An NFT, or “non-fungible token,” is a digital asset that typically represents real-world objects like art, music, in-game items, videos, and more. They are bought and sold online, usually with cryptocurrency, but more and more platforms are now starting to allow credit card purchases as well.
Similar to cryptocurrencies, most NFTs exist on a blockchain and are encrypted in much the same way. Essentially, NFTs are like any physical collector’s item, only entirely digital. So instead of getting a beautiful oil painting hanging on their wall, the buyer gets a file on their computer instead.
Although they’ve been around since 2014, NFTs have only recently started to become more mainstream.
The main driver of this popularity growth has been recent development breakthroughs in NFT technology, coupled with NFT’s unique ability to allow artists of all types to monetize their work in a revolutionary new way. Exact figures are still hard to find in this new industry, but recent reports suggest that NFTs brought in somewhere between $21-$41 billion dollars in 2021 alone.
While most digital creations are almost always infinite in supply, NFTs are by nature “one of a kind,” due to their unique encryption or “digital stamp.” “Essentially, NFTs create digital scarcity,” says Arry Yu, Managing Director of Yellow Umbrella Ventures.
But many NFTs, at least in these early days, have been digital creations of something that already exist in some form elsewhere, like iconic video clips from NBA games, or securitized versions of digital art that are already floating around on Instagram.
Famous digital artist Mike Winklemann, better known as “Beeple,” crafted a composite of 5,000 daily drawings to create perhaps the most famous NFT of 2021, “EVERYDAYS: The First 5000 Days,” which sold at Christie’s for a record-breaking $69.3 million.
Anyone can view the individual images—or even the entire collage of images online for free. So why are people willing to spend millions on something they could easily screenshot or download?
One main reason, at least on the art side of things, are the digitally-provable “bragging rights” a collector has by owning the original creation.
Another, more tangible reason for NFT’s popularity is the ability to encode royalties directly into the product. This is one of the most powerful features of NFTs for creators, allowing the artist to not only earn money from the first sale, but also from the 2nd, 3rd, 5th, 10th, etc…
NFT stands for non-fungible token. They’re generally built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends.
Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They’re also equal in value—one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin.
Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.
NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for one another, even if they’re technically the same value or even the same price, hence the “non-fungible” part of the name.
One NBA Top Shot clip, for example, is not equal to EVERYDAYS simply because they’re both NFTs. (One NBA Top Shot clip isn’t even necessarily equal to another NBA Top Shot clip, for that matter.)
Similar to cryptocurrencies, NFTs exist on a blockchain, which is a distributed public ledger that records transactions.
The most popular blockchain for NFTs is traditionally the Ethereum chain, but due to rising transaction fees, NFTs on other, less expensive chains (such as Solana and Avalanche) are gaining popularity more and more every day.
An NFT is typically created through a process called “minting.”
This process usually involves paying a fee (most commonly $ETH) in order to post a transaction on the blockchain that ties your unique wallet address (see below) to the digital information of that particular NFT. NFTs can take any form, such as:
- Graphic art
- GIFs
- Videos and sports highlights
- Collectibles
- Virtual avatars and video game skins
- Designer sneakers
- Music
- Even tweets!
As mentioned above, NFTs are like physical collector’s items, only digital. Once an NFT has been “minted,” it can then be sold on an online marketplace, traded directly with another person, or even used as collateral for a loan through certain crypto-companies.
Although NFTs were initially just a novel way to show ownership online, new ways of using NFTs are emerging every day.
In addition to the use cases mentioned in the previous sections, NFTs are now being utilized in a variety of ways, including:
- Specialty tickets to real life events such as Coachella, or even smaller, local meetups
- As an investment vehicle via locking (or “staking“) the NFT into a special type of contract that earns monetary interest
- As a new way to “crowdfund” new projects
- As a way to gain membership into online social clubs. This is one of the most popular use cases, and will most likely continue to stay that way. Some of the top NFT projects currently out there have used their initial NFT releases (or “drops”) as a “membership fee” to join their exclusive community.
Purchasing your first NFT isn’t as scary or difficult as you might think.
The first thing you’ll need is the cryptocurrency required for the NFT you’re interested in. This is typically $ETH, but as mentioned before, more options are becoming available every day.
The quickest way to buy $ETH, and most other cryptocurrencies, is through a trusted exchange like Coinbase, or Crypto.com, both of which have mobile apps to make it even easier.
Once you have the currency you need, you’ll need to send it to your digital wallet, which is the browser plugin that interacts with the NFT platforms.
Check out the video in the section below for a detailed walk-through on how to set up MetaMask, which is the current industry standard for digital wallets.
