Has the NFT craze gotten you yet? If yes, you might be on the lookout for some expert advice in navigating the new yet vast world of NFTs. In case you’re looking for some guidelines on how to invest in NFTs, follow this article to stay ahead of the curve and ace the NFT trend.
The decade-old blockchain technology has gone on to become the blockbuster technology of the century. From winning people’s hearts through its decentralized vision and mission to welcoming an era of paperless money, blockchain has given birth to many trendy investments like Decentralized Applications (DApps) and Decentralized Exchanges (DEXs).
One trend that’s taken the lead is that of Non-fungible tokens, or simply NFTs. The NFT trend has been getting pace and for good reason as well. However, there’s still some lack of knowledge regarding NFTs and many people wonder how to invest in NFTs. Although NFTs have been around since 2014, it has been a couple of years since the technology has gotten bigger and better. And since last year, the NFT technology has seen some enormous investments worth billions.
If you wish to expand and diversify your investment portfolio, NFTs might be a good option for you. The NFT technology, along with its cool artwork and community is a pretty straightforward way to add to your investment portfolio and enhance your returns. The concept of digital artwork and assets has quickly risen to become increasingly popular. NFTs are rapidly finding their way into the gaming and fashion world along with many other technical sectors, as developers are looking to offer unique and interesting experiences that were not possible before the rise of NFTs.
However, the trend of NFT investment is fairly new. NFTs can be immensely profitable if handled wisely. The only thing that can fail an NFT investment is the lack of knowledge and experience in the field. That’s why it is greatly important to know enough about this fairly young trend before dipping your toes in it. Read on to learn how to invest in NFTs and what potential these non-fungible tokens possess.
What are NFTs?
NFT is an abbreviation for Non-Fungible Tokens. An NFT is a unique and one-of-a-kind digital asset representing a digital world asset. Since it’s non-fungible, it means that an NFT cannot be exchanged for any other NFT or digital asset of equal value. Based on blockchain technology, NFTs hold unique properties and value which makes them irreplaceable. They hold their own codes and hence have a limited and finite supply.
Since they’re non-fungible, NFTs simply cannot be changed or replaced by any other digital art, no matter how many similarities they hold. This uniqueness is what makes them stand out from the rest of the art. Because NFTs can mostly be viewed online by anyone, people sometimes wonder why some pay huge amounts to buy such NFTs. The answer lies in the one-of-a-kind nature of NFTs.
If you own a non-fungible token, you are having a unique piece of art that no one else in the entire round world has. You’re the only one in 8 billion to have such a piece of art. So it’s no wonder that this uniqueness is costly. It is the NFTs’ unique coding that makes them so valuable and therefore, helps investors attain a higher return on investment. And yes, NFTs can be highly expensive, depending on the digital piece of art’s value. For example, the record-breaking NFT, EVERYDAY’S: The First 5000 Days, was sold for a whopping $69.3 million.
NFTs can prove to be a valuable and profitable investment. If you’ve recently become interested in the NFT craze and want to try your luck investing in the digital art realm, you can do so through an NFT marketplace. Some of the best NFT marketplaces provide an easy-to-use online marketplace where investors, interested individuals, or anyone can browse NFTs that have been created by NFT artists and then purchase the NFTs they like. Mostly, NFTs are sold for a fixed price. However, they’re also sometimes listed through an auction where investors are allowed to make bids until someone wins the NFT.
Since the NFTs belong to the cryptocurrency ecosystem, they’re stored in crypto wallets. So if you’re thinking of investing in non-fungible tokens, you’ll need a crypto wallet to keep your NFTs as well as to store the crypto money necessary to facilitate transactions. Some of the best crypto wallets can connect with NFT marketplaces and help users fund purchases, along with holding their digital assets like NFTs safely.
Why are NFTs so valuable?
NFTs have become the talk of the town. From big fashion brands like Gucci and Nike to football tournaments, NFTs are making their way into every sector and walk of life. But the question that sometimes gets into people’s minds is why are NFTs so valuable and what traits make these pieces of digital art stand out in the art realm? If you’ve also wondered about this, you’re at the right place to get the right answers.
Technically speaking, NFTs have no intrinsic value. Unlike stocks, the value of NFTs does not depend on shareholder dividends, projected business growth, or annual profit margins. Their value hinges on factors such as supply and demand. That’s why they’re only worth as much as they’re in demand and people are willing to pay them. The more the demand for an item, the higher its value will be. In the case of NFTs, this value principle depends on several factors including utility, uniqueness, and application potential.
Some NFTs have been sold for millions of dollars but they are not guaranteed to be worth that much in the future. It is because NFTs’ value does not work in the same way as that of real estate or stocks. It all depends on whether the NFT will be in demand or of interest to NFT enthusiasts or art collectors. This makes NFTs somewhat a dubious investment. However, if you believe that an NFT will grow in value and will be worth more money someday, then NFTs might be a suitable high-risk investment for your portfolio.
NFTs vs. Cryptocurrencies – What’s the difference?
Although NFTs belong to the crypto ecosystem and both have the same underlying technology, NFTs and cryptocurrencies should not be confused as similar trends. Just like humans and chimpanzees share many similar traits but are completely different, NFTs and cryptocurrencies also share the same common ancestry i.e. blockchain but are completely different species. Both are digital assets that can be bought, sold, and traded but there are some traits that make them different from each other.
The key difference between NFTs and cryptocurrencies is that the former is non-fungible while the latter is fungible in nature. This means that NFTs cannot be exchanged while cryptocurrencies can be. One Bitcoin will always equal another Bitcoin but an NFT will never equal any other NFT due to its unique nature. Every NFT has a unique digital signature that makes it impossible to exchange or swap with another NFT.
For a detailed understanding, let’s take the example of fiat money or cash that you use every day. One ten-dollar note will always equal another ten-dollar note; you can trade or exchange it and it will not affect anything. Similar is the case with cryptocurrencies but not with NFTs. An NFT cannot be swapped for another NFT with expectations of similar value because no two NFTs are of the same value or uniqueness. Each NFT is distinct, unique, and valued differently.
Cryptocurrencies are used for the buying and selling of NFTs, just like you use cash to buy a portrait you really like when you visit an art gallery. Although cryptocurrencies and NFTs both are stored in crypto wallets, it doesn’t make the two entirely different assets any similar.
How do NFTs work?
NFTs represent digital art in any form. Be it pictures, audio, video, gif, virtual avatars, or video game skins, NFTs can represent any digital art that is unique and one-of-its-kind. Guess what? Tweets from social media platform Twitter can also count as NFTs and Jake Dorsey sold one for $2.9 million dollars. You might wonder if it’s a picture, why not just download it from the internet rather than paying thousands to buy it? Well, the answer lies in the uniqueness and ownership that NFTs can give you. Through NFTs, you can own art that no one has the right to own since you’re the sole owner of that masterpiece.
NFTs work in a way that provides you sole ownership of the digital art you’ve bought. And unless you sell it further to someone else, you will remain as its rightful owner. Once you’ve bought and stored an NFT, it is yours forever and you acquire the ownership rights. No more copies of that specific NFT exist on the blockchain or on any NFT marketplace. NFTs are used by artists to monetize their digital artwork which holds a unique identification code. Not just artists, NFTs are also likely to attract art collectors collecting one-of-a-kind art pieces and investors looking for assets to invest in and attain a profit.
For starters, NFTs exist on a blockchain which is a decentralized network for storing data. When it is created, it goes live on the blockchain to be bought or sold and the process is entirely visible to the public. This transparency allows the investors to view the increasing value of an NFT, creating the excitement to invest. NFT purchases work in a way that when you buy an NFT, the transactions are registered on a network of computers and you’re given an access code for it.
NFTs exist on two types of blockchains namely Proof-of-Work (PoW) and Proof-of-Stake (PoS), with the former having certain limitations since it requires an immense amount of computational power and energy which makes them expensive to operate. Both of these blockchain networks secure public ledgers and store valuable information like NFTs and other digital tokens. PoS blockchain networks are more preferred and effective since no mining or hashing is involved and they don’t require any electricity or computational power at all. That’s the reason most NFTs are linked to the Ethereum blockchain.
How to invest in NFTs?
If you’re looking for ways to invest in NFT or buy NFT art, it’s important that you understand the investment process in detail before diving deep into it. To help streamline this process, the steps described below will tell you how to invest in NFTs and buy them in an effortless way.
