Author: Juan Fajardo
If you thought that the NFT craze was just a passing fad… Think again. With January already over, the NFT space is starting the year with a bang after breaking a new record. The trading volume of the NFT market reached an all-all time high of $6 billion in December 2021.
This has many investors wondering how to invest in NFTs.
Chances are that you are already an active participant or thinking about joining the NFT space. Sure, you might not agree with the current trends in the space but NFTs are more than just generative artworks selling for millions. With NFTs being applied in more industries every day, their cultural and economical importance can’t be underestimated.
However, using NFTs as a profitable form of investment is not a matter of chance. Depending on the type of NFT you are acquiring, you will need to develop a certain degree of expertise: By doing your research, you already are on the right path toward making the best out of your NFT journey. Let’s take a look at everything you need to know on how to invest in NFTs!
What Are NFTs and Why Are They So Big?
Investing in technology or a market you don’t understand can be a recipe for disaster. This has been one of the most frequent criticisms the NFT market has received over the years as most investors don’t really understand how they work. Misunderstandings of what NFTs actually are and entail are too frequent, which can drive investors to lose their assets and investments.
Take the example of Spice DAO, a group of investors who acquired a rare art book: Alexander Jodorowsky’s Dune”. The group paid $3 million for the NFT, believing it would grant them the rights over the work… Which was a mistake. What they had acquired was just a really expensive book. This mistake is far from an isolated case not only due to NFT being a pretty novel technology but also due to investors’ lack of research.
For this reason, we will first take a brief look at what NFTs are and some of the most common misconceptions around them. This will allow you to get a better understanding of the technology and the possibilities it brings to the table… Which is extremely relevant when using them as a means of investment.
What Actually Are NFTs?
Artists like Beeple and Pak have made a name for selling some of the most expensive digital artworks out there, bringing Non-Fungible Tokens (NFT) to the headlines of major outlets. These artists, as well as projects like CryptoPunks, Axie Infinity, and Bored Ape Yacht Club, have made NFTs a synonym of digital collectibles for many. While this is certainly one of the purposes they can serve, NFTs are much more than just collectibles. In essence, NFTs are a digital representation of any asset that is unique in nature and indivisible. This means an NFT could represent anything from a piece of art to real estate ownership, IDs, insurance policies, and much more. NFTs provide a means for investors, holders, collectors, and users to review the provenance of the asset they represent.
An example of some of the innovative applications given to NFTs includes when TechCrunch Founder Michael Arrington sold his apartment in Kyiv as an NFT. Other companies like Black Manta Capital Partners’ have followed these examples and created “Real Estate Token Offerings”. By the end of 2021, we also saw Auroboros’ showing of NFT-powered Augmented Reality clothing during the London Fashion Week.
These are examples of how NFTs really operate: They prove ownership over an asset that has been linked to it. When the buyer acquired Arrington’s apartment, the apartment itself was not in the NFT. This is the same case with art collectibles, which only contain a link in their metadata to the artwork they represent. While anyone could copy the image linked to your NFT, they wouldn’t have proof of their ownership over that image or be able to prove its authenticity. This is the same as having an exact copy of famous artwork, the original will be the only one to hold real value.
Understanding that NFTs are all about ownership and authenticity is essential when investing in them, especially at a time when scams are becoming more prevalent. This will also allow you to invest in new applications of the technology, such as virtual real estate, loot boxes, and more.
NFTs are not…
Now that we have talked about the actual purpose of NFTs, it is time to clear some of the misunderstandings around them. Clearing these is of uttermost importance not only for those looking to invest in NFTs but also to help the whole ecosystem evolve. With that in mind, NFTs are not…
A common misconception is that NFTs have no value. While it is true that NFTs are just a means to represent ownership over an authentic asset, this function and the associated asset provide them with value. Fiat currency by itself, works of art, and other types of commodities rely on demand and trust to get their value. This same principle is applied to NFTs: The scarcity and demand for the asset they represent drive their value.
While someone might be able to copy the artwork your NFT represents, in the case of collectibles, they don’t truly own it. The NFT represents ownership over the image, which means that anyone who copies it without having the NFT won’t be able to truly transact with it. Sure, anyone might have a copy of the bible but the original manuscripts are the ones to hold true value.
A Get Rich Scheme
Just like with crypto in its inception, NFT critics have resorted to terms such as “scam” and “get rich scheme” to refer to the NFT space. This is in part due to how many people are investing their life savings in NFTs and a misunderstanding of the nature of NFTs. However, NFTs are not a scam or scheme of this sort.
