signing up is free, but you need a digital wallet to do so. In addition to Axie Infinity, OpeanSea, CryptoPunks, NBA Top Shot, Rarible, Foundation, and Sorare, there are many other NFT marketplaces.

There is a listing process for each of these platforms, which involves adding a few details and uploading your item. Once you’ve completed all of these steps, your token will have been successfully created.

How Are NFTs Used?

Artists and content creators can monetize their work through blockchain technology and NFTs. Artists no longer have to sell their works through galleries or auction houses. An artist can instead sell it directly to the consumer as an NFT, allowing them to keep more of the profits. Further, artists can set up royalties to receive a percentage of sales whenever their art is sold. This is an attractive feature because artists typically do not receive future proceeds after their art has been sold.

Making money with NFTs isn’t the only option. Taco Bell and Charmin have auctioned themed NFT art to raise funds for charity. Taco Bell’s NFT art sold out in minutes for the highest bid of 1.5 wrapped ether (WETH)-equivalent to $3,723.83 at the time of writing. Charmin called its offering “NFTP” (non-fungible toilet paper).

The 2011-era Nyan Cat, a cartoon cat with a pie-shaped body, sold for nearly $600,000 in February. The NBA Top Shot game generated more than $500 million in sales as of late March. NFT highlights of LeBron James have fetched more than $200,000.

Even celebrities like Snoop Dogg and Lindsay Lohan are releasing securitized NFTs that contain unique memories, artwork, and moments.

NFTs: How to Buy

You will need the following items to start your NFT collection:

You will need a digital wallet that lets you store NFTs and cryptocurrencies. If your NFT provider accepts cryptocurrency, you’ll likely need to purchase some, such as Ether. Coinbase, Kraken, eToro, PayPal, and even Robinhood allow credit cards to be used to buy crypto. Then, you can move it from the exchange to your wallet of choice.

When researching your options, keep fees in mind. When you buy crypto, most exchanges charge a percentage of your transaction.

Final Words

Just like when you sell stocks at a profit, NFTs are subject to capital gains taxes. However, because NFTs are classified as collectibles, they may not receive the preferential long-term capital gains rates stocks get and may even be taxed at a higher collectibles tax rate, though the IRS has not yet defined what NFTs are for tax purposes. Ideally, you should check with a tax professional before adding NFTs to your portfolio, since the cryptocurrencies used to purchase them may also be taxed if their value has increased since you bought them.

As such, you should approach NFTs like any other investment: Do your research, understand the risks—including the possibility of losing your entire investment—and if you decide to take the plunge, proceed with caution.

Also Read: Guide on How to Calculate expected portfolio return

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