Table
of Contents
Introduction........................................................................................... 5
NFTs
Explained...................................................................................... 6
How
NFTs Work.................................................................................. 12
How
to Use NFTs................................................................................ 16
How
to Purchase NFTs....................................................................... 22
Risk
Management............................................................................... 25
How
to Get Started with NFTs........................................................... 28
Resources............................................................................................. 35
One
new asset you might have seen exploding onto the market is the NFT or
Non-Fungible Token.
From
music and art to everyday items like toilet paper, these digital assets are “selling like 17th Century exotic Dutch
tulips,” say Forbes writers Robyn Conti and John Schmidt.
The
question is: are they worth the money (or the hype)?
Some
experts feel they are “a bubble poised to pop,” while others believe NFTs are
going to change investing forever.
In this special report, we’ll take a close look at what NFTs are, how they can
help your business and so much more.
Let’s begin!
What exactly is an NFT?
It’s
a digital asset that represents some real-world object like music, art, in-game
items, or videos. NFTs are bought and sold online, often with cryptocurrency,
and are usually encoded with the same underlying software as many cryptos.
NFTs
are becoming well-known now, though they’ve been around since 2014, because
they’re an increasingly popular way to buy and sell digital artwork.
Conti
and Schmidt report that “a staggering $174 million has been spent on NFTs since
November 2017.”
NFTs
are usually either one of a kind, or one of a very limited run, so they have
unique identifying codes. Arry Yu, chair of the Washington Technology Industry
Association Cascadia Blockchain Council and managing editor of Yellow Umbrella
Ventures says they “essentially … create digital scarcity.”
This
contrasts with most digital creations, which are almost always practically
infinite in supply.
So,
cutting off the supply of a given asset should raise its value (assuming it’s
actually in demand at that moment).
Many
NFTs, especially nowadays, have been digital works that already exist in some
form elsewhere (like securitized versions of digital artwork that’s already out
on Instagram).
Why
are people willing to spend so much money on something they could screenshot or
download elsewhere?
“Because,”
say Conti and Schmidt, “an NFT allows the buyer to own the original item.”
Also,
since it has built-in authentication to serve as proof of ownership, collectors
can amass an online collection. Some collectors even value “digital bragging
rights” almost more than the item they’ve purchased.
People
are starting to answer the question: how
do we assign value to something that doesn’t exist? What is a digital object
worth?
“While
we were all waiting for virtual worlds to spring up,” says Joe Procopio,
entrepreneur and founder of TeachingStartup.com and GetSpiffy.com, “Facebook
was selling out of Oculus.
While
we were laughing or wincing at the pop culture references in Ready Player One,
Minecraft was letting its players build their own blocky starter-kit societies.
And
while we were debating the ‘realness’ of Bitcoin as a currency, someone was
paying 170,000 real dollars for a CryptoKitty.”
If
you’re an entrepreneur, you can’t help but wonder about the method of
calculation on that $170,000 digital cat’s valuation.
The
value of that CryptoKittywas determined by the expectation that its value would
increase over time. That same speculation “drove the great alt-coin rush of
2017, and some painful lessons resulted in a hardening of the rules of value
for digital currency.”
Many
have found that some of the “must-haves” for almost every type of token come
down to scarcity, supply and demand, ability to transact, and tangible proof of
ownership.
The
digital coin is still only a virtual piece of money, and ownership is still
only in the virtual sense. But thanks to the implicit rules in the blockchain
(documented by smart contracts), virtual ownership became “real enough.”
What’s the difference between an
NFT and cryptocurrency then?
NFT
stands for Non-fungible token. A fungible asset, like physical money and
cryptocurrencies, can be traded or exchanged one for another.
They’re
also equal in value. One dollar is always equal to another dollar and one
Bitcoin equals any other Bitcoin.
In
fact, cryptocurrency’s fungibility makes it a trusted means of conducting
transactions on the blockchain.
On
the other hand, a non-fungible asset, even if built using the same kind of
programming as cryptocurrency, cannot be exchanged with any other non-fungible
asset.
Each
NFT has its own digital signature that makes it impossible for it to be
exchanged for (or equal to) another one.
For
example, say you have two different video clips from an NBA game.
One
clip isn’t even necessarily equal to the other clip, much less to an entirely
different work of art.
You’ve
heard of blockchain, probably as the underlying process that makes
cryptocurrencies possible. It’s basically a ledger recording transactions.
NFTS
exist on a blockchain, usually the Ethereumblockchains (although other
blockchains support them as well).
An
NFT is “minted” (created) from digital objects representing both tangible and
intangible items, including art, GIFs, videos, sports highlights, collectibles,
video game skins & avatars, designer sneakers, and music.