- Step 1: Research the marketplace and choose the NFT you want to buy
- Step 2: Set up a compatible crypto wallet
- Step 3: Add compatible crypto to your wallet
- Step 4: Select an NFT marketplace and connect your wallet to it
- Step 5: Buy an NFT
Step 1: Research the marketplace and choose the NFT you want to buy
When you’re looking to buy some NFTs, you’ll have to choose some first. For that purpose, you need to do some homework and look through different NFT marketplaces to select the NFT you would like to purchase. If it is your first NFT purchase, you need to carefully research the internet to look for artistic NFTs with value and demand and can prove to be a great investment for profit.
Make sure to choose an NFT that has an upside value potential. It can be some art, music, video, or video game item. You can either buy an existing NFT or one that’s to be listed for sale soon. You can look up sites like Rarity.tools to have an idea of the upcoming NFTs on Ethereum and Solana blockchains. When scrolling through the upcoming NFTs, keep note of when your favorite items will be up for sale and note other requirements as well to stay in the loop.
While shopping for the NFT to start your collection, navigate through the marketplace listings until you find the right NFT that you feel is the perfect one to commence your NFT journey. Major NFT marketplaces like OpenSea, Rarible, and Axie marketplace offer a variety of NFT options to choose from. Check out what’s available and what’ll be coming soon in the future. You also need to note the cryptocurrency through which you can buy the NFT you’ve chosen. Make sure you have enough of it in your crypto wallet to start the purchasing process.
You need to consider many things when looking for an NFT to buy. For example, the team behind the NFTs project must be large and reputable enough to drive the NFT’s value up. So it’s something you need to consider while shopping for NFTs. Once you’ve decided to buy a specific NFT, make sure to join the project’s community on Discord or Telegram to stay updated on the latest updates and project news. Also, try to get a feel of what others are saying or what are the expert predictions about this particular NFT project.
Step 2: Set up a compatible crypto wallet
If you don’t already have a wallet, you’ll need to set up a compatible crypto wallet to proceed with the NFT purchasing process and store the NFT keys and crypto tokens. Since not every wallet is compatible with the non-fungible token you’re buying, you need to have a digital wallet that is compatible with the cryptocurrency required to purchase the chosen NFT.
Most of the NFTs are based on Ethereum. In that case, you’ll need an Ethereum (ETH) digital wallet to exchange ETH for non-fungible tokens. For that purpose, you can set up your account at Metamask, Parity, MyEtherWallet, Trust Wallet, or any other digital wallet you want for free via your phone or computer. Once you’ve set up your account, follow the instructions to add it to your browser and you’re good to go.
Step 3: Add compatible crypto to your wallet
When you’ve set up your wallet, the next step would be to add some crypto to it. You can’t buy an NFT without any crypto or with any non-compatible crypto. So make sure that you are acquiring the crypto that is compatible with the NFT you’ve chosen. For this purpose, you can use fiat money like dollars or euros by connecting your bank accounts or credit cards to buy the cryptocurrencies you need for the NFT. You can purchase crypto through an exchange or a cryptocurrency brokerage, where the latter is a third-party firm or individual facilitating the buying and selling of cryptos.
Although most of the NFTs are compatible with the Ethereum cryptocurrency, it is possible that the NFT you’ve chosen to buy is only compatible with another digital currency like Cardano or Solana. Once you’ve got some cryptos in your wallet, you can purchase the NFT directly through an exchange or participate in a mining pool.
Step 4: Select an NFT marketplace and connect your wallet to it
The next step is to select the marketplace on which the NFT that you’ve chosen is listed. The requirements for the crypto wallet will vary from one marketplace to another so keep note of that. Also, the NFT marketplaces will either sell the NFT directly or list it up for auction. In the latter case, you’ll have to make a bid to purchase the particular NFT. Have a look at some of the popular NFT marketplaces below.
Connect your wallet to the NFT marketplace and make sure that there is enough crypto to conduct the transaction including the relevant fees, the costs of converting one crypto to another, and gas fees. Gas fees refers to the fees paid to miners in exchange for the computing power they use while recording transactions on the blockchain.
Step 5: Buy an NFT
Once you’ve connected your wallet with the NFT marketplace, you’re all set to buy an NFT. As described earlier, NFTs might be up for sale for a fixed price or they might be up for an auction. In that case, the interested individuals need to place bids and the NFT goes to the highest bidder.