As we said before, the value of an NFT depends on the same principles of art, fiat, and other types of commodities. As the value of the assets depends on the market, it is up to investors to find those hidden gems to maximize profit. If an investor fails at recognizing the true value of an asset or falls victim to a scam, this is not due to the nature of the NFT but due to human error.
The NFT ecosystem has proven to be highly profitable over the past year, which of course has resulted in scammers taking advantage of this fact. As such, we recommend you get familiar with NFT scams in order to avoid them.
A lot of people consider NFTs in the same ways as cryptocurrency. However, while both crypto and NFTs are based on blockchain or distributed ledger technology, they are quite different in nature. Cryptocurrencies are able to serve a financial purpose due to their fungible nature while NFTs are… Well, non-fungible. This means that while you can exchange 1 Bitcoin for another without it affecting you in any way, you can’t do the same with an NFT. Every NFT, even if they represent the same digital asset, is different from one another. While this might not sound like much of a difference, this makes both types of assets entirely different.
As we said before, it is possible for someone to copy the artwork or asset attached to an NFT. However, the NFT itself can’t be copied due to the immutability of blockchain technology. While physical assets like IDs can be copied in a way that they look entirely legitimate with some work, blockchain makes this impossible.
Due to how the technology works, 2 exact copies of an NFT can exist even if representing a similar asset. This means that once an NFT is minted, no one else will be able to copy it, not even the holder.
Bad for the Environment
While discussions around the environmental impact of blockchain technology have been around for years, it wasn’t until 2020 that the discussion started gaining relevance. This occurred when The New York Times published a piece titled “In Coinbase’s Rise, a Reminder: Cryptocurrencies Use Lots of Energy”. Networks like Ethereum, which hosts some of the biggest NFT marketplaces, have a big carbon footprint. This means that by using them, you could potentially be contributing to the deterioration of the environment… Which might be against your beliefs. That being said, several networks use more energy-efficient algorithms, at least according to their development teams. The fact is that most experts agree that concerns around the environmental impact of the blockchain (including NFTs) were blown out of proportion. Not only does most of the energy used by blockchain come from renewable sources but it often avoids energy from being wasted. Sure, blockchain (as any technology) has an environmental impact but blockchain is not a major driver of carbon emissions. You can read more about this topic here.
What Makes an NFT Valuable?
Let’s go back to the basics: Demand drives value. No matter what service or service you are thinking of, it will have value if someone is willing to pay for it. Whereas we used to trade goods with each other, humanity eventually found a means to abstract this process: Money. Ever since the invention of money, we have continued to create new tools to facilitate the trading of goods and services. Credit cards, stock, crypto, payment processing services, etc, are all just means to help us abstract transactions. Now, NFTs are just taking this one step further by continuing with the digitization of assets.
NFTs take advantage of their unique nature to tap into scarcity. Just in the same way that there is only one Eiffel Tower or La Gioconda, NFTs are unique. Sure, you can have 100 NFTs depicting the same artwork but each of the NFTs by itself is also unique. This means that just in the same way that the first edition of a book is worth considerably more, an NFT might be the same. If an artist as famous as Beeple mints only an NFT of its “Everydays” artwork, the value will escalate astronomically.
Now, scarcity only translates to value if there is a demand for the asset. You might remember that during the start of the COVID19 pandemic, there was a scarcity of goods like toilet paper and condoms. This prompted some people to buy them and sell them at a higher price, with many people choosing to buy from them. Once the scarcity disappeared as manufacturers produced more goods, the price normalized. NFTs behave in the same way. The factors that drive the demand of an NFT will depend on the type of NFT, who minted it, its functions, scarcity, and many more. With the NFT market being so popular at the time, its speculative nature is also on the roof, which can make it harder for investors to determine value. Sentiment and momentum play an important role in driving prices.
Should You Invest in NFT?
Before we jump and answer the “How to invest in NFTs?” question, you should consider if you should invest in NFT in the first place. While the potential to make money when investing in NFT is real, so is the potential to lose money.
Investing in NFT can be more complex than investing in other types of assets like gold, precious metals, and even forex, as the human element plays a bigger role. This is especially true when it comes to digital art, which is the most popular niche in the NFT market at this time.
The process of choosing the right project only gets more complex as new projects emerge. With anyone now being able to mint a token, finding the hidden gems is like finding a needle in a haystack. On the other hand, if you rely too much on momentum and FOMO, you might fall for pull rugs and other types of scams.
