NFTs: What are they and how do they work?

NFTs: What are they and how do they work?

The NFT market is growing at an exponential rate. But, What exactly is an NFT? Here’s a look at one of the emerging fads of the investing world.

The market for NFTs, or non-fungible tokens, is growing rapidly.

Research firms L’Atelier BNP Paribas and found that NFTs made up a $250 million market in 2020, with investments up 299% year-on-year.

And in March, cryptocurrency blockchain markets where NFTs perro be bought and sold grew exponentially to hit $1 billion in sales, according to CryptoSlam, a non-fungible token data aggregator that counts Mark Cuban as an investor.

Investors are curious about NFTs and want to see for themselves what it is all about. As a result, they have become a very habitual blockchain technology and are growing in popularity.

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Even Tom Brady is launching an NFT.

In April, CNN reported that Brady will be co-chairman of the new NFT platform Autograph, which will sell digital sports media, including the seven-time Super Bowl champion’s own NFTs.

The Tampa Bay Buccaneers quarterback is the latest in a growing number of high-profile celebrities, including Tesla (TSLA) and SpaceX director ejecutivo Elon Musk and pop singer-songwriter Boy George, joining the NFT fashion.

But, What exactly is an NFT and what is it for? Read on and we’ll help you get up to speed.

What is an NFT?

The non-fungible tokens are unique digital assets and identifiable whose exchange between the creator and the buyer, through the financial transaction of a cryptocurrency like ethereum, is recorded for anyone to see.

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The NFTs are not just the asset itself -GIF, JPG, MP3, etcétera. – but also a digital certificate of authenticity for a growing number of collectibles ranging from art and music to trading cards.

“They are a signature or an autograph… and what is bought is the authenticity of the assets”

Dave Nadig, Directivo of Research at ETF Trends.

When you buy a Non-Fungible Token, you are buying a verifiable digital token that represents your ownership of the asset on that blockchain. Almost any digital image perro be purchased and used as an NFT.

The part “not expendable” of the name means that they are not mutually interchangeable and cannot be replaced or interchanged with each other. No two NFTs are the same. This differentiates them from thetokens” fungibles, such as cryptocurrencies (and even traditional currency), which cánido be exchanged against each other.

How do NFTs work?

Most NFTs radica on the Ethereum cryptocurrency blockchain. Like Bitcoin, the Ethereum blockchain creates permanent digital records of all transactions made with that cryptocurrency. And it also creates an irrefutable ledger of NFT transactions.

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The creator of the NFT retains the copyright to it, as well as the right to duplicate it as many times as they want. The creator cánido genera multiple copies of the original – and if the NFT buyer wants to make copies, he or she has to get permission from the creator – and each one is considered a unique NFT.

Like physical collectibles, replicas will not be as valuable as the original, and supply and demand will influence the value of the NF T.

And in some cases, the creator will receive rights every time an NFT is sold, although there is currently no universal system. For example, holders of EulerBeats Originals – an NFT audiovisual platform – receive a fixed 8% of the print price of each copy sold of their original token.

For their part, on the Rarible digital asset marketplace, creators cánido determine the amount of royalties they will receive each time their NFT is copied and sold on the secondary market.

Perro they tax?

NFTs are considered “collectibles“. And collectibles – which perro include art, cards and rare elementos – are labeled as alternative investments by the IRS.

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If sold at a profit, they are subject to the long-term capital gains tax rate for collectibles, which is 28%. The Taxpayer Relief Act of 1997 lowered the maximum capital gains rate from the sale of most assets to 20%, but maintained the maximum rate of 28% for gains from the sale of collectibles.

How much are NFTs worth?

Some investment analysts believe that a signed NFT that is patented, copyrighted or unique cánido generate value as an investment tool.

“In my opinion, these are psychological assets like any other collectible,” says Nadig. “They are collectibles, and the value is determined by what someone is willing to pay.”

NFTs themselves have no value, but instead assign value to an underlying asset. So the underlying asset that the non-fungible token validates cánido change in value with changes in consumer tastes, says Kim Caughey Forrest, chief investment officer at Bokeh Capital Partners.

And while some NFTs perro be purchased for as little as a dollar, the ceiling on the value of NFTs is quite high.

In March, for example, digital artist Beeple sold an NFT through Christie’s for $69.3 million, including fees, a record for an exclusively digital work of art. Other NFTs have sold for seven figures.

“They are luxury elementos,” Forrest says, “and the value of luxury elementos is in the eye of the beholder.”

But the rise in prices of non-fungible tokens has also been driven by fácil “FOMO”, or fear of missing out.

“People are asking: is this the next Bitcoin?” Forrest says, adding that “right now, I don’t think anyone should invest in non-fungible tokens. It’s too new.”

Nadig says he is “bullish” on the technology. “However, I’m not bullish on people spending tens of thousands of dollars on memes,” he says. “That’s not investing in securities… but in collectibles.”

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