What You Should Know About Investing in NFTs
While NFTs (non-fungible tokens) initially emerged as a “colored coin” on the Bitcoin blockchain around 2012-2013, the digital assets have become increasingly popular as a way to buy and sell digital artwork. Because NFTs are relatively new, however, it is unclear to analysts what their future will look like, so most are advising the same practices that apply to investments of any kind -- research and know the risks.
What are NFTs?
In short, NFTs are digital assets that represent digital collectibles like artwork or archived footage. NFTs are encoded with similar software to cryptocurrency, the latter of which is used to purchase NFTs on blockchains such as Ethereum. This coding makes each NFT unique, and grants the purchaser individual ownership and authentication of the item. In a sense, it’s like becoming a digital art/content curator. In fact, for many artists, NFTs can replace the often frustrating process of selling artwork through a gallery or the like, allowing them to profit more in the long-run.
Should you invest?
The marketplaces for NFTs are still relatively new -- as are NFTs themselves. Analysts still don’t know if they’ll just be a fad, or whether they can prove longevity for artists trying to make a sustainable profit. For investors, risks are higher for this very reason.
Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures, told Forbes “NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance...it may be worth investing small amounts to try it out for now.”
Another consideration for investing in NFTs is their tax rates; both the cryptocurrencies used to buy NFTs and the actual profits made off NFTs are subject to taxation and may have higher collectibles rates. Analysts recommend talking to tax professionals so you are aware of exactly what risks you are facing.
There’s also the added risk of digital work disappearing for whatever reason; the internet can be fickle, so there’s no guarantee that things like this can’t happen. It all comes down to doing proper research, and being prepared for whatever risks may be attached.