What are NFTs? – Time Magazine defines them as “computer files combined with proof of ownership and authenticity.” They can be anything digital: artwork, memes, sports cards, music, etc. For example, Twitter CEO Jack Dorsey sold the first tweet as an NFT for $2.9 million (see FIGURE 1 for more examples). Unlike traditional money or bitcoin which are essentially interchangeable, NFTs are non-fungible, meaning each token has a unique worth and cannot be traded for another. 

Digitizing and monetizing – Artists have been creating easily accessible art online for years, often times with nothing to show for it­—especially in a monetary sense. NFTs allow digital artists the ability to truly own and sell their creations while benefiting financially.

The pandemic, the Internet, and NFTs – NFTs aren’t a new concept and have been around for years. Their popularity has been boosted by a combination of Bitcoin’s success and people spending more time online due to COVID-19.

How big is this market? – Bigger than you may think. The NFT market grew by 299% in 2020¹ with sales in the first quarter of 2021 soaring to more than $2 billion²—and it’s shown no signs of slowing. Auction houses are already getting in on the NFT craze and NFT-related stocks have been on the rise.

Is this the future of digital-asset investing? – Some investors see NFTs as a modern approach to investing in art, but how this may pan out remains to be seen. The growing field of digital assets is volatile, but it’s a trend both investors and financial professionals should keep an eye on.

Risky business – Like all investments, NFTs have risks. They’re unregulated and the mania surrounding them may lead to volatility: buyers may purchase an expensive NFT only to discover later that it’s not worth much. NFTs aren’t readily exchangeable for cash, so liquidity is an issue.

Environmentally unfriendly – Digital assets might be paperless, but, unfortunately, they’re far from green. The computers, storage, and security required by NFTs (and cryptocurrency in general) use a lot of energy.

Surprise! They’re not tax-free – Both buying and selling NFTs is a taxable event. Because NFTs are considered collectibles, they’re taxed at the maximum capital-gains rate of 28%. Investors can also expect to be taxed when buying and selling NFTs with cryptocurrency, selling an NFT for another NFT, and when converting cryptocurrency back into US dollars.

Bubble trouble? – With so many people trying to “get in early” and pushing prices to exorbitant highs, some worry that this market isn’t sustainable.