Once your $ETH or other cryptocurrency is in your digital wallet, you’ll have all you need to dive into the exciting new world of NFTs!
A digital wallet is an essential tool in the world of cryptocurrencies and NFTs.
Check out this video walk-through to set up your first MetaMask wallet: https://www.youtube.com/watch?v=Af_lQ1zUnoM
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Cryptocurrency
Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency received its name because it uses cryptographic encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers.
The first cryptocurrency, Bitcoin, was created in 2009 and although it remains as one of the most familiar to the general public, there are actually thousands of different currencies or “coins” available today.
Cryptocurrencies run on a distributed public ledger called a blockchain, which is a permanent digital record of all transactions for that currency.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate “coins.” Users can also buy the currencies from brokers, then store and spend them using cryptographic (digital) wallets.
If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
As mentioned in previous sections, there are actually now thousands of cryptocurrencies, but some of the best known include:
Bitcoin: Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
Ethereum: Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin. Litecoin: This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
Solana: First conceived by Anatoly Yakovenko in 2017, Solana, whose native currency is $SOL, didn’t officially begin until early 2020. Solana uses slightly different algorithmic mechanisms than Bitcoin or Ethereum to secure it’s blockchain, and has steadily gained popularity since it’s inception.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.
You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:
Step 1: Choosing a platform
The first step is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:
- Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
- Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.
When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.
Step 2: Funding your account
Once you have chosen your platform, the next step is to fund your account so you can begin trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.
Crypto purchases with credit cards are considered risky, and some exchanges don’t support them. Some credit card companies don’t allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.
Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.
An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.
Step 3: Placing an order
You can place an order via your broker’s or exchange’s web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting “buy,” choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to “sell” orders.
There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:
- Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market.
- Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
- Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.
The best option for you will depend on your investment goals and risk appetite.
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
- Hot wallet storage: “hot wallets” refer to crypto storage that uses online software to protect the private keys to your assets.
- Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys. Typically, cold wallets tend to charge fees, while hot wallets don’t.
When it was first launched, Bitcoin was intended to be a medium for daily transactions, making it possible to buy everything from a cup of coffee to a computer or even big-ticket items like real estate. That hasn’t quite materialized and, while the number of institutions accepting cryptocurrencies is growing, large transactions involving it are rare. Even so, it is possible to buy a wide variety of products from e-commerce websites using crypto. Here are some examples:
Technology and e-commerce sites:
Several companies that sell tech products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.
Luxury goods:
Some luxury retailers accept crypto as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in return for Bitcoin.
Cars:
Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.
Insurance:
In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a mode of payment for all its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.
If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.
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Taxes
The last time the Internal Revenue Service said anything about cryptocurrency/NFT taxes was in 2019 when it issued new guidance on certain issues (its first since 2014) and added a cryptocurrency question to its forms.
In short, for the purposes of U.S. taxes, cryptocurrencies are treated as property and taxed on their capital gains, NFTs are not taxable until they are sold, and then they are treated as physical property. As part of the infrastructure bill package that passed in Congress last year, cryptocurrency exchanges will be required to issue 1099-B forms to their U.S.-based customers and the government starting in 2023 (though experts say that, in practice, that’s more likely to begin the year after). An ongoing court battle, Jarrett v. United States, could determine whether staking (earning tokens for acting as a transaction validator in proof-of-stake blockchains) is taxed as income.
The nuance that makes crypto extra complicated is that many people don’t know their cost basis when they acquire the asset, so it is important to keep yourself educated and on the lookout for further guidance.
Many people don’t get in the habit of keeping detailed records of their crypto transactions necessary to calculate their gains and losses, though a number of software tools for this have cropped up in recent years.
Yes, NFTs are taxable — specifically, the sale of cryptocurrencies like ether to make the purchase (and the purchase of cryptocurrencies when selling the NFT) is a taxable event. Airdropped tokens are another tricky event as the owner receives them for free. In 2019, the IRS said that airdrops, such as acquiring a new cryptocurrency following a hard fork, are treated as ordinary income.
TEAM
Building
Your Most Valuable Investment
As you can see from the previous sections, there’s a lot that must happen behind the scenes in order to build an NFT or cryptocurrency empire.
Most people in the NFT, crypto, or Metaverse spaces wait far too long to recruit an effective team that can take their projects to market.
Fortunately for you, you don’t have to worry about building a team – we already have one ready for you!
If you already have an idea of what you want to do, don’t wait!
Click here or fill out the form below to submit your idea, and after we due our diligence regarding your concept, we’ll reach out to schedule a free consultation.
