Headline: Be careful not to get Token.
Date:3/1/2022
Body: OK, “nonfungible” is not a word that many people encounter on a regular basis. I promise you that it has NOTHING to do with mushrooms. So, what DOES it have to do with?
What the heck does “fungible” mean?
Fungible just means that one certain quantity of that asset is identical to the same quantity of that asset taken at an other location. Let’s mess with Texas a bit. When you store oil in a tank, you usually have several owners represented by that tank. But for quantity, Frank’s oil is identical to Dan’s oil, is identical to Cal’s oil. The oil is fungible. Pieces of land, for instance, are never fungible because, each one is unique, by definition.
NFTs are originals of digital art or music (or other novel composition), and are code-numbered to prove that it is the original. Like a series of gallery tags on the backside of a painting, these code numbers are there to prove the authenticity and unique nature of the original.
Are there REALLY Markets for these NFTs?
The cynical side of me says that “there shouldn’t be.” But, there seems to be a genuine number of people who are interested in making the investment. Somebody paid $6.6 Million to receive a video from a person named “Beeple.” Somebody paid just less than $400,000 for a 50-second video clip. A staggering $174 million has been spent on NFTs since November 2017. An NFT related to Labron James brought in $200,000. In early March 2021, Twitter CEO Jack Dorsey put up his first ever tweet from 2006 for sale as an NFT. It sold for $2.9 million nearly 2.5 weeks later. Doing a modicum of research, I stumbled upon “penguin communities.” To my dismay, this is NOT a club of hockey fans in the city of Pittsburgh. In fact, it’s even more interesting.
For decades, there have been Corvette clubs, and the only entrance requirement was to own a Corvette. The penguin communities are just like this but use NFT ownership instead of owning a chunk of automotive history.
Am I a Buyer or a collector?
Being a buyer often gets you basic usage rights, (e.g. using it as the lock screen of your cell phone), but if you are a collector, you are hoping that the market begins to value your NFT at a higher level than you purchased it.
The risk facing the collector especially, was well-stated by this author. A collection is valuable, largely due to scarcity. To paraphrase, assume the Kevin Spacey character from House of Cards put out note cards, this one pack was the only pack made. But, true to his character, the truth is that 100 packs of the notecards were created. What is preventing this from happening? The simple answer is, “not much.” Your collection would at this point, likely not be worth much at all.
OK, I’m Sold, How do I Buy?
First you’ll have to purchase a wallet that can hold NFTs and cryptocurrency. Once you have that, and have it charged with cryptocurrency, you can go out looking for NFTs to buy. The 3 biggest NFT markets appear to be the following
• OpenSea.io: This peer-to-peer platform bills itself a purveyor of “rare digital items and collectibles.” To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.
• Rarible: Similar to OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.
• Foundation: Here, artists must receive “upvotes” or an invitation from fellow creators to post their art. The community’s exclusivity and cost of entry—artists must also purchase “gas” to mint NFTs—means it may boast higher-caliber artwork
| Attribute | NFTs | Cryptocurrencies |
| Uniqueness | Unique—includes a code as a sort of Certificate of Authenticity. | Not unique, one Dogecoin is identical in value to the second Dogecoin. |
| Buying proposition | NFTs are bought and sold, but not actively traded. | Cryptocurrencies can be traded like securities. |
| Usability | NFTs are not a medium of exchange. | Can be used to buy physical items. |
Who is most interested in NFTs, and what’s in the future.
Game developers are very interested in the NFT as another income stream. Imagine if you are playing a game that follows some Mafia guy, you can make his house really unique by hanging in it art that is for sale only within the game. Perhaps, for a fee, the publisher could transfer the design of one work to a t-shirt. With NFTs, the sky is no longer a limit.
The Verdict
Cryptocurrency investing is one level of speculation. Spending this cryptocurrency to obtain one or more NFTs is yet another level of speculation. If you did invest like this, you could do fabulously well or lose your whole investment.
Think of it like changing a very high light in your home. You could go out and buy a ladder, use it once safely, but then what do you do with the ladder? You decide to instead, use one of your chairs, which unfortunately, is a rolling chair that comes readily to hand. You need just a few more inches, so you throw your balance board on top of the rolling chair and you can reach the light bulb. You have saved a bit of time, but, you are atop an unsteady platform (balance board) that is atop another unstable platform (rolling chair.) In this illustration, the rolling chair represents your investment in cryptocurrency, and the balance board represents your purchase of NFTs. It can get you places, but, you could also suffer a tragic fall. Be cautious.
REFERENCES
https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq
https://www.forbes.com/advisor/investing/nft-non-fungible-token/
https://www.thebalance.com/non-fungible-tokens-nfts-5184054
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.