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What is an NFT? How do NFTs work? Is it worth the investment?

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23 mins read
What is an NFT? How do NFTs work? Is it worth the investment?

In today’s fast-paced world where everything is getting digitised and mass marketing campaigns are a common trend, it is hard to read the newspaper, browse the internet, or watch TV without the words “blockchain”, “cryptocurrency” and “NFT” flashing in front of your eyes.
I’d assume you’ve already seen multiple ads and TV commercials where famous athletes and actors would be telling you to buy cryptocurrencies or NFTs, or seen stories on the news about people buying crypto and NFTs for increasingly mind-blowing sums of money.
Today, even most of our favourite brands and companies have NFT offerings to offer in exchange for exclusive benefits. But what do these terms mean, and how do these technologies work? The rate at which these technologies are evolving makes it almost impossible to predict how the state of the market will be next week or next month in comparison to today.
But before we discuss cryptocurrencies and NFTs, it is important to understand how these digital currencies and tokens came about.

The 2008 financial crisis

The 2008 financial crisis has similarities to the 1929 stock market crash. Both involved reckless speculation, greed and fraud, loose credit, and too much debt in asset markets, namely, the stock market in 1929 and the housing market in 2008. 

The deregulation in the financial industry – which was one of the primary causes – permitted banks to engage in hedge fund trading with derivatives, and banks started demanding more mortgages to support the profitable sale of these derivatives by creating interest-only loans that became affordable to subprime borrowers. 

Moreover, within a short span of time, everybody was at it, including pension funds, large banks, individual investors and, of course, hedge funds. Some of the biggest players in this were Bear Stearns, Citibank, and Lehman Brothers. 

So, hedge funds and others sold these mortgage-backed securities (bonds), collateralised debt obligations and other derivations. 

A mortgage-backed bond in this case was a financial product, the price of which was based on the value of the mortgages that were used for collateral. These hedge funds bundled mortgages with hundreds if not thousands of similar mortgages to make a bond. These bonds were then sold to investors. 

Since the banks were able to sell these bonds, they made new mortgages with the money they received. Furthermore, the banks also understood that a mortgage became more valuable when issued as part of a bond rather than an isolated mortgage. So the banks issued loans to real estate investors to set up the required housing infrastructure, while they dished out mortgages to almost anybody on initial interest-only mortgages. It was basically risk-free for the banks and the hedge fund. The investors took all the risks of default, but they didn’t have to worry about the risks because they had insurance, which was called credit default swaps. 

Now, the problem arose when they realised that the biggest return from a bond came when it first hit the market. A new bond that created new securities sales was worth more than an old bond which was slowly appreciating but not seeing enough trades. Secondly, there were a finite number of houses and people in the US. 

Moreover, post-9/11, the banks were hit hard and, as a result, the Federal Reserve Chairman Alan Greenspan lowered the fed funds rate to 1.75% in December 2001, and then again lowered the fed funds rates in 2002 to 1.25%, also lowering the adjustable-rate mortgages. Many homeowners who couldn’t afford conventional mortgages were delighted to be approved for these interest-only loans, as a result of which, the percentage of subprime mortgages more than doubled, from 6% to 14%, of all mortgages between 2001 and 2007. The payments were cheaper because their interest rates were based on short-term Treasury bill yields, which were based on the fed fund rates. Thus, the creation of mortgage-backed securities and secondary markets helped end the 2001 recession.

While this did help the US economy recover, it also created an asset bubble in real estate by 2005. The demand for mortgages drove up the demand for housing. With loans on offer at such cheaper prices, speculators were buying houses as investments rather than a necessity as prices kept on rising, and many of these borrowers didn’t realise that the rates would reset in three-to-five years. 

By 2004, the Federal Reserve started raising rates. By the end of the year, the fed fund rates were at 2.25%. By the end of 2005, it was 4.25%, and by June 2006, it hit 5.25%. The borrowers were hit with repayments that they couldn’t afford. 

