A Guide to Investing in NFTs

A Guide to NFT Investing

The surge experienced in cryptocurrencies and the digital asset industry has had millions of investors refocus their energy on these new and profiteering investments. For the first time in April 2021, the value of the cryptocurrency market hit a record high with a total capitalization of $2 trillion. Interestingly, the recently witnessed boom in the cryptos has significantly been driven by the Ethereum blockchain, the technology behind the new digital asset: non-fungible tokens. As non-fungible tokens, best known as NFTs, continue to gain prominence, there seems to be more than meets the eye with crypto assets. But, what are they, and how do they work? This guide gets you up to speed with the fundamentals of investing in NFTs.

What are NFTs?

Non-fungible tokens are unique and identifiable crypto assets traded online over cryptocurrency technology. An NFT acts as a digital representation for a mix of collectibles ranging from videos and in-game items to music and trading cards. Generally, cryptocurrencies are fungible. This means that they can be directly traded or interchanged one for each other. However, unlike cryptocurrencies, each NFT bears distinctive information that differentiates it from any other NFT. As a result, each NFT item can be traced back to one original owner. This explains why NFTs cannot be traded or exchanged one for the other.

The distinctive design of an NFT makes it ideal for a wide range of uses. For instance, NFTs can represent real assets, such as artwork and real estate. On the other hand, non-fungible tokens eliminate market brokers by bridging artists with their target audiences.

Features of a Non-Fungible Token

Some of the features that distinguish an NFT from any other digital and crypto asset include the following;

Non-Fungibility

The most notable characteristic of NFTs is that they are non-fungible by design. Essentially, fungibility refers to an asset’s capacity to be exchanged with an asset of the same kind while retaining its value. NFTs lack this ability. Therefore, these digital assets cannot be equated with other digital assets for interchange.

Indivisibility

As a non-fungible asset, an NFT is indivisible. This means that they cannot be fractionally divided into smaller units. They are designed to be purchased as whole units.

Verifiability

NFTs are verifiable via any blockchain. What this means is that you can trace an NFT item back to the original owner without using a third party to authenticate the ownership.

Immutability

Ownership of a non-fungible token is immutable. This feature implies that the possession of NFTs remains with the original owners of collectibles and not the companies that generate them. In other words, an NFT enables artists to put a claim of ownership on their digital artwork without having to worry about its duplication.

How do Non-Fungible Tokens Work?

NFTs provide what looks like a digital certificate of ownership to the creator of the digital asset in question. The owner of the NFT retains its copyright and the legal right to make copies of the asset in their preferred amounts. Every copy made from an NFT is considered to be another unique non-fungible token. In this case, buyers who wish to duplicate the same asset must get copyright permissions from the owner.

Notably, when transacting NFTs, the value of the replica is always lower than the original copy. Also, how much copies of the initial NFT cost is influenced by the market demand and supply. Owners of the NFTs are also entitled to royalties every time a copy of the digital asset is sold. On a high level, non-fungible tokens are housed by the Ethereum blockchain, enabling NFT owners to implement smart contracts with their assets. Items represented by an NFT can be tangible or intangible, including the following;

  • Music
  • Art
  • Collectibles
  • Real Estate
  • GIFs
  • Virtual Avatars
  • In-game Items
  • Digital Artwork
  • Designer Wears
  • Domain Names
  • And Digital Tickets

The Pros and Cons of Investing in NFTs

Investing in non-fungible tokens comes with a wide range of opportunities. However, without careful considerations, NFTs can pose some significant risks to your investments. Here is a highlight of the pros and cons associated with non-fungible tokens.

Pros

Security and Authenticity

One of the primary reasons NFTs have become popular among investors is the high-end security associated with the blockchain technology supporting these digital assets. It is impossible to forge, alter, or manipulate a non-fungible asset. Again, the unique information and data embedded on every NFT are verifiable, making it easy to point to the original owner of an asset.

Market Decentralization

Since the Ethereum blockchain technology is wholly decentralized, NFTs are not regulated by a central marketplace. As a result, non-fungible tokens are transacted over a vast market, giving artists and asset owners access to a significantly large audience. Additionally, the market participants determine how much an NFT is worth.

Ease of Entry

With only a few dollars, established and first-time investors can purchase some NFTs. This is unlike the conventional investment opportunities that require an initial deposit of thousands if not hundreds of thousands of dollars to enter the market. Being able to invest a few dollars in a venture with the capacity to yield high returns in the future is a reason why NFTs are a craze today.

No Brokers

NFTs allow you to execute transactions in the form of smart contracts. This way, copyrights to your products can be embedded on every NFT, enabling you to earn royalties rightfully. Should anyone make copies of your artwork or music, the technology supporting NFTs automatically wires a percentage of their value to your royalties’ wallet. Essentially, you will not need brokers to gain from your products, thanks to the Ethereum blockchain technology.

Market Efficiency

Generally, a non-fungible token is a representation of a physical or digital product on a blockchain. Artists and product owners can connect seamlessly with their target market, including buyers and advisors. This not only eliminates market intermediaries, but it also facilitates efficiency in the execution of business transactions and processes.

Cons

Complexity of Smart Contracts

Smart contracts are best known for auto-executing the terms of an agreement between various parties using a set of computer codes. While smart contracts are beneficial to investors, a lack of understanding of the fundamentals of these agreements can be a setback when investing in NFTs. For instance, non-fungible tokens using the Ethereum ERC-721 smart contract do not support the function for royalties. Such contracts may go against the desire of artists interested in earning royalties from their artwork or products.

Copyright Issues

NFTs are highly verifiable. However, it is quite challenging to identify whether the seller of an NFT is the original copyright owner of the asset. In this case, due diligence is fundamental to ensure that you are buying an NFT from its rightful owner. Some of the platforms available for trading NFTs have established thorough procedures to help verify buyers and sellers.

Metrics to use when Investing in NFTs

Like any other asset, measuring the performance of your NFTs is fundamental to the progression of your investment. The following metrics will help you determine the value of your NFT and whether you should continue investing in it.

Floor Price

The floor price of an NFT defines the lowest value for which the digital asset can be sold. The floor price is probably the most critical metric every investor should keep tracking to establish whether the NFT is worth the investment. Ideally, the higher the floor price, the better the ROI of your NFT. Most investors will rely on the floor price metric to inform their decision to sell an NFT for a good profit.

Ownership Reputation and History

The reputation and historical record of a former NFT issuer is a contributing factor to the value of a digital asset. Prominent companies and artists are often associated with high-value NFTs. To leverage when investing in NFTs, consider trading non-fungible tokens that were previously issued by influential personalities or popular brands. Some NFT trading platforms provide addresses to individuals or companies with an appealing history in the business.

Liquidity Premium

Liquidity premium refers to the extra return investors receive for investing in NFTs that are not actively traded. This metric is used to analyze the current and future value of a non-fungible token. A rise in the liquidity premium of an NFT translates to an increase in its value. In the event of a decline in the utility value of an NFT, digital assets with a high liquidity premium are still highly valued, provided there are prospective buyers and sellers in the market.

Earning Capacity

Earning capacity is the metric used to establish the potential gains generated by holