We’re seeing new projects and stories about this novel way of buying, selling, and recording ownership of all things digital almost every day.
With so much hype and jargon out there, we decided to write up this quick post giving people living everything they need to know about NFTs.
What’s an NFT?
NFT is an acronym for “Non-Fungible Token.”
Let’s break those terms down a bit.
Fungible or fungibility means the ability to change one item for something else of the same value. For example, if you had two 250 ml jars of your favorite peanut butter, it would be fungible with one 500 ml jar of the same brand.
Non-fungible means nothing exists that has equal value to a particular item. (That could very well be your favorite peanut butter. All other peanut butter makers have inferior peanut butter, at least in your eyes).
A token is a crypto asset that writes transactions and ownership onto a decentralized ledger (aka blockchain).
NFTs, in other words, are a digital way to show ownership of a unique asset.
Unlike cryptocurrencies, NFT are indivisible.
That means it’s impossible for more than one person to own one simultaneously.
(A group of investors could pool their money together and buy an NFT. However, the NFT wouldn’t show who in that pool owns what).
This (very) new technology has a lot of practical uses as it enables people to collect and claim ownership to digital assets like:
NFTs could even change the physical world. Not only could they help digitize collectibles, but they could also replace property contracts.
If you’ve ever bought real estate, you know all too well about the paperwork involved. An NFT could replace a physical deed and simplify the notary process.
How NFTs work
NFTs work through a (mostly) straightforward, digital process.
A content creator goes to an NFT platform and uploads the content they want tokenized.
From there, she’ll be able to set some parameters around the token.
For example, she could upload a special remix of a song she made and offer an exclusive download to NFT holders.
She’ll then set the amount of NFTs she wants to be issued for the piece of content.
From there, she mints the NFT, putting it on a marketplace where a collector/investor can purchase or bid on it.
When an investor purchases the token, he receives its unique address into their wallet.
At the same time, the platform records the change in ownership, going from the creator’s wallet to the new owner’s one.
This transaction is permanent as the platform writes it to the blockchain.
The owner is now free to do whatever he wants with it.
He could hold onto the NFT and benefit from any ownership perks, or he could sell it for a profit (hopefully).
Here’s an example we saw in Barcelona, where we’re headquartered.
This street art was one of many on the ever-evolving walls around the Tres Xemeneies park.
The artist referenced the project’s name and the NFT’s ID in the tag, which we found on a marketplace.
Reading through the transaction history, someone purchased the asset on October 18th for 0.85 Ethereum(ETH) or 3,506.22 USD.
The owner currently has it open for bidding, with the highest price at 1.3325 ETH (or 5,330.23 USD) as of this writing.
What’s the benefit for me as an investor to get an NFT?
So if you’re still with me, you might be thinking: “okay cool. So what’s the point of all of this?”
(Even if you’re not still with me, you probably have that question as well).
That’s a valid point.
We see them being useful for a few reasons.
From an investment point of view, NFTs are excellent for diversification.
An NFT is what we call an “alternative asset.”
In finance-speak, that’s any investment outside of traditional stocks, bonds, and real estate. Alternative assets are fantastic tools for diversification as they have little in common with their conventional counterparts.
We’ve said it a million times, but it’s still worth repeating:
The number-one way to minimize risks in your portfolio is through diversification. In that sense, NFTs, on the surface, have tons of value.
Outside of the financial realm, NFTs offer a couple of other benefits.
For one, you’re able to financially support a project or creator. Digital artists have long suffered from piracy diluting their value.
While NFTs might not solve that problem entirely, it certainly helps them receive compensation for their passion projects.
Second, NFTs are one of the hottest trends in crypto-tech, which is still in its nascent stage. Purchasing a token helps validate the technology.
By being an early adopter, you’re voting on the medium’s future with your wallet.
Where can I buy NFTs?
As we wrote above, it’s possible to collect basketball highlights via the NBA Top Shot platform.
Right now, Ethereum is the cryptocurrency of choice for NFTs as the coin’s creator optimized their blockchain for them. Therefore you’ll need to have a crypto wallet and Ethereum to purchase an NFT.
That said, some platforms and issuers take other cryptocurrencies, so make sure to check before purchasing.