Besides, supply also outpaced demand by 2006 and housing prices started to fall. However, falling prices meant the homeowners couldn’t sell their homes for enough to cover their loans, while ridiculously high fed fund rates meant new owners were priced out despite the fall in price. Thus, one by one, homeowners started defaulting on their mortgages. Eventually, the default rate reached criticality and the bonds failed. As the bonds failed, this directly affected its first order buyers, i.e., hedge funds, pension funds, retirement savings funds and banks. It also cascaded through all derivatives, which were financial products that were taking their value from the value of the bonds. 

This created a knock-on effect: as huge segments of the economy turned out to be rotten trees and one by one started to collapse, this created the banking crisis in 2007, which spread to Wall Street in 2008. With its global reach, the US banking industry almost pushed most of the world’s financial system to near collapse as well. 

To override this crisis, the US government was forced to implement enormous bail-out programmes for financial institutions previously billed as “too big to fail”.  

The origin of Crypto

When the US investment bank Lehman Brothers Holding Inc. filed for bankruptcy, it laid the breeding ground for both anti-capitalist and hyper-capitalist movements, with both groups seeing themselves as victims of this naked display of greed and fraud. 

While one group diagnosed the problem as the banking industry’s inherent corrupt and corrupting incentives, the other diagnosed the problem as a consequence of too much regulation and too much exclusion. 

On November 1, 2008, about two months after the Lehman crisis, an engineer by the name of Satoshi Nakamoto wrote an email to a cryptography mailing list: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party. The paper is available at bitcoin.org/bitcoin.pdf.”

The main characteristics of this system, Nakamoto said, would be that the transactions would be peer-to-peer and would not need to be sent to a financial institution. The system was designed to be decentralised, meaning the user would not have to repose their trust in a central authority, such as traditional banks. 

Satoshi also expressed dissatisfaction at banks for repeatedly breaching the trust of people who deposit their money with them by lending out the money in credit bubbles while keeping very little in reserve. “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust,” Satoshi wrote. 

Just a few months after floating the idea, Satoshi created 50 Bitcoins with the very first transaction on the blockchain at 18:15:05 hours on 3 January 2009. The system is so designed that the initial 50 BTCs can’t be used or spent.

With Bitcoin and the idea of decentralised cryptocurrency gaining popularity by 2011, other cryptocurrencies started popping up. Litecoin was among the first cryptocurrencies to come up in 2011. Ether, another popular decentralised currency, came into existence in 2015. At present, there are tens of thousands of cryptocurrencies being traded worldwide. 

While Satoshi wanted Bitcoin to be a currency which could be used for peer-to-peer transactions without having to trust a third party like a central bank, over the years, Bitcoin and other cryptocurrencies have turned more into assets for speculators than a currency for the masses.

Now, before we dive into what NFTs are, how they work, and everything that comes with it, it is important for us to know what a blockchain is, and why it is relevant to NFTs. 

What is a blockchain? 

A blockchain is a system for securely recording and storing information and transactions in a database that is duplicated and distributed across a network of computer systems. A blockchain database is referred to as a “distributed ledger technology”. 

Blockchain ledgers can be made either public (like Bitcoin) or private (like a close intranet network). Unlike a traditional database which usually structures data into tables, the blockchain ledger collects information and puts it into groupings or units known as “blocks” that hold a set of information or data.

The type of transaction and amount of data that can be captured in a block depends on the blockchain. When a transaction is entered into a blockchain system, it is transmitted to a network of peer-to-peer computers that can be anywhere in the world. There are different protocols available for validating transactions on the blockchain, and different blockchains may use different protocols to validate their transactions. 

Once the transactions are confirmed to be legitimate, they are chained together in blocks that are given an exact timestamp and a cryptographic signature called a hash. The block constitutes the ledger to create a long history of transactions that is permanent and immutable, immutable being the keyword here. 

