What are NFTs and how do they work?

Let’s get down to business: Non-fungible tokens (NFTs) are digital assets that represent real-world objects. Those objects could be anything from paintings, cars or even — as we will see in the following paragraphs — blockchain-based cryptocurrencies. They really have a long way to go from a budding concept and still have their applications limited but, exactly what are NFTs and how do they work?

In this blog, we’re going to answer that in full detail.

what are NFTs and how do they work
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What are NFTs and how do they work?

NFT is an abbreviation for Non-fungible tokens.

“Non-fungible” means that it is inimitable and cannot be swapped with any item. For instance, a crypto coin like bitcoin is fungible; exchange it one for another and you will receive the same value.

A one-of-a-kind trading item, on the other hand, is not fungible. You’d get something completely different if you traded it for a different item.


How is NFT different from Crypto?

Most NFTs are part of the Ethereum blockchain at a high level, though other blockchains have implemented their own version of NFTs. Ethereum, like bitcoin or dogecoin, is a cryptocurrency, but its blockchain also keeps track of who owns and trades NFTs.

Physical money and cryptos are fungible, and that means they can be traded or exchanged for one another. They also have the same value—one USD is always worth another USD, and one crypto coin is always worth another crypto coin. The exchangeability of crypto makes it a dependable process for leading blockchain transactions.

NFTs are different. Each has a digital uniqueness that stops these Non-Fungible Tokens from being exchanged for something that has the same value.


What’s the point of NFTs?

It depends completely on if you’re an artist who plans to sell your music or art. Or a buyer who plans to own an awesome collection of art from your favorite artist.

If you’re an artist, first and foremost, I want to express my admiration for you. Excellent work. You might be interested in NFTs because they let you sell your art that would otherwise be tough to sell especially if you’re just starting out. What will you do if you come up with a really cool digital sticker idea? Is it thinkable to sell it on the App Store or any digital marketplace? Unlikely.

Besides, some NFT marketplaces have a feature that lets you guarantee that you are paid a percentage every time your NFT is sold or traded. This ensures that if your work becomes extremely popular and increases in value, you will earn some of the profits.

If you’re a buyer, one of the most obvious advantages of purchasing art is that it allows you to financially support artists you admire, and this is also true for NFTs. Purchasing an NFT usually includes some basic usage rights, such as the capability to post the image online or set it as your profile picture. There are also bragging rights to owning the art, with a blockchain entry to back it up.

Making money with NFTs is not limited to the arts, though.

what are NFTs and how do they work - Nyan cat image NFTs
‘Nyan Cat’ Crypto Art image from Hypebeast

Nyan Cat, a GIF from 2011 depicting a cat with a pop-tart body, sold in February of 2021 for about $560,000. And as of late March, sales of NBA Top Shot exceeded $500 million. LeBron James’s single clip NFT sold for more than $200,000.

NFTs can function in the same way as any other speculative asset in that you buy it and hope that the value rises one day so that you can sell it for a profit.


Are NFTs subject to taxes?

When sold for a profit, NFTs, like stocks, are subject to capital gains taxes. Although the Internal Revenue Service (IRS) has not yet defined what NFTs are classified for tax reasons, they may not enjoy the favourable long-term capital gains rates that equities do and may even be charged at a greater collectibles tax rate because they are deemed collectibles.

Whenever putting NFTs into your portfolio, talk to a tax expert because the cryptocurrencies you used to buy the NFT might be subject to taxation if their value has risen after you bought them.


Are NFTs bad for the environment?

Yup, NFTs are harmful to the environment. The Ethereum network is where the majority of NFTs are traded. This means that each transaction is established by a sort of mining procedure. Many people are concerned about the energy used in mining because they believe it contributes to carbon emissions if non-clean energy sources are used.