This brings us to the question: Should you invest in NFT? Well, the answer depends on several questions you need to consider. The golden rule you should always consider before making any type of investment is if you can afford to lose the money.
Most advisors will tell you that NFTs can be riskier than other types of investment, which is actually the case. Not only is the NFT ecosystem pretty young and unregulated but it is also a highly volatile market. For this reason, we recommend that you only invest it if you have the time to do your research and learn about it. Now, there are several pros to investing in NFTs. First, investing in NFT is more than just a financial activity, it can also be a hobby. Due to the potential NFTs have to represent a variety of assets, you can bring the pleasure of a hobby and make a profit together. In fact, if you are interested in an NFT niche you already know of, your chances of profit will increase considerably. NFTs also benefit from the global reach of the internet, as all that is required for any interested party to trade them is an internet connection. This means that the exposition any given NFT has is far bigger than other commodities or assets.
The use of smart contracts by most platforms also ensures that NFT transactions are trustless, which facilitates trades. As smart contracts don’t require human intervention to ensure an outcome, you can be sure that your transactions will be completed if you use a well-designed platform.
Lastly, as NFTs are entirely digital, this means that the storage process is as simple as it gets. Get a crypto wallet, secure it, and interact with it as needed. This also translates to efficiency and reduces costs when transacting with them, as physical commodities require logistics. NFTs can be a great means to invest in the technology of the future. However, they might not be the best option if you don’t have an eye or interest in the asset behind the NFT. This is because this would result in difficulties when it comes to recognizing trends and valuable NFTs. In such a case, another type of investment might be more appropriate for you. How to Invest in NFTs? We have been beating around the bush for too long. However, we believe that all of the information we have provided is essential for anyone wondering how to invest in NFTs. Now that you should have a better idea of investing in NFTs is right for you, let’s look at how you can actually do it! Find the NFT You Want to Buy Finding the NFT you want to invest in is the first step toward investing in NFT. This is because the wallet, cryptocurrency, and other aspects of acquiring it will depend on the platform where the NFT is offered. As the NFT will be offered via an NFT platform such as a marketplace, finding this one is part of the same step. You see, it is not only about “how to buy NFTs” but also “where to buy NFTs”. There are multiple NFT marketplaces out there that you can use to find NFTs. From well-known platforms like OpenSea to Cardano’s Fiborite, which is about to launch, there are plenty of options out there. Each platform will come with different benefits and drawbacks, which you should consider before using them. For example, using a platform that relies on the Ethereum Network alone means that gas prices will be considerably higher. If the platform charges you for the gas, this is something you need to account for when calculating the price. Let’s take a look at some of the most popular platforms! OpenSea If you are looking to buy or sell NFTs in categories like art, collectibles, music, photography, sports, virtual worlds, or domain names, OpenSea has you covered. With a vast collection in all of these categories, the marketplace is a favorite for collectors looking to acquire a variety of NFTs. OpenSea is also known for how easy it is to use, which is a huge plus for any beginner. With a variety of resources and a vast knowledge base, you are likely to find whatever information you are looking for. If you are still unable to do so, the platform’s customer support team will provide top-notch service. OpenSea supports 3 different networks: Ethereum, Polygon, and Klatyn. When it comes to supported cryptocurrencies, you will be able to choose between WETH, DAI, and USDC, as well as over 150 tokens. Rarible With support for Ethereum, Flow, and Tezos, Rarible has distinguished itself from OpenSeafor its support to multiple blockchain networks instead of Layer2 solutions. In addition to this, personalities like Pak, Lindsay Lohan, and Floyd Mayweather Jr have chosen Rarible as their go-to platform. This has resulted in Rarible being involved in some of the biggest sales in the NFT space. In terms of features, Rarible also shines strongly. The marketplace offers creators and buyers the chance to use multiple editions of NFTs, timed auctions, advanced royalties systems, messaging systems, and many more. All of these features are supported across digital art, collectibles, music, video, domain names, metaverse land, wearables, and more categories. Rarible is backed by companies like CoinFund, Coinbase, Parafi, and 1kx but remains committed to its community. The marketplace’s “Rarible protocol” is completely run by its users via a DAO governance model, for example. Unlike OpenSea, Rarible makes use of its own cryptocurrency: Rari. Rari is not only used to pay for NFTs but also works as the governance tool of the platform, which allows it to work in a decentralized manner by having its holders vote. This is a reflection