Immutability is an important feature since it means that if one block in a chain is altered, the entire block fails. This makes it impossible to change, hack, or cheat the system. For instance, if a hacker wants to corrupt a blockchain system, they’d have to change every single block in the chain across all distributed versions of the blockchain, which is highly unlikely from a technical standpoint. 

What is an NFT? 

An NFT is a non-interchangeable unit of data stored on the blockchain but differs from a cryptocurrency, which is fungible and interchangeable. It is a form of digital ledger that can be sold and traded with a buyer.

An NFT can be associated with a particular digital or physical asset including but not limited to, arts, songs, sports highlights, and other types of digital files. It uses blockchain technology to provide verifiable proof of the item the NFT is associated with. 

However, just like purchasing a limited-edition signed and numbered print of a photograph does not transfer copyright ownership of the photograph to the purchaser, purchasing an NFT does not necessarily confer any of the intellectual property (i.e. copyright) in the subject matter of the NFT. 

The underlying intellectual property right may be transferred by a smart contract associated with the NFT, but caution should be exercised here to make sure that no conflict exists between what is in the smart contract and what is in the terms of the website or platform on which the NFT is created or purchased.

How is an NFT different from a cryptocurrency? 

As stated above, NFTs are non-fungible tokens, generally built using the same kind of programming as cryptocurrencies like Bitcoin and Ether, but this is where the similarities end. 

Physical money or cryptocurrencies are fungible, which means they can be exchanged or traded with one another. This is because they are also equal in value. A dollar will always be equal to another dollar, and one unit of Bitcoin will always be equal to another unit of Bitcoin. 

For instance, Ether is a cryptocurrency, but its blockchain, Ethereum, supports NFTs, which store additional information related to the digital file or other unique items they are associated with. This is where cryptocurrencies and NFTs differ because, in Ether’s case, only the amount, the transaction date and information of the sender and the receiver are stored on the blockchain. 

NFTs are different. The unique digital signatures make it impossible for NFTs to be exchanged for or traded with another. For example, an NBA Top Shot clip is not equal to any other NFT or, for that matter, another NBA Top Shot clip due to its non-fungibility. 

How does an NFT work? 

NFTs exist on a blockchain, an underlying process that makes cryptocurrencies possible, but works as a distributed public ledger that records transactions. They are typically held on the Ethereum blockchain, although other blockchains support them as well. 

An NFT can be created or minted from digital objects that represent both tangible and intangible items, including but not limited to: 

  • Art
  • GIFs
  • Video clips
  • Collectables
  • Virtual avatars and video game skins
  • Designer sneakers
  • Music 

In simple terms, NFTs are like physical collector’s items, only in digital format. So, instead of getting signed memorabilia to decorate on one’s shelf, the buyer gets a digital file instead, which gives them exclusive ownership rights. 

Yes, an NFT can have only one owner at a time. Its unique data makes it easy to verify an NFT’s ownership and transfer tokens between owners. An owner or creator can also store specific additional information inside them. For example, an owner can store their signature or include giveaways in an NFTs metadata. 

What are the uses of NFTs? 

NFTs and blockchain technology give artists and content creators a unique opportunity to monetise their content or wares. The days of artists and creators relying on galleries or auction houses to sell their art are gone now. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits. 

Artists can also program in royalties in order to receive a percentage of sales whenever their art is sold to a new customer. This is an attractive proposition since artists usually do not receive any future proceeds after their art is sold for the first time. Moreover, art isn’t the only way to make money from NFTs. 

Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, sold for nearly US$600,000 this February, while Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT for more than US$2.9 million. Besides, brands like Charmin and Taco Bell have also auctioned off themed NFT to raise funds for charity. 

How to create an NFT? 

For artists and creators, NFTs can be transformative as they enable them to own their digital work, sell it, and even earn profits from future proceeds. While one can create NFTs on computers or laptops, people also have the comfort to mint NFTs on their phones. 

However, before creating or minting, you are going to need a cryptocurrency wallet to set up your account on any NFT marketplace in order to create an NFT. Metamask and Coinbase are two of the most widely used marketplaces for this. Furthermore, when you’re creating your cryptocurrency wallet, you’ll be given a 12-word ‘seed phrase’, this is a unique password and should be stored securely for future references. 

