Non-fungible tokens or NFT's have taken the world by storm as the newest type of digital asset. With an NFT, the blockchain - the same type of ledger used by bitcoin - records ownership. The only difference is that an NFT is unique, and a user can't trade one for another. In comparison, if we look at a cryptocurrency like bitcoin, users can trade one bitcoin for another. The other difference is that NFTs operate as a part of the Ethereum blockchain.
As a recap, Ethereum is a cryptocurrency similar to XRP, dogecoin or bitcoin. However, the creators of the Ethereum blockchain designed it to support NFTs by storing information additional to what is on an Ethereum coin. Ethereum is not the only blockchain to have an NFT, although it is the most well-known.
Looking specifically at the Ethereum network, users can use blockchain technology for just about anything, including digital paintings, music, or a means to earn funds for a charity. One example of this use was Taco Bell auctioning NFT art to raise funds for charity, which sold out in minutes.
Now that we've piqued your interest, you are probably wondering how to get started.
There are two main ways to join the NFT craze: using NFT escrow services to manage your transactions with an independent seller or purchasing on an NFT marketplace.
Many new online artists have emerged in the NFT craze and begun to sell their assets. If you find a seller on Reddit, Discord, or elsewhere, you may choose to negotiate with them one on one. Talking to the seller directly is a great way to get a fair valuation on an NFT without other parties bidding and driving up the price, which is common when purchasing on a marketplace. Additionally, when dealing with an independent seller, you will typically have more variety for which wallet you will use.
The only major concern is that, like other cryptocurrency transactions, once you pay with bitcoin, it is irreversible. To ensure you, the collector, receive the digital asset, many have found NFT escrow services valuable.
The other option to buy and sell NFTs is by using a marketplace. The process that follows selection is similar to any auction site, where you may place your bid on an asset and hope you are the winner. Some NFTs may be able to hit "Buy now" and purchase immediately, although this is typically less common.
Some believe that purchasing on a marketplace is less risky than purchasing from an independent seller. Unfortunately, this is not necessarily the case. The verification processes for creators on NFT listings are not consistent across all platforms. While some platforms require owner verification, others do not. A lack of verification leaves little protection for the buyer. Therefore, while these platforms host hundreds or thousands of creators, you must do your research before making a purchase. Some collectors have still become victims of scams where an unknown party has sold an asset that doesn't belong to them.
If you are purchasing independently, you can use any cryptocurrency exchange to buy Ether and transfer the coins to your wallet. New users can make the comparison to an arcade that requires visitors to purchase arcade tokens that they can use on the games. The only difference is that the exchange will likely take a small percentage of your transaction as a fee for using their platform. It is important to do your research ahead of time, so you know what these additional charges will be.
If you take the independent method, bundling the exchange with the platform will act as your escrow service can keep the transaction fairly simple.
Alternatively, on a marketplace like OpenSea, the recommendation is to use a plug-in for your Chrome browser called MetaMask. The MetaMask installation process takes 30 seconds to install. Users can then launch the wallet using the profile button in the top right corner of the OpenSea website. You can then use your preferred exchange to purchase Ether.
Once you have funded your account, you can begin bidding or making offers on your NFT.
NFTs, like cryptocurrency, are also subject to capital gains taxes. Although the exact regulations are still largely undetermined in most areas, collectors will be required to account for the price at the time of payment and the selling price if the asset rises in value. If you plan on purchasing a significant amount of NFTs, it might be wise to engage a tax professional to help you navigate these murky waters.
It might be hard not to have a slight fear of missing out (FOMO) when it comes to the NFT craze, but that doesn't necessarily mean you should participate. NFT's are still so new that it is hard to say what the future holds. An investor with a limited amount of money to invest should start small until they learn the ropes.
It is also important to keep in mind that an NFT's value is determined entirely by consumer demand, with little impact from fundamental or other macro-level indicators. Therefore, what is valuable one day may be worth very little the next if consumers decide this to be true.