If the NFT you’ve chosen is available for buying directly, just click on the button and make the transaction. The non-fungible token will be transferred to your wallet. If you want to purchase an NFT that’s put on auction, you need to note the starting bid price and the current bid price to make your bid accordingly. Once you’ve decided how much to bid, click the button and confirm your bid. When you’ve confirmed your choice by following all the steps and clicking the final button, there’s no looking back. Blockchain transactions are irreversible so the NFT will remain yours until you decide to trade it or sell it further. You can decide to sell the NFT in the future when its value has soared, giving you a huge return on your investment.
Congratulations, you’ve officially become the owner of the NFT you’ve just purchased. The transaction might take some time to finalize before the purchase appears in your wallet. When you can view the purchased NFT in your wallet, it means that the transaction has been confirmed and verified by the blockchain network that supports the NFTs and is now complete.
Pros and cons of investing in NFTs
While NFTs are a good high-risk investment to add to your portfolio, they’re certainly not a surefire way to get rich instantly. While some investors have received great profits in their NFT investments, there is no guarantee that your specific non-fungible token will keep or soar in its value.
As a relatively new asset class, NFT s are considered a high-risk investment mainly due to the risk associated with cryptocurrencies. Suppose you’ve bought an NFT associated with Ethereum. So if the value or price of Ethereum cryptocurrency falls down, it will have a direct impact on your NFT as well and its value will sink simultaneously. Moreover, it’s also possible to lose your entire investment in NFTs or cryptocurrencies.
Be that as it may, NFT investments come with pros and cons that every investor must be aware of before making an investment.
NFT investments can be hugely beneficial in the long term. Down below are some of the pros or advantages that you can benefit from when you invest in digital art.
- Potential value increments: One of the most appealing factors for NFT investment is the huge returns on non-fungible tokens due to the potential value increments that may occur over time. Let’s take an example of a famous NFT Cryptopunk 1422 which was purchased for $74 almost 5 years ago in 2017. Fast forward to 2021, the NFT was sold for $2 million, as reported by BusinessInsider. You can check the report here. It is a perfect example of dramatic price increases and profit margins for many NFTs.
- Access to exclusive and limited content: When you invest in NFTs, you not only become the owners of some cool art masterpieces but are also provided a gateway to access exclusive and limited content in the NFT and blockchain realm. Once you’ve become a steady and regular investor, it is no longer difficult to get whitelisted for certain NFT collections. Many NFT collection creators might give you early access to their NFTs or provide additional NFTs via airdrop.
Moreover, if you own some really classy and high-end NFTs, you are allowed to become a part of exclusive communities, which adds an air of prestige to the assets. For example, the Bored Ape Yacht Club is a Discord community filled with celebrities and high-profile names who own Bored Ape NFTs.
- Ownership of one-of-a-kind art: It is indeed one of the most prominent advantages of investing in NFTs that you get to own pieces of digital art that are one of their kind. Since you are the sole owner of your NFTs, you can also display your digital assets as your profile picture on social media. The ownership is solidified through blockchain technology, making it impossible for anyone to copy your NFT.
Since NFT is a relatively new investment, with less than a decade of life, NFT investments come with some cons or disadvantages that you need to be aware of before investing big in digital art.
- High-risk investment: NFTs are static assets and don’t generate income or value of their own. Since their value depends on their demand, non-fungible tokens are considered to be highly volatile just like cryptocurrencies. The high-risk investment can also result in possible large losses. For example, if the market for Ethereum goes bearish, it will have a direct impact on the NFTs associated with Ethereum.
- Expensive fees: Investing in NFTs can be highly expensive. Let alone the NFT cost, there is a huge collective fee that you have to pay in order to buy a piece of digital art. This can include fees to convert one crypto to another, purchase and transfer cryptos, and gas fees. All-inclusive, NFTs can turn out to be an extravagant investment.
NFTs are digital assets that represent a one-of-a-kind creation on the internet, like a meme, video, picture, GIF, or any digital artwork. Due to an immense rise in popularity in 2021, NFTs have become a subject of interest for investors all around the world. NFTs can prove to be a profitable yet high-risk investment so you need to be extremely careful in such investments. Overall, if you’re an art enthusiast and want to capitalize on the latest investment trends in the digital art world, you can jump on the NFT bandwagon and get your NFT journey started.
In conclusion, this article has taken an in-depth look at how to invest in NFTs, how these non-fungible tokens work, and what are the pros and cons of investing in NFTs, covering all the basic points related to NFT investments. Having read this guide in detail, you’ll be able to navigate this popular yet new investment asset world quite easily.