In a world where everything is available on the internet, NFTs are the answer to creating technical scarcity. NFTs have allowed new types of digital goods to be created that give users the opportunity to purchase or sell unique, digital items. What is an NFT? A Non-fungible token. Non-fungible means that each token is unique and cannot be replaced by something else. Cryptocurrencies like Bitcoin, Ethereum, and Dogecoin are considered fungible as they can be easily traded – you can exchange one Bitcoin for another readily. A one-of-a-kind piece of artwork created by a digital artist, however, is non-fungible. It cannot be readily exchanged for another good within the same asset class as that good may not hold the same value. NFTs cannot be divided into smaller denominations in the same way that dollars can be split into pocket change. NFTs are making inroads into the realms of music, fine art, and even virtual trading cards. In the process, they are making some people very rich.
NFTs are unique digital goods that are, for the most part, stored on the Ethereum blockchain. Ethereum is a cryptocurrency but its blockchain supports NFTs. Blockchains are peer-to-peer networks that use complex encryption algorithms to record online cryptocurrency transactions. They use a significant amount of computing power to ensure each transaction on the network is legitimate. The blockchain is able to store extra information which makes the NFT different from an ETH coin. It is worth noting that other blockchains can also support their own NFTs separate from Ethereum’s blockchain. Each NFT on the Ethereum blockchain has its own unique identification, including data on who created the NFT, its price, and more. To put this into perspective, let’s use the example of having one-of-a-kind Adidas sneakers made just for you. Adidas could also send an official authentication certificate that says there are not other sneakers in the world like yours. In the same way, NFTs are uniquely created digital goods (music, graphic designs, GIFs, memes, tweets, and animations) that appeal to collectors because they come with a digital certificate of authenticity due to the Ethereum-based blockchain support proving their uniqueness.
NFTs are appealing for artists who struggle to keep their unique work from being illegally downloaded or stolen. When an NFT is minted on Ethereum by a creator, this information is registered on the blockchain and becomes a digital fingerprint for the work. Artists and creators are able to secure their work and can guarantee buyers are getting an authentic product. Some NFTs have been recently sold for millions of dollars. A GIF of a flying cat with a Pop-Tart body and rainbow tail sold for $580,000 according to the New York Times. Jack Dorsey, Twitter’s CEO, sold an NFT version of his first tweet on the website for $2.9 million at an auction. While these digital assets cannot be held physically, they are selling at extremely high prices because buyers are looking for authentic virtual artwork via NFTs.
Many investors wonder if NFTs will be the next investment vehicle, like cryptocurrency. NFTs, like any piece of artwork, are risky. They are even higher risk than investing in Bitcoin or Ethereum; with cryptocurrency, you can evaluate and make a wise bet on its value increasing over time as Bitcoin and Ethereum become more widely accepted forms of payment. NFTs are more of a collector’s item for fans of crypto-art and are just beginning to gain popularity. NFTs are not well-known and have not yet gained mass acceptance. This does not mean that using an NFT as an investment tool is out of the question. Purchasing an NFT album from a well-known musician this year may turn out to be a great investment if something significant happens to that musician in the future. If the musician’s fame skyrockets or they experience a publicized tragedy, you may be able to resell that NFT album for double or triple the price of your original purchase. This is a massive gamble, though, and your NFT investment could plummet in value if the hype dwindles and demand wanes. Keep in mind that if the value of Ethereum falls, NFTs will also lose value.
NFTs can be found on platforms including OpenSea, Nifty Gateway, and Rarible. These platforms are currently seeing more members of the public willing to spend large sums of money or cryptocurrency to purchase tokens that represent ownership of unique digital goods. Even Christie’s Auction House held its first digital auction for a digital collage by an artist named Beeple, which sold for nearly $70 million. With history-making sales so early in the year, digital art tokens are becoming one of the biggest breakthroughs of 2021. The structure of an NFT, being modeled after artwork instead of shares, implies that they may not be subject to the same types of financial regulation as stocks or cryptocurrency. Those wanting to enter the world of NFT artwork should consider whether the transfer of this type of token will be subject to certain taxes, what value it truly represents, and what rights the owner will be given for display of the artwork.
Houston Cryptocurrency Lawyers
If you have any questions about how state and federal laws might impact a recent or upcoming NFT transaction, we encourage you to reach out to the Houston cryptocurrency & blockchain lawyers of Feldman & Feldman to discuss your situation. Contact our office today to set up a consultation.