You
can even sell a tweet. In fact, Twitter co-founder Jack Dorsey sold his very
first tweet as an NFT for nearly $3 million!
Essentially,
an NFT is like a physical collector’s item, only it’s digital. Instead of
buying a physical painting to hang over the mantel, you get a digital file. You
also get exclusive ownership rights because an NFT can only have one owner at a
time.
Its
unique data makes it easy to verify ownership and transfer tokens between
owners. Also, the creator or the owner can store specific information inside
their NFT, such as the artist’s signature in the metadata.
NFTs
give artists and creators the power to protect and authenticate their work like
nothing before. With an NFT, a creator can certify that a piece of art is one
of a kind. This can make the demand for NFT creation higher than ever.
The
problem is, all the value proposition of a digital work is tied to
speculation—the promise that the value of that work will increase (or at least
hold steady) over time. Who’s making that promise, though? This is where things
can get sketchy, according to Joe Procopio.
“Speculative
value is not to be confused with value derived from usage.”
Let’s
say you buy a saw to cut a piece of lumber for a shelf in your bedroom. The
value of that saw is directly tied to the cost of making it plus how badly you
need that board sawed. And as a saw owner, you’re not really interested in
whether or not the value of the saw is going to go up over time. Speculative
value is tied to market value.
“Your
company,” says Procopio, “is worth what’s gone into it + the speculative value
of the investment in that solution once that solution reaches peak market
saturation.”
Investors
buy shares in a company for one reason: they believe that down the road,
someone else will pay more for those shares.
Collectibles
like NFTs don’t have usage value like the saw does. You buy a painting, and the
value of that artwork is mostly tied to how it makes you feel, not how well it
can cover a stain on your wall.
Collectibles
have speculative value—and lots of it. You can purchase a piece of someone
else’s painting, sitting on their wall. You may never even see that painting in
person, but that’s not the point.
What
you want is the return when someone else buys your piece of that painting for
more than you paid for it.
“When
you get your head around that,” says Procopio, “it opens up the possibilities
for digital collectibles.”
When
you stop caring about having an actual painting above your mantel, it doesn’t
really matter whether or not that painting even exists in the real world—so
long as the rules of ownership apply.
“Blockchain
technology and NFTs afford artists and content creators a unique opportunity to
monetize their wares,” say Conti and Schmidt.
Instead
of having to rely on an art gallery or auction house, an artist can sell their
work directly to the consumer as an NFT. This also lets them keep more of the
profits.
Artists
can also program in royalties so they will receive a percentage of the sale
when that art is sold to a new owner.
This
is a very attractive feature to an artist, as they usually don’t get any future
proceeds after the art is first sold.
And
art isn’t the only way to make money with NFTs. Brands like Taco Bell and
Charmin have auctioned off themed NFT art for charity. Taco Bell’s art sold out
in minutes, with the highest bids topping $3 million worth of cryptocoins.
Charmin dubbed its offering “NFTP” for non-fungible toilet paper.
A
2011-era GIF of a cat with a pop-tart body, called Nyan Cat, sold for nearly
$600,000 in February.
Sports
is a big seller also. NBA Top Shot generated more than $500 million in sales as
of March, while a single LeBron James highlight NFT brought in more than
$200,000 on its own.
Even
celebrities are jumping on the bandwagon. Snoop Dogg and Lindsay Lohan have
released unique memories, artwork, and moments as securitized NFTs.
Let’s
get back to that imaginary painting that only exists in the digital world. The
blockchain, NFTS, and a system of record for ownership would seem to solve all
your problems.
But
here’s part of that problem you might not have thought about—and its one
entrepreneurs need to solve. The markets for physical things like saws are (for
the most part) standardized and regulated.
“If
you want to sell me a piece of your company,” says Joe Procopio, “the SEC will
definitely be involved.”
The
markets for physical collectibles like paintings aren’t as regulated, but are
somewhat standardized.
“If
you want to sell me your Tom Brady rookie card or your Fantastic Four #1,” says
Procopio, “there is at least an agreement of value based on some
standard—scarcity, condition, proof of ownership—those are all considered and
balanced across the trading card or comic book industry.”
Now
think about NFTs. The markets for virtual assets are individually controlled by
the smart contract that created that NFT. “Can you really buy a ‘piece’ of a
celebrity or their digital equivalent?” asks Procopio.
“No.
What you’re buying is speculation, and you’re also betting on the integrity of
the market maker.”
That’s
a real problem. There will be scams and lawsuits; there will be chaos around
these new markets as they struggle to exist without any connection to a
universal marketplace.