While you can use any NFT marketplace, I’ll be guiding you on how to create NFTs with a similar marketplace called Rarible. Once you’ve set up your account (tasks like adding a username, photo, bio), you’ll have to link your Metamask account to your Rarible account by following the given instructions. Linking the two accounts ensures that your NFTs will appear in your wallet and all transactions can be completed with ease.

Finally, when it’s time to upload your artwork and begin creating an NFT for free, these NFT marketplaces like Rarible have very user-friendly guides to assist you while uploading your art, and the process too is very user-friendly (some marketplaces may want to verify your account first, which could take up to a couple of days to process). 

Next up, you’ll be asked to create a tab and continue where you’ll now be asked to choose a blockchain. Rarible gives you four choices, including the new low-carbon cryptos Flow, Tezos and Polygon. But to create an NFT for free, choose the Ethereum blockchain. 

Once you’re done with that, the next few options will help you decide the value and the type of NFT you’re creating. For instance, choosing ‘Single’ lets you create a one-off NFT, while ‘Multiple’ lets you mint a series of NFTs to create a collection. After deciding on the type of NFT you want to mint, set the price, add a name and a description, and make sure to switch Free Minting to “ON”. 

Free minting or lazy minting enables you to put the fees for minting onto the buyer so that you don’t get charged. Normally, users are charged ‘gas fees’ — the cost of transacting on the blockchain — to mint an NFT. The unit of gas fees is “Gwei” and, depending on the traffic on the blockchain, the minting fees can fluctuate; the greater the traffic, the higher the minting fees. 

However, one major downside to minting for free is that, since you’re pushing the gas fees onto the buyer, you may need to lower the asking price or auction off the NFT and let the buyer decide. Besides, these NFT marketplaces always tend to push the ‘normal’ NFTs, making them more visible. Thus, you’ll have to be on your A-Game, especially on social media channels and platforms, to promote your NFTs. 

Where to buy NFTs? 

Before you start buying NFTs and building your own collection, there are a couple of things that you should acquire beforehand. 

First things first, you’ll need a digital wallet that allows you to store NFTs and cryptocurrencies. And most probably, you’ll likely need to buy some cryptocurrencies, depending on what currency your NFT provider accepts. 

Buying cryptocurrency has become a cakewalk nowadays since you can buy crypto using a credit card on platforms like Coinbase, eToro, and even the likes of PayPal and Robinhood. However, you’ll have to keep fees in mind while looking at various options since most exchanges charge at least a percentage of your transactions when you buy crypto. 

Once your wallet is set up and funded, there’s no shortage of NFT sites to shop at. Some of the most popular and trusted marketplaces are: 

  • OpenSea.io: This peer-to-peer platform is one of the most dominant NFT marketplaces with a valuation of US$13.3 billion, which is ever-growing. To get started, all you need to do is create an account to browse for NFTs. There are many features to sort and search for different NFTs as per your taste and need. 
  • Rarible: Similar to OpenSea, Rarible is a democratic, open marketplace that enables artists and content creators to issue and sell NFTs. Rarible makes use of two NFT token standards: ERC-721, which allows for the creation of one-off unique items, and ERC-1155, which allows for the creation of multiple editions of an item. 
  • Foundation: Unlike the two marketplaces mentioned above, the Foundation community’s exclusivity and cost of entry — artists needing to purchase “gas” for minting — means it mostly boasts of high-quality artwork. Although it may imply higher prices, it isn’t necessarily a bad thing for artists and creators who are seeking to capitalise, assuming the demand for NFTs stays at current levels or increases in due time. 

While these platforms and others are hosts to thousands of NFT creators and collectors, the verification processes for creators and NFT listings aren’t consistent across all platforms, with some being more stringent than others. Platforms like OpenSea and Rarible, for instance, do not require owner verification for NFT listings, while buyer protection appears to be sparse at best. 

