In recent years, Non-Fungible Tokens (NFTs) have taken the world by storm, thanks in part to the pandemic that has forced many to spend more time online. As cryptocurrencies and other digital assets have become more popular, investors have turned their attention to the world of NFTs.
Digital art pieces such as CryptoPunks have been sold for millions of dollars, causing some to wonder whether this is a speculative bubble or a new investment asset class.
Despite the debate, NFTs have promising applications for artists and businesses alike. If you’re looking to get started in NFT investing, it can be overwhelming to know where to begin.
That’s why we’ve put together this guide to help you understand what NFTs are and how to invest, buy and sell them.
Read on to learn everything you need to know about the exciting world of NFTs.
Table of Contents
What Are NFTs?
NFTs, or non-fungible tokens, are unique digital assets that represent ownership and authenticity of original works of art, music, videos, and more on a blockchain.
A token is a digital asset that represents value on a blockchain. Most tokens on a blockchain are fungible, which means they are interchangeable and identical to each other. On the other hand, a non-fungible token is unique and one-of-a-kind. It represents something that is entirely original and cannot be duplicated or replicated.
NFTs allow creators to verify ownership and authenticity of their digital works of art, music, videos, and more. They are digital certificates of ownership, enabling creators to sell their original work as a unique asset. For digital artists, NFTs are revolutionary as they can now mint and sell their original creations as a unique asset.
NFTs have immense potential in various industries. They can be used to represent legal documents, deeds to properties, event tickets, collectibles, and much more. NFTs bring a new level of transparency, authenticity, and security to digital ownership.
However, NFTs are not without their criticisms. Some argue that they contribute to the growing problem of environmental degradation caused by the energy-intensive blockchain technology. Others believe that NFTs contribute to the commercialization of art, turning it into a purely financial asset rather than a creative expression.
How Do They Relate to Cryptocurrency?
At their core, NFTs are powered by the Ethereum blockchain, the second most popular cryptocurrency by market cap after Bitcoin.
Launched in 2015, Ethereum allows users to record unique pieces of information, known as non-fungibles, using smart contracts.
What sets Ethereum apart from Bitcoin’s blockchain is its ability to store unique data, like the ownership details of digital art or collectibles. This is where NFTs come into play. Think of an NFT as a “certificate of ownership” for a specific digital item.
It’s crucial to understand that the actual digital file, whether it’s a JPG or GIF, isn’t stored on the blockchain itself. Storing large amounts of data on the blockchain can be both resource-intensive and costly. Instead, the blockchain holds the NFT, which acts as a record of the current owner of the digital asset.
Although Ethereum is currently the go-to choice for NFT storage and trading, new competitors are emerging. However, Ethereum is expected to stay ahead of the game with the upcoming launch of Ethereum 2.0, a more advanced version of the blockchain, in 2022. This will likely solidify Ethereum’s position as the leading platform for NFT storage and trading.
How to Buy NFTs
Non-fungible tokens (NFTs) have taken the digital world by storm, offering an exciting new way to own unique digital assets such as art, music, and in-game items.
Here’s how to purchase your first NFT:
Step 1: Picking the Right NFT Marketplace
To begin your NFT journey, you’ll need to choose a marketplace where NFTs are bought and sold, much like you would with traditional e-commerce platforms like Amazon or Etsy. Popular NFT marketplaces include OpenSea, Rarible, SuperRare, and Foundation. Each platform has its own distinct offerings and features, so take the time to explore and find the one that best fits your preferences and interests.
Step 2: Setting Up Your Crypto Wallet
After selecting an NFT marketplace, you’ll need to open and fund a cryptocurrency wallet. A crypto wallet functions like a digital wallet on an e-commerce site and is essential for storing the cryptocurrencies required to purchase NFTs. Be mindful that the type of cryptocurrency needed to buy an NFT may vary depending on the specific NFT. For instance, an NFT created on the Ethereum blockchain may necessitate payment in Ether tokens.
Step 3: Discovering Your Ideal NFT
With your crypto wallet set up and funded, it’s time to find the perfect NFT to buy. NFTs encompass a wide range of digital assets, such as artwork, music, videos, or virtual items in video games. You’ll find that some NFTs have a fixed price, while others are sold through auctions. Be aware that auction-based NFT prices can be quite volatile, fluctuating based on demand.
Step 4: Placing Your Bid or Purchasing Your NFT
When buying an NFT via auction, you’ll need to place a bid. Keep in mind that high-demand NFTs typically command higher prices. If you’ve found an NFT with a set price, simply click the “buy” button and finalize the transaction using the funds available in your crypto wallet.
How to Sell NFTs
You can sell your NFTs on a marketplace. However, be aware that marketplaces charge fees for NFT sales, which may vary based on the blockchain network the NFT utilizes. This is due to the energy consumption, or “gas fee,” associated with verifying the NFT on the blockchain.
