What is an NFT? | The Motley Fool

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The Motley Fool: NFTs seem to be the new craze this past year, but do you anticipate this trend to continue or do you foresee NFTs being just another bubble? Why?

Dr. Ozair: Whether an asset’s value is in a “bubble” or not is determined in hindsight. If you are purchasing an NFT as an investment, then the risks associated with it are the same as with any other investment — whether that’s stocks, collectibles or real estate. The NFT’s value may go up or down, depending on market sentiment, conditions, or preferences. Anyone can guess at or believe what the future value will be.

NFTs might also have a personal or “emotional” value associated with them, like the one-of-kind “GRONK Career Highlight Refractor Card.” This NFT is a collage of four illustrations comprising the other tokens in the collection and is digitally signed by (National Football League star) Rob Gronkowski. The token’s purchaser received the opportunity to meet the NFL star, two tickets to attend one of his NFL games, and VIP tickets to Gronkowski’s next beach party event. The “perks” associated with this NFT might be valued only on a personal or emotional level for the purchaser.

NFTs are here to stay because the possibilities and the opportunities of NFTs are boundless and go beyond art and celebrities’ tweets or photos. The future of NFTs lies in business applications — as the true power of NFTs is providing authentication and facilitating the transfer of ownership. Thus, you can tokenize a bottle of wine, a Gucci bag, a property, or any physical or digital asset that is deemed unique.

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The Motley Fool: NFTs are often images or videos that anyone on the internet can view, but the owner of that NFT has the “original,” meaning the value of that NFT is based solely on what someone is willing to pay for it. That said, do you think it’s worth adding NFTs to your investment portfolio when the value is so subjective?

Dr. Ozair: You can ask the same question about purchasing art or any collectible — baseball cards, paintings, jewelry, or wine. It’s the feelings of ownership and pride that incentivizes people to purchase a collectible.

Some may view [unique assets that they own] as investments. Unique assets like Picasso paintings or rare baseball cards may increase in value in the future, like the 1952 Mickey Mantle baseball card from Topps that sold for $5.2 million. In this tokenized world in which anything can be digitized, Twitter CEO Jack Dorsey sold his first tweet as an NFT for $2.9 million.

A real estate property could be an NFT, with its investment value tied to the real estate’s property value. In fact, [tokenizing] a real estate property would actually increase its value by adding liquidity.

The Motley Fool: What are some things investors should consider when looking to purchase an NFT (e.g., capital gains taxes, use of cryptocurrency, valuation, etc.)?

Dr. Ozair: If you are considering an NFT as an investor, not as a collector, then you should approach it like any investment. Who is the creator of the NFT? Does it have the potential to increase in value due to the reputation of the creator, its rarity, or [history of] ownership? On which auction platform is the NFT auctioned? Is it tradeable or liquid?

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NFTs are not regulated yet. But regulators, especially in Europe, have already put forward some proposals. The U.S. has yet to follow suit. Regulation for NFTs may have implications on how they are classified and where and if they can be traded.

NFT creators pay income tax, while NFT investors are subject to [the standard] capital gain rules.

Most — if not all — NFT platforms use cryptocurrency to trade NFTs. Since the value of an NFT is quoted in cryptocurrency, the risk includes exposure to the fluctuation of the cryptocurrency’s value, [in addition to the risk that the] NFT as an asset will lose value.

A few new platforms, like Circle and Rarible, will soon provide the ability to purchase NFTs with fiat money. This would eliminate, or at least decrease, the exposure to cryptocurrency value fluctuations. [These platforms can also] facilitate NFT transactions, which makes NFTs more appealing to the mainstream and likely can increase NFTs’ liquidity and value.

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