Right
now, the value rules for digital assets like NFTs are being made up on the
spot. This might be exciting to some investors, but “maybe not a great idea in
terms of risk vs. reward.”
Procopio
relates the lesson learned “the hard way” with Gamestop.
“There’s
no way Gamestop is worth any more than, let’s say $40 a share max.” But lots of
investors are still hanging on to $400-a-share bags of that company because
they believed that others would be compelled to pay more than that.
The
lesson, he says, is that we can lose the foundation of a digital asset’s value
being tied to a physical standard—"but what we can’t lose is the line
between speculation and reality, even if that reality is virtual.”
Here’s
where Procopio thinks there is some entrepreneurial opportunity.
“Most
of the action around NFTs currently swirls around creating the tokens, tying
them to a digital asset, and auctioning them off. This is the digital currency
ICO-equivalent phase of digital assets, where the quick FOMO money is made.”
The
vast majority of these assets, he says, will devalue back into the bits that
created them. But organization of digital assets has to happen at some point.
Someone
is eventually going to make an index like the Dow Jones or the Nasdaq, once the
standards of what a digital “asset” actually is gains more definition.
“Let’s
call this the Coinbase of digital assets,” says Procopio. And since speculation
is already a big part of the picture, someone is going to “white-glove” the
brokering of these assets. Let’s call this the Amazon of digital assets.”
Procopio
says it’s an exciting time to get involved as an entrepreneur—just avoid the
lure of the quick (digital) buck.
To acquire your own NFT collection, you’ll need a few key
items.
First is a digital wallet that
will allow you to store cryptocurrency and NFTs.
You’ll also probably need some
actual cryptocurrency like Ether, depending on which currencies your NFT
provider will accept.
You can purchase cryptocurrency
with your credit card on platforms like Kraken, Coinbase, eToro, PayPal, and
Robinhood. You can then move it from the exchange to your digital wallet.
You’ll need to keep fees in mind
though, as you research your crypto options. Most exchanges charge at least a
percentage of the transaction when you purchase currencies.
Once you’ve got your wallet set
up and funded with crypto, you can start shopping for NFTs. Here are some of
the largest NFT marketplaces currently:
OpenSea.io –
this is a peer-to-peer platform that bills itself as a purveyor of “rare
digital items and collectibles.” Get started by creating an account, then start
browsing their collections. You can sort pieces by sales volume to “discover”
new and up-and-coming artists.
Rarible –
this is another democratic, open marketplace like OpenSea. It allows artists
and creators to issue and sell NFTs. RARI tokens issued on the platform let
holders weigh in on features like community rules and fees.
Foundation –
this is an invitation-only platform. Artists must receive “upvotes” or an
invitation from fellow creators in order to post their work. They also have to
buy “gas” to create those NFTs.
These features mean the site may
boast a higher caliber of artwork. Of course, it may also mean higher prices
for the buyer, which isn’t necessarily a bad thing for artists and collectors
looking to capitalize (assuming the demand for NFTs stays at current levels or
even increases in the future).
Be sure to do your research before
you buy. These platforms and others host thousands of NFT creators and
collectors and some artists have fallen victim to impersonators who listed and
sold their work without permission.
Also, the verification process
for creators and NFT listings aren’t consistent across the various platforms.
Some platforms are more stringent than others, so always be cautious.
Array Yu, chair of the Washington
Technology Industry Association Cascadia Blockchain Council says it all
depends. “NFTs are risky because their future is uncertain,and we don’t yet
have a lot of history to judge their performance. Since NFTs are so new, it may
be worth investing small amounts to try it out for now.”
Investing in NFTs is largely a
personal decision—if you have money to spare, it might be worth thinking about,
especially if you find a piece that has meaning to you.
But keep in mind, the value of an
NFT is based entirely on what the public is willing to pay for it.
Demand drives the price, not the
more typical fundamental, technical, or economic indicators which influence
stock prices and usually form the basis for investor demand. This means your
NFT might resell for less than you paid for it. You even might find yourself
stuck with an NFT you can’t unload because there is no longer a demand for it.
NFTs are also subject to capital
gains taxes, just like when you sell stocks at a profit.
However, since they are treated
as collectibles, they might not
receive the preferential long-term rates that stocks receive. NFTs might even
be taxed as a higher collectibles tax rate, although the IRS hasn’t actually
ruled on what NFTs are considered for tax purposes.
The cryptocurrencies you used to
buy that NFT might also be taxed if they’ve increased in value since you bought
them. This means you might want to check with a tax professional if you’re
thinking about adding NFTs to your portfolio.