To sell your digital asset, follow these simple steps:
- Upload your NFT to a compatible marketplace: Ensure that the marketplace you choose supports the blockchain on which your NFT was created. Once you’ve found a suitable platform, upload your NFT.
- Choose your selling method: You can either list your NFT for sale at a fixed price or opt for an auction-style sale where potential buyers place bids.
- Marketplace verification: After uploading your NFT, the marketplace will verify the asset to ensure its authenticity and ownership.
- Complete the transaction: Upon the successful sale of your NFT, the marketplace will handle the transfer of the digital asset from you, the seller, to the buyer. It will also transfer the cryptocurrency funds to your wallet, minus the listing fee and any related blockchain computing expenses.
How to Create NFTs
Non-fungible tokens (NFTs) have captured the attention of creators across various domains, including artists, musicians, filmmakers, and writers, thanks to the ability to authenticate and monetize their digital work. Turning a digital asset into an NFT, or “minting” it, is a simple process that allows you to sell your creation on a marketplace.
Here’s a basic guide to minting your own NFT:
- Prepare your crypto wallet: Ensure you have an open and funded crypto wallet, such as one containing Ether, to cover the computing fees associated with creating your NFT.
- Navigate to the marketplace: Access your chosen NFT marketplace and click the “create” button to start the minting process.
- Upload your work: Select and upload your digital asset (artwork, music, video, etc.) to the marketplace, which will then be turned into an NFT.
- List your NFT for sale: Decide whether you want to sell your NFT at a fixed price or through an auction, and list it accordingly on the platform.
Pros of NFTs
1. Digital Art Can Appreciate in Value
Physical collectibles like art have a history of increasing in value over time, and digital art could be no different. In fact, some NFTs have already sold for millions of dollars, showing the potential for price appreciation in the digital art world.
2. More Accessible Buying and Selling
NFTs allow for access to a much larger pool of buyers and sellers than traditional physical assets. This means there’s a greater chance of finding someone willing to pay top dollar for your NFT or finding a rare NFT to add to your collection.
3. Fair Payment for Creators
Smart contracts built into the blockchain can ensure that artists and creators get paid each time their work is used or resold in the future. This guarantees that they receive fair compensation for their work, even if they’re not involved in every transaction.
4. Content Moderation and Curation
NFT platforms have the ability to control what NFTs are shown in their marketplaces. This means they can blacklist problematic NFTs or creators, ensuring that only authentic and legitimate NFTs are available for buyers to purchase. While this may not align with the philosophy of immutable blockchains, most NFT users appreciate the effort to remove fake or fraudulent NFTs from the market.
Cons of NFTs
1. Subjective Value and Volatility
Unlike stocks or other assets that generate income, the value of most NFTs is determined by buyer demand and can be extremely volatile. This means that prices may drop significantly after the initial hype dies down, and you may end up losing money on your investment.
2. Fees Can Add Up
Creating and selling NFTs involves transaction fees that can add up quickly, especially if you’re not making significant profits from the sale of your NFTs. These fees can eat into your profits or even exceed the value of the NFT itself.
3. Environmental Impact
NFTs and the blockchain technology they rely on consume a lot of energy, which can have a negative impact on the environment. This is a concern for many people, and it’s important to consider the environmental cost before investing in NFTs.
4. Lack of Rights and Control
Some NFT projects may not guarantee ownership or control over the digital asset itself. It’s important to research where the digital asset is located and whether you have the ability to move it to a different location or platform. Otherwise, you may end up with an NFT that you can’t actually use or sell as you please.
Should You Invest in NFTs?
The NFT movement is still young, but it has the potential to revolutionize the digital economy by promoting inclusivity. For creators, selling digital assets can be a profitable pursuit. However, buying NFTs as collectibles is inherently speculative because their value is tied to the demand for the work itself.
Identifying emerging NFT trends can yield substantial returns. Several digital art pieces that were initially sold for modest amounts have since sold for thousands of dollars. If you enjoy collecting and have an eye for art or music, NFT investing may be a promising venture.
When considering an NFT purchase, evaluate factors such as the creator’s reputation, the uniqueness of the asset, its ownership history, and the potential for generating income through fees or relicensing charges.
Some critics argue that NFTs are a bubble that will burst, but it’s essential to keep in mind that bubbles are often only recognizable in hindsight. Although digital assets may experience a cool-down in the future, this shouldn’t deter potential investors altogether. In early 2022, the crypto and NFT markets experienced a widespread pullback concurrent with stock market fluctuations.
To minimize risk, consider diversifying your investments by incorporating cryptocurrencies and stocks in businesses developing blockchain technology, in addition to your NFT portfolio. While NFTs present a promising technological frontier, the inherent risks associated with early-stage investments should not be overlooked.
Approach NFT investments with caution, continually educate yourself on the topic, and maintain a diversified investment strategy to minimize the risk of any single asset derailing your wealth-building endeavors.