DAOs and their functionality

DAO or Decentralised Autonomous Organisation is defined as an organisation represented by rules encoded as a transparent computer programme which is controlled by the organisation members and not influenced by a central government. 

Imagine a world where there is a way to organise with other people around the world without knowing each other, establishing your own set of rules, and making your own decisions autonomously all encoded on a blockchain. DAOs are here to do exactly that.

While Bitcoin is generally considered to be the first fully functional DAO, as it has programmed rules, functions autonomously, and is coordinated through a consensual protocol, in 2016, German startup slock.it launched “The DAO” in support of its decentralised version of Airbnb. Although it was perceived to be a great success at the time, with a crowdfunding campaign that raised over US$150 million worth of Ethereum, unfortunately, the code the startup issued in the DAO had certain issues in it. So, in June 2016, hackers managed to syphon off nearly US$50 million worth of Ethereum from the DAO before it was stopped. Even though the fault was in the slock.it code and not in the underlying technology, the hack did undermine some people’s trust in both Ethereum and DAOs in general.

A DAO needs the following elements for being fully functional: a set of rules to which it will operate, funding like tokens that the organisation can spend to reward certain activities to their members, and also provide voting rights for establishing the operation rules. Most importantly, it is a secure structure that allows every investor to configure the organisation. 

However, one of the key drawbacks is with the voting system. Even if there is a glitch or a security hole in its initial code, it cannot be corrected until the majority votes on it. Thus, while a voting process is underway, hackers can use a bug in the security hole to cause mayhem. 

The playground for scammers

While NFTs are becoming more and more popular with each passing day, it would be really unwise to ignore the risks associated with them. Apart from becoming digital currencies, cryptocurrencies have become lucrative investments but are always vulnerable to increasingly savvy attacks. 

Most NFTs contain a simple URL that points to where the actual file is stored, often on a centralised server susceptible to hacking. To combat this, NFT data needs to be stored on-chain. 

Nifty Gateway, one of the most trusted NFT marketplaces in the world, was hacked nearly a year ago, where attackers targeted Nifty Gateway accounts that lacked two-factor authorisation, stealing thousands of dollars of artworks and NFTs. 

While the Nifty Gateway heist cost collectors and creators thousands of dollars, more recent attacks have seen creators lose hundreds of thousands of dollars worth of NFTs.

On a similar scale, a couple of months ago, scammers stole 245 digital tokens worth US$1.7 million from OpenSea using smart contracts to transfer ownership from legitimate OpenSea users to their own accounts. Since the attackers targeted already-signed contracts, the theft became authorised transactions on the blockchain. 

But if blockchain technology supports NFTs, why is it so vulnerable? 

A digital asset only becomes an NFT when a miner adds its identifier onto the blockchain. This process is called “minting”. A digital asset can never become an NFT without this process. Minting an NFT on the blockchain, however, expends a lot of energy. 

Usually, miners charge a one-time, upfront “gas” fee to compensate for the cost. Gas fees fluctuate and are based on a percentage of an NFT’s initial and secondary sale prices, which can range anywhere between 3% and 15%. Thus, storing NFT data on-chain is expensive, which is why many creators don’t do it. 

Many centralised platforms store digital assets that only mint when purchased. Known as “lazy minting”, this approach makes NFTs more affordable for creators. At the same time, it puts their digital assets at tremendous risk of theft. An NFT’s real value comes from its assimilation into the blockchain. Creators who submit their NFTs without minting submit unprotected digital files, enabling potential scammers to upload and timestamp a digital file to Ethereum or another processing public protocol.

Apart from threatening an artist’s collection, lazy minting exacerbates plagiarism issues for the artists. NFT marketplaces that allow lazy minting are playgrounds for scammers, who can steal digital art from online galleries, websites and social media accounts and then create dozens of plagiarised NFTs waiting for someone to buy one. 

