The explosion of NFTs and their accompanying marketplaces have left many baffled, incredulous, and deeply skeptical. How much could clusters of pixels possibly be worth? More pointedly, why are they worth anything at all? Here are the answers to the 10 most FAQs about NFTs and what they are all about so you can better understand the concept and determine if getting involved in that market is for you.
By Lorimer Wilson, Founder and Managing Editor of munKNEE.com and an affiliate of Bitgrum.com for which this article was written.
#$$4$ NFTs are digital properties such as those of an image, video, audio file, tweet, etc. and the market for them has been growing parabolically. Over the past 12 months, for example, the number of registered users who have made at least one NFT transaction on OpenSea.io, the world’s first and largest NFT marketplace that purports to be “The NFT marketplace with everything for everyone”, has risen by 3,233% – yes, 3,233% to more than 500,000.
1. Why do NFTs exist?
NFTs create scarcity among otherwise infinitely available digital assets and that scarcity can run up the value of such assets in general and, in some cases, dramatically. The most expensive known NFT (Everydays: The First 5,000 Days), for example, sold for US$69.3 million in March of last year.
2. Who creates NFTs?
Anyone with access to the technology can create an NFT – even you – and you can get all the help you need to do so by visiting OpenSea and other sites such as it. It is that easy.
3. How are NFTs purchased?
NFTs are only bought and sold with cryptocurrency, usually ethereum, and you have to set up a digital wallet to purchase an NFT.
Most NFTs are traded on online marketplaces designed to serve the market, such as Rarible and OpenSea, but other less conventional outlets, such as the NBA (with its Top Shot NFT video clips of its star players) and the New York Stock Exchange (with its NFT video clips commemorating the first trades of 6 major listings, are also available.
When you’ve found the NFT you want to buy on one of the marketplaces mentioned above (and others), you link your wallet to the marketplace and make your purchase.
4. How are NFTs shared?
Usually, NFTs are displayed in one’s icon photo on social media and, in order to do that, one’s digital wallet associated with the NFT has to be linked to one’s social media account. Since one’s digital wallet is public, anyone can see which NFTs you own.
5. What do NFTs cost?
According to NonFungible.com the typical price range last year was $100 to $1,000 but you can spend hundreds of thousands of dollars to ride the latest digital trend. The average sale price of a CryptoPunk image, for example, rose from about $100,000 last July to nearly $500,000 in November and many of the NFTs in the Bored Ape Yacht Club collection start at about $300,000 with some having sold for millions of dollars In addition, there are buyer’s fees (OpenSea charges 2.5% per transaction, for example, and others, such as SuperRare, charge even more) and sellers may also be subject to fees when selling an NFT on certain marketplaces.
6. How do NFT creators make money in the aftermarket?
NFT creators usually enter into smart contracts that outline the terms of an NFT sale, including what percentage of the sale the original issuer will receive in the future whenever there is a new transaction although someone may also issue an NFT without the intention of selling it and forgo earnings on future transactions.
7. What’s the technology behind NFTs?
Non-fungible tokens are just that, non-fungible, because they are not interchangeable as compared to a dollar bill, for example, which is fungible because it is interchangeable with other dollar bills.
Each NFT has a unique digital signature and that unique digital signature, or code, is stored on the blockchain and because an NFT is a token created on the blockchain, it carries all the features of the blockchain – immutable, traceable, trackable and transparent – because it is a digital ledger, or a record of transactions, accessible to anyone, no matter who you are, as long as you have access to the internet.
8. What are the risks with NFTs?
Buy your NFTs at an accredited marketplace, as the risk of scams, plagiarism and fraud is high. Research the NFTs before buying them and, as with any investment, don’t buy something you don’t understand.
9. Does the government tax NFT proceeds?
An NFT is generally treated as a capital asset, meaning any gain or loss you have on its sale is treated as a capital gain or loss. Because NFTs are usually considered as collectibles, they are usually taxed in most jurisdictions at a higher rate than on the sale of other capital assets and this will adversely affect the amount of tax that higher income taxpayers will have to pay .
10. What are the environmental impact of NFTs?
Like Bitcoin and other cryptocurrencies, NFTs have come under fire for their environmental impacts because they require the use of energy-intensive computer transactions to authenticate and sell the digital property.
For even more on “How NFTs Create Value” check out this post.