Does it make sense to invest in an NFT while living abroad?
If you’ve read some of our other pieces, you’ll know that we never commit to a “yes or no” answer on investment advice.
The reason? We don’t know you, making it impossible for us to say what’s suitable for your needs and profile.
(Sorry. However, we can get to know each other and build amazing investments together.
Sign up for our early access now!).
What we can give you are some guidelines to help you figure out if and where NFTs are a good fit for you.
NFTs are part of what we’d call the “sexy” part of your investment portfolio.
Any well-built portfolio will have a mix of dull and exciting investments.
The boring part will make up the bulk of your investments (we like ETFs for that).
That gives you a solid foundation that can weather all sorts of market storms while having a bit more fun.
The “sexy” part of your portfolio can be more exotic and alternative assets like crowdlending and cryptos.
It’s here where you’d want to place an NFT into our investment strategy.
There are many risks here, so going all-in on NFTs has a high chance of ending poorly. As a new technology, NFTs are in uncharted territory.
There’s a ton of risk involved, and it will be only one or two NFTs in your portfolio that will bring the most return (hopefully).
In other words, NFTs should be a supporting member and not the core of the way you’re building your wealth.
Speaking of risk, here are some of the most important ones to be aware of.
- Liquidity risk: even if there are marketplaces for NFTs, there aren’t always buyers and sellers. If you need cash (or “liquidity,” as we finance people call it), your NFT might be hard to sell. Further, even if you find a buyer, you might have to take a loss as she’ll have all the leverage against you.
- Exchange rate risk: many NFTs price in Ethereum. Unless you’re living in an Ethereum-based economy (spoiler: you’re not), you have exchange rate risk between ETH and your main currency.
- Regulatory and taxation: like all things crypto, there’s not much clarity on NFT rules and taxes. Holding NFTs between different countries could be extra problematic for people living abroad since the rules lack any standards. That could mean extra tax bills and reporting requirements.
NFTs aren’t green
As people living abroad, we have a first-hand view of what climate change looks like. Despite the futuristic promises of crypto, the technology behind it is energy-intensive.
NFTs might not align with those goals if being an environmentally responsible investor is important to you.
I’m a creator living abroad: should I use NFTs to sell my work?
It’s a fascinating time to be a creator right now, thanks to NFTs. If you’re an artist living abroad, NFTs offer a fantastic opportunity to reach a bigger audience and more supporters.
If you’re thinking of creating content and listing it as an NFT, here are some points we think you should keep in mind.
You’ll be receiving crypto (probably ETH) when your NFT sells. That means a currency risk.
As we mentioned above, holding crypto represents an exchange rate risk for investors. The longer you keep the crypto, the more chance you can see the value of your sale fall.
If that’s not part of your financial strategy, convert to a stablecoin or even fiat (better) immediately after the sale.
Of course, you could also put the crypto to work as part of your sexy strategy. It’s up to you to decide how you want to use your profits.
Depending on where you are, the taxes could get complicated.
Assuming you don’t want to break the law, there’s no getting around tax obligations. If you’re selling an NFT, you’ll have two potential tax hits:
- At the time of sale (income tax)
- When you convert from crypto to fiat
Many creators know the first part but tend to overlook the second.
Yet, it’s an essential detail as tax authorities will calculate the difference between the crypto’s price when you sold the NFT and its price when you convert to fiat.
That difference could mean a second, hefty tax on the content you sold.
Obviously, taxes change from country to country. Still, it’s crucial to do your homework beforehand to avoid nasty surprises later.
Make sure whatever platform you’re using is legit.
It’s the Wild West out there, and getting scammed, losing your earnings (or both) sucks.
You (probably) know it already, but marketing is your key to NFT success
Creators love to create and hate to sell. Yet, with the NFT market being wildly popular right now, success on this platform means standing the f#ck out. Joining or participating in communities will help you reach a larger audience, meaning more sales.
An exciting future
NFTs are probably the first crypto-backed tech to have an actual use in the mass market.
This field will be an exciting one, and it represents an exciting way to invest (a small part of) your money.
As a person living abroad, will you be investing in NFTs?