of the platform’s high emphasis on its users. SuperRare Another big player in the NFT space, Superare has helped artists earn more than $128 million in primary sales while also generating $84 million in secondary sales. SuperRare self-describes itself like an “Instagram meets Christie’s”’s platform focused on art, culture, and digital collections. SuperRare relies entirely on Ether (ETH) as it runs on the Ethereum network and charges 3% in transaction fees to its buyers. However, artists must pay 15% in commissions for primary sales while receiving 10% commission in all secondary sales by default. If you are looking for simplicity, SuperRare might be the best platform for you. With a straightforward layout, the platform makes it easy to explore art and find NFTs you might want to invest in. If you are looking for something specific, the filtering functions also make it easy to find it. Foundation Foundation is one of the newest players in the NFT space, having been around for less than a year. Launched in February of 2021, the marketplace has generated over $125 million for its creators and gained the praise of major collectors and artists on the Ethereum network. As a platform operated by artists for artists, Foundation has become one of the top NFT marketplaces for those looking for great works of digital art by exclusive artists. If you are looking for a tight-knit community of NFT enthusiasts, Foundation is right for you! Make Sure You Have a Compatible Wallet If you have been part of the NFT or crypto ecosystem before, you probably already have a wallet. However, it is possible that the wallet(s) you use this time are not compatible with the NFT platform offering the NFT you want to invest in. As such, you want to make sure by looking at the platform’s official documentation. If you don’t have a crypto wallet, on the other hand, you will have to create one before investing in NFTs. A crypto wallet is basically the tool that you use to “store” your crypto and NFTs. We use quotations as a wallet doesn’t really contain your tokens but it grants you access to interacting with them by storing your keys. While this technical distinction might not seem relevant at first, it can become important under certain circumstances… However, we won’t duel on the technical aspects of wallets as there are great articles such as this one by Binance Academy, which explains the ins and outs of crypto wallets.
No matter what crypto wallet you choose to use, you will need to make sure it is compatible with the NFT platform you chose to use. You also have to make absolutely sure you store your recovery phrase somewhere safe as it is the only means to recover your wallet and all the crypto you have associated with it.
Get Some Cryptocurrency (If Needed)
Now that you have a crypto wallet, it is time to ensure you can use it to buy your NFTs. As you will see when looking at the different NFT marketplaces, most of the time you will be required to complete payments using cryptocurrency. For this reason, you will need to fund your wallet with a cryptocurrency supported by the platform you chose.
Just like the cryptocurrency will depend on the networks supported by the NFT marketplace, so will the exchange you choose to use. It is important to note that not all crypto exchanges sell all cryptocurrencies, which is why you need to make sure to use an exchange that supports it.
To find a reliable cryptocurrency exchange and check supported currencies, you can take a look at CoinGecko’s exchange rankings. This will provide you with important information on how trustworthy an exchange is. That being said, most new investors will opt for popular exchanges like Binance, Coinbase, Kraken, Gemini, FTX, and OKX.
Connect to the Marketplace
Now that you have a wallet with crypto in it, you are ready to purchase your NFT. This process will vary depending on the platform you chose, it will be similar in most cases. Just visit the platform and locate the “login” or “connect wallet” option.
Once you click on this option, you will be prompted by your wallet to authorize the connection. This will allow you to log in or create an account on the platform as needed, with the account being linked to the wallet from that moment onwards.
Buy the NFT
You are now ready to buy the NFT you selected. Just click on the “Buy” or “Bid” options and follow the instructions. In the case of a purchase, you will be prompted to continue the process and given instructions to process the payment. Once complete, the NFT will be transferred to your wallet.
In the case of an Auction, the transfer of the token will only be completed if and once you earn the bid for it. This means that you will be required to keep a close eye on the auction in case someone outbids you.
Once the platform informs you that the NFT has been transferred to your wallet, make sure to check your wallet. While it is unlikely for transactions to fail, it is extremely important to ensure they didn’t so you can contact support in a timely manner if needed. That being said, we have never had an issue when buying an NFT in such a manner.
Congratulations You should be now the owner of an NFT. This NFT will be associated with your address, which means you own it until you decide to sell or trade it. Other users will be able to make you offers for your NFT or you can choose to sell/auction it when you desire. Now it is just a matter of crossing your fingers and hoping the value of your NFT increases! Article courtesy of our content partner Grit Daily