NFTs have tremendous potential to protect art ownership, but lazy minting is entirely counterintuitive to this goal. Thus, the upfront cost of storing NFT data on-chain is worth the gamble considering that the savings may be a drop in the bucket compared to the losses incurred by an artist if a hacker steals one of their valuable digital assets. 

NFTs and play-to-earn games exist to get you to buy cryptocurrencies

Play-to-earn is a business model that works on blockchain technology, where players can play a game and potentially earn cryptocurrency as income. 

In play-to-earn games, players can get hold of potentially valuable in-game assets that can be anything from skins and cards to a specific type of cryptocurrency. The more these players play, the more assets they are able to collect. While these assets in traditional games hold only in-game value, in play-to-earn games, they have real-world value as well. 

Moreover, as these games are decentralised, at any moment, players can transfer these assets to the real world and sell them for cryptocurrency or real money as they wish. The developer isn’t able to control everything from its power centre, which is the whole point of it. 

Now, recent studies have shown that the players participating in such games aren’t playing it as a game anymore; it is a source of income for them, and, more or less, most players treat these games as a money-paying job. 

Essentially, these crypto-based games reward players with small amounts of cryptocurrency, which they collect by participating in tasks, contests and any other activity the game brings. 

Developers usually have two approaches that they can consider: 

  • Native Cryptocurrencies
  • Existing Cryptocurrencies

A native cryptocurrency is one where the developer creates a game’s own native cryptocurrency in the form of tokens. They make this happen by creating a blockchain project, designing tokens and closing the deal with smart deals. 

For example, Axie Infinity is a popular play-to-earn game that runs on the Ethereum blockchain. However, since Ethereum is too slow to interact with, the developers have created a sidechain called “Ronin”, which has essentially three tokens: 

  • AXS Governance Tokens,
  • Axie Character Tokens, and
  • Smooth Love Potion Tokens or SLPs. 

Other developers, meanwhile, have opted to rely on existing cryptocurrencies. For instance, Bitcoin, Ethereum, Dogecoin, Cardance, etc. However, even though players are directly rewarded with some of the existing cryptocurrencies, the monetisation process usually takes longer and the payouts aren’t significant. 

Now, where do NFTs come into this conversation? The answer: these skins or cards or other gaming assets can themselves be sold or traded as NFTs, in-game or in any outside dedicated marketplaces. These assets are stored on the blockchain and each of them holds its own unique value. 

By “we” they mean “them” and not “us”

While cryptocurrency has been touted as the new form of digital money not tied to any central bank and is, therefore, inherently free from bias and unequal distribution, a recent study by the National Bureau of Economic Research suggests that crypto has developed its own one-percenters who will likely reap all the rewards in the coming years. 

While these hyper-rich developers pitch their ideas of “we’re all gonna make it” or “we’re all gonna get rich”, the NBER study found that the top 10,000 Bitcoin investors own a combined 5 million Bitcoins, roughly worth US$198 billion at the time of writing. These 10,000 Bitcoin owners represent just 0.01% of all Bitcoin holders and yet control more than 27% of the digital currency as reported by The Wall Street Journal

Igor Makarov and Antoinette Schoar, who wrote the NBER study, said: “Our results suggest that despite the significant attention that Bitcoin has received over the years, the Bitcoin ecosystem is still dominated by large and concentrated players, be it large miners, Bitcoin holders, or exchanges.” 

It is a system that is at once impenetrable and brittle, and that arrangement disproportionately empowers the dishonest. One of the ironies of all this is that any legitimate artistic or anti-capitalist uses of the technology are contingent on the tech remaining niche. 

Blockchains are usually just slow, difficult to use, and oblique. For most parts, their usability is largely down to having only a few users. There are also blockchains that are generally responsive and cheap, but it is because they are not popular. 

A simple example can be found in how Hic et Nunc—a well-regarded art marketplace on the Tezos blockchain—works. At Hic et Nunc, transaction fees and deflation are at a minimal rate at present, and thus a lot of the transactions are able to operate in the US$5–20 region, but that’s because they are ranked very low in the charts; high enough to attract actual users but not high enough to attract too many bots. 

