You've probably seen a celebrity talking about how they've invested in NFTs or have created one of their own. Maybe even a few of your friends have purchased them. But what are they? Are they really a good investment? We share some facts about NFTs to help you make your own decision about this new investment trend.
What is an NFT?
NFT stands for "non-fungible token," a type of investment that is purely digital and represents either a physical or digital item of perceived value, such as a piece of art, a unique ebook, or a limited-edition GIF file. NFTs usually get their value from their scarcity. Unlike a digital wallpaper or standard ebook, where thousands, millions, or unlimited copies may exist, NFTs are created (or "minted") in a small batch or limited run, where only so many people can purchase and own them.
Once purchased, an NFT can only have one owner, and the transaction is recorded on a blockchain — a type of public digital ledger. The metadata of each NFT can also hold unique identifying information, like the artist's signature, for example.
What do NFTs have to do with cryptocurrency?
Since NFTs are digital, you can generally only get them online or through digital means. You can often find them on the same platforms as some of the more popular cryptocurrencies. It's also common for some NFTs to be built on the same technology as cryptocurrency, such as the encryption technology, which assures that each NFT has a unique digital marker that helps to keep it from being duplicated and ensures its value as a one-of-a-kind item.
Many of the same people who are interested in cryptocurrency, like Bitcoin, are also collectors of NFTs. These collectors claim that the future is in digital currency and digital assets with a set limit that can't be printed, unlike cash, and that by investing in items that are few in number, they are potentially creating a portfolio of assets that may someday be worth much more.
Aside from those features, however, NFTs and cryptocurrency are not alike. Cryptocurrency is "fungible" and can be traded like any other currency for money, items, or other cryptocurrencies. A single bitcoin is always equal to another single bitcoin. NFTs, however, are so individually unique that each one has its own perceived value, similar to how an individual Picasso original painting will not be worth what another individual Picasso painting would be worth.
Are NFTs a good investment?
It's impossible to give one-size-fits-all investing advice about any asset, and NFTs are no exception. When buying an NFT, just like a stock or even rental property, you are taking a risk that the item won't be worth what you paid for it if you decide to sell it later on. There's also the added risk that we really don't know the future of NFTs and how they will be traded, taxed, or even valued for insurance purposes. (If your Picasso painting could be insured and then was stolen, insurance would probably pay out. We don't know that NFTs can be valued in the same manner, and therefore their insurability is uncertain. In fact, most homeowner's insurance policies don't cover money or currency over a very low limit of a few hundred dollars - unless you add on an optional rider to cover more.)
While not all NFTs are considered art, it may be helpful to think of investing in them as investing in art. It's hard to know the value of a piece in the future; buying it may be based on your love for the art or the artist. NFTs have been, up until now, approached by many in the same way. They love the artist or feel a connection to the NFT and want to be an owner of something unique and timely.
Just like the art, an NFT is only worth what someone will pay for it. If you decide to sell, just know that no one may want your gorilla cartoon or NBA video, no matter how valuable the creator hoped it would be someday. If it's not worth much, you may not be able to sell it after all.
Also, NFTs' profits can trigger taxes. While there are still some determinations to be made on whether they are taxed as art or currency, just know your profits count under IRS rules.
How can I buy NFTs?
If you're certain that NFTs are for you, and you want to get in on the ground floor of something quite interesting, you'll need to get a digital wallet to store your NFTs. This is the same wallet you would use to store cryptocurrency, so if you're already invested in crypto, you may have the wallet already set up. If not, consider Coinbase orPayPal, , which both offer wallet options to their users.
From there, find a reputable platform that sells NFTs and start shopping. You may also learn of an NFT from someone you know and seek it out, but be careful! Not all NFT sales are what they seem, and scammers do exist. Many marketplaces also charge additional fees, so factor this in before you buy.
NFT marketplaces include OpenSea.io and Rarible. Be sure you research any NFT before you buy to ensure you are buying the real thing from the actual creator. Just like tangible art, books, or jewelry, fakes exist, and it can be devastating to give your money to someone only to find out they don't have the actual NFT for sale but rather a counterfeit. Not all platforms require owner verification, so approach any NFT listing with caution.
The future of NFTs
There are always two sides to every story, and NFTs are no exception. Some are eager to continue investing in NFTs, claiming that it is the right time to buy and get into something truly revolutionary in our economy. Others fear the NFT trend is a fad, much like Beanie Babies, and that there will be many more people investing who will cause a bubble. Anyone going into NFTs should understand the risk and that you may not get back what you paid. If you like an NFT for what it is, consider investing purely to be an owner, not with the hope of selling it at a profit someday.