In other words, treat NFTs like
you would any investment. Do your research, know the risks, and proceed with
caution if you decide to buy.
Tyler Gallaghher, CEO and founder
of Regal Assets and writer for Forbes, produced his list of ten business ideas
for entrepreneurs to start working on now.
The good news is, you don’t have
to be a digital artist to succeed as an NFT entrepreneur. There are lots of
applications for NFTs besides art, across a variety of industries.
“As a nascent industry,” says
Gallagher, “the sky is truly the limit when it comes to potentially
money-making ideas with NFTs.”
Here a few of those ideas:
Create
an NFT Online Course: if you’ve learned a thing or two
about the NFT ecosystem and how to create, produce, and sell NFTs, considerdeveloping
a course or masterclass.
You could also charge for a week
long “bootcamp” or a semester long course (depending on your level of expertise
and investment).
Write
an NFT-Themed Blog: Gallagher says that the web is
desperate for well-written and informative NFT-related content. There’s a “huge
potential readership” for any blog that is planning to cover NFTs and the news
around them.
Then, monetize your blog with sponsors,
ads, or affiliate links after you have a dedicated readership and have built a
following.
Create
an NFT Forum or Community: The internet, says Gallagher,
needs more spaces for NFT creators, sellers, and enthusiasts to talk about
their projects.
Creating an NFT-exclusive forum
“that rivals Bitcointalk” could become a really lucrative project, especially
if you run banner ads.
Become
an NFT Broker: There’s a high demand for
secure, encrypted marketplaces and brokerages that let buyers and sellers view,
commission, and transact NFTs.
They’re being bought and sold in
record numbers nowadays, and you can get in on the ground floor here.
Create
an NFT Newsletter: There just aren’t a lot (if any)
of NFT-themed newsletters taking a deep dive into the subject. “If you can
aggregate all the latest NFT news, press releases, major auction sales and
market developments into a short monthly or weekly newsletter,” says Gallagher,
you might end up with a very profitable venture.
Write
an NFT eBook: It’s not unheard of, says
Gallagher, for a bestselling cryptocurrency book to earn six (potentially even
seven) figures in royalties.
If you’re a gifted writer, think
about self-publishing an eBook on NFTs, or you could always outsource it to
qualified writers who are experienced with NFTs. Make sure to explore the
subject from as many angles as you can while “providing actionable advice to
those who want to get started with NFT investing.”
Create
a White Label NFT Service: The NFT market needs “a
Shopify-like service that can bring a project to life with little or no
additional development.”
If you can manage to launch an
off-the-shelf NFT service to help develop NFT ventures, “you could become one
of the most popular white label platforms in the blockchain industry.”
Become
an NFT Artist: There’s nothing stopping you
from producing your own digital art, even if it’s abstract.
You don’t need to be the smartest
or most talented physical artist in the world to get started in the digital
marketplace. Convert your art into an NFT and market it on popular forums such
as DeviantArt, Reddit, or Wetcanvas.
Create
NFT Collectibles: NFTs lend themselves well to
preserving and authenticating collectibles. For example, “you could mint NFTs
out of authentic collectible items, like sports trading cards or autographed
photos.”
Launch
an NFT App: Centralized apps for buying,
selling, trading, or minting NFTS are “likely in high demand.”
An app that would mimic Bid
Beacon or BiddingOwl—but is solely focused on the NFT market—could be quite a
lucrative project if you take a commission from every sale.
Unlike other industries, says
Gallagher, The NFT business is totally new. It’s going to take years of
development before it fully matures. The same is true of whatever business
venture you launch into NFTs.
If at first you don’t succeed,
don’t sweat it. At this stage, there’s plenty of room for error.
If an NFT can bring in over $11
million at auction, there’s really no reason why a “bold and adventurous
entrepreneur” can’t build on that momentum.
Consider the many ways you can make money with NFTs, such as the ideas we’ve
discussed in this chapter, and then decide on a plan of action.
Remember, it’s the wild west right now when it comes to startup projects and
monetization methods in the NFT space.
You’re getting in at a great time so seize the moment!
To your success,
Here are links to a few
resources that I believe will help you:
NFTs Explained:
>>https://aws.amazon.com/blockchain/nfts-explained/
NFTs for Small Businesses:
>>https://www.marthastewart.com/8148532/nft-explained-small-business-benefits
What You Need to Know About NFTs:
>>https://www.inc.com/amrita-khalid/what-are-nfts-blockchain-benefit-businesses.html
How to Make and Sell NFTs:
>>https://www.creativebloq.com/how-to/make-and-sell-an-NFT
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