Now, if Tezos goes up, as they say, “to the moon”, then everything changes. Users adopt the platform disproportionately to the scale of the validators, so the value of Tezos skyrockets and the actual marketplace of people using Hic et Nunc experiences hyper-deflation, where the hoarders are rewarded handsomely while the buyers get punished. 

You see, deflation is counterintuitive because, as the charts soar, which makes it look like a good thing, it is only good if you have the currency in hand. As the purchasing power of the currency increases, the cost of goods and labour goes down. 

Since a deflationary economy punishes buying things, anything bought today will inevitably be cheaper to buy in the future. So, if you don’t buy things that are financial assets that don’t appreciate in value, it is fair to say that you’re already in the mud. 

This is hyper-deflation. It is not only designed into cryptocurrencies with their hard cap on total coin supply but is also supported by its creators and evangelists. Thus, the hoarders and early investors keep raking in money, while the casual buyers and new buyers pay the price for it. 

Should you dip your toes in it? 

If you look closely, the driving force underlying this entire movement is economic disparity. It all comes down to the 2008 economic collapse, where techno-geeks look at people like Jeff Bezos and Bill Gates, billionaires minted via tech industry doors that now have been shut by market calcification, and look to synthesise a new market where they can be the ones to ascend from mere programmers to hyper-rich industrialists. 

The wealthy and the tenuously wealthy are looking for a place to dominate, where they can be the trend-setters, they can be the tastemakers, and can seemingly invent value through sheer force of will. 

It’s a cat-fight between the 1% and the 5%. It is a movement that is driven by rage, by people who looked at 2008, who looked at the system as it existed, but concluded that the problem with capitalism was that it didn’t provide enough opportunities to be the boot. And that was basically their pitch: buy in now, buy in early, and you can be the next high-tech future boot. It is this hope that made the casual masses buy into this pitch, people who felt their opportunities shrinking, who saw the system closing around them, who had become isolated by social media and a global pandemic, who saw the future getting smaller, who saw the casualisation of work as jobs dissolved into gig economy and wanted a reason to convince themselves that there is always an escape, and it’s that easy. 

“NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance,” said Arry Yu, founding Chair of Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures. “Since NFTs are so new, it may be worth investing in small amounts to try it out for now.” 

In other words, investing in NFTs is a personal preference. If one has money to spare, and these digital assets hold any significance to them, it might be worth considering. But this stands in stark contrast to most digital creations. Ideally, cutting off the supply of a given asset should raise its value, assuming it’s in demand. However, many NFTs nowadays have been digital creations that already exist in some other form elsewhere. 

Besides, an NFT’s value is entirely based on what a buyer is willing to pay for it. Thus, demand will drive the prices higher, not fundamental, technical or economic indicators which typically influence stock prices and generally dictate the basis for investor demand. Thus, an NFT may re-sell for less than what you paid for, or it may never resell again if no one wants to buy it. Moreover, the volume of theft and scams that are taking place in the crypto marketplaces is worth considering for any investor before dipping their toes. 

Apart from that, buyers and creators must bear in mind that NFTs are also subject to tax as is the case with the cryptocurrency used to purchase these NFTs. The Indian budget for FY22 proposed imposing a withholding tax on the transfer of virtual digital assets (which should include both cryptocurrency and NFTs), to be effective from 1 July 2022. Besides, a tax deduction at source is also proposed. Thus, it remains to be seen how the taxation will work and calls for more detailed research when considering adding NFTs to your investment portfolio. 

Therefore, although many promoters and evangelists would make you believe that there’s no reason why you shouldn’t approach NFTs just like any other investment, I see more red flags than benefits, while its inherent properties and characteristics don’t appeal to me as loudly as it would to any advocate of this unstable currency. Do your research, understand the risks and rewards, and if you still decide to take the plunge, exercise caution and be alert to the market.

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