In a nutshell, here’s how it works:

  • The Ethereum blockchain is used by the majority of NFTs, which necessitates a proof-of-work system that confirms each new block.
  • To confirm the block, computer networks must solve complex problems.
  • The entire network expends energy in the hope of receiving the gas fees generated by block confirmation.
  • This system incentivizes miners to invest in more hardware, which necessitates even more grid power.
  • Greenhouse gas-emitting power sources have a negative impact on the environment.

How to buy NFTs

If you are interested in buying NFTs and plan to make a collection of them, you’ll need these:

To start, you must acquire a digital wallet that lets you stock crypto and NFTs. Depending on the currencies accepted by your NFT provider, you may need to purchase some cryptocurrency, such as Ethereum.

You can now buy cryptocurrency with a credit card on platforms such as:

You will then be able to transfer it from the exchange platform to your chosen wallet.

As you study your choices, keep in mind the fees. Of course, when you buy crypto, most exchanges out there charge you at least a fraction of your transaction.


Where to buy NFTs

After you have set up and funded your digital wallet, choosing NFTs sites to buy is endless. Here are the major NFT marketplaces now:

  • Foundation: To post their art here, artists must receive “upvotes” or an invitation from other creators. Because of the community’s exclusivity and high entry cost—artists must also purchase “gas” to mint NFTs—it may have higher-caliber artwork.

    It may also mean higher prices, which isn’t necessarily a bad thing for artists and collectors looking to capitalize if demand for NFTs remains stable or even rises over time.
  • OpenSea.io: This peer-to-peer platform markets “rare digital items and collectibles.” To get started, simply create an account and browse NFT collections.
  • Rarible: is an open marketplace where artists and producers can create and sell NFTs, similar to Opensea.io. On-platform RARI token owners have the ability to vote on features like charges and community rules.

Although these and other platforms are home to thousands of NFT contributors and collectors, do your research before purchasing. Some artists have been conned by scammers who have listed and sold their projects without their consent.


So, should you buy NFTs?

The decision to invest in NFTs is essentially a personal one. It’s something to consider if you have more additional money, particularly if the item holds special significance for you.

But remember that an NFT’s worth is entirely dependent on what another person is prepared to pay for it. Demand, not structural, analytical, or economic variables, which normally affect stock prices and, at the absolute least, provide the foundation for investor demand, will therefore determine the price.

Because of all of this, an NFT might not be worth what you spent on it. You may not be able to sell it at all if nobody really wants it.


Well, that’s all for NFTs! I hope you enjoyed and learned everything there is to know about this trendy digital currency that Gen-Z has gone crazy about.

Not ready to start your journey on NFTs but want to start with day trading instead and find out if it’s worth day trading crypto? Book a free 15-minute discovery consult with a former student, Susanne!

4 thoughts on “What are NFTs and how do they work?”

  1. Thanks a lot for this comprehensive and valuable post on NFTs. I really didn’t know much about NFTs. But I was also looking for this. You have done a good detailed description in this post. I learned a lot. And do NFT for me too. Keep posting like this. I will definitely share

    Reply
  2. Thank you for your wonderful explanation of NFTs and how they work, as I had no idea before I read this article. There was just one thing I was unclear on. One can purchase NFT’s but not trade them for something of equal value. However can one sell them or would that be up to the creator of the NFT?

    Reply
  3. I am in the process of building knowledge about digital currencies and NFTs. 

    I see people have made money from Crypto, Doggie, and from NFTs.

    This post provides knowledge for making better decisions. Thank you for this.

    I am not ready to invest yet in this platform yet. 

    Do I understand Art, the core knowledge about earning from NFTs? No. It takes time to acquire and I will wait to join.

    Your post is helpful to many artists and people knowledgeable in this field,

    Reply
  4. I found out about it for the first time now. You explained it very well. I think the world will soon change with the use of NFTs. As far as I understand, an NFT can represent any real-world object. Does this mean that identity cards will also be in that format? I am interested in the process itself regarding Non fungible tokens. When it comes to works of art such as paintings, does this mean that the image is scanned and transferred to NFT format or that artists have to create their works using digital tools?

    Reply

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