Business of: NFTs

“There are a ton of opportunities to dive in, learn and have fun. There are opportunities out there for sure, but it can be overwhelming, so just be careful.”

– Caleb Hawk, Chief Meme Officer, Pudgy Penguins

As NFTs, a category of digital assets, continue to rise in popularity, understanding what they are and how they work is crucial for business professionals looking to stay ahead of the curve.

Bored Apes, Pudgy Penguins and Crypto Punks. Are they the hottest new toddler toys? Nope. They’re all collections of NFTs — unique and verifiable digital assets stored on a digital ledger. Still unclear on the concept? We asked local NFT expert Caleb Hawk, Chief Meme Officer of Pudgy Penguins, to help us demystify these interesting collectible investments.

What are NFTs?

In the simplest terms, NFTs are digital collectibles that can be bought, sold and traded using cryptocurrency. NFT stands for “Non-Fungible Token,” meaning these digital assets are completely unique and cannot be replicated or exchanged for something of equal value. The authenticity and value of each unique NFT is documented on a digital ledger known as the
blockchain.

NFTs typically come in the forms of digital art pieces, trading cards and other collectibles. For example, baseball fans can purchase digital trading card NFTs that show video highlights from real games. In a similar vein, art collectors can add digital illustration NFTs to their collection. Since each NFT is unique and can be authenticated through the blockchain, artists and collectors can easily prove ownership and track the value of the asset over time.

NFT Terms Translated

• Blockchain: A shared ledger that can be used to record any transaction and track the movement of any tangible, intangible or digital asset.
• Cryptocurrency: A digital or virtual currency that uses encryption to secure transactions and isn\’t
  regulated by banks.

What makes NFTs different from other digital assets?

The biggest feature distinguishing NFTs from other digital assets like photos and music clips is that they cannot be replicated. And even if they are replicated, the copies don’t hold value. The person who officially purchased the NFT is the only one who truly owns it and can prove its authenticity via the blockchain.

How do NFTs work as collectible investments?

NFTs have the potential to increase in value over time just like traditional collectibles. Factors that impact an NFT’s value include rarity and scarcity, popularity and cultural significance. If you own an NFT that grows in value, you have the option to trade or sell it and make a profit. Investing in NFT collectibles is similar to investing in the stock market and real estate; it’s all about predicting popularity and value and then buying in at the right time.

What are the risks associated with investing in NFT collectibles?

NFTs fluctuate in value like any investment. That means anyone who invests in an NFT is at risk of losing some or all of their invested money. You can mitigate risk and make wise investments by looking into an NFT\’s history, researching who created it and scouting out the online marketplace where it\’s being sold.

Plus, as is the case with any new investment opportunity, scammers are on the prowl and preying on newcomers to the digital asset market. “It’s a new piece of technology, so be careful. I’ve seen people lose lots and lots of money from clicking on a link they shouldn’t click on,” Hawk said. You should only buy NFTs from reputable sellers and online marketplaces that have a good track record. OpenSea, Rarible and Nifty Gateway are among the most popular and trusted.

What else makes NFTs valuable for business professionals?

Hawk explained that buying into the NFT market is a tactical way to expand your professional network. “You get access to a community of people that all have similar assets, and with that you have these connections. The networking opportunities that come from holding some of these NFTs are very valuable,” he said. Businesses can also engage with customers and build brand loyalty by creating their own custom NFTs and using them as marketing tools.

What’s the future of NFTs?

As more people learn about NFTs and explore their potential uses, there will likely be an increase in the number of NFT marketplaces, the variety of NFTs available, and the ways in which NFTs are used. “It’s something that I think is going to be a major part of our future. You’re going to start seeing people use NFTs as tickets to events and memberships,” Hawk said.

By the Numbers

• $946 million worth of NFTs were traded during January 2023. (Demand Sage)
• Around $10 to $20 million in NFTs are traded on the blockchain network each week. (Demand Sage)

The Tax Man Cometh

In late March, the IRS announced some possible changes to the way NFTs are taxed. If the agency goes ahead with its plans, NTFs will be taxed as collectibles, meaning those in the highest tax bracket would see their NTFs taxed at the top long-term capital gains rate of 28 percent, instead of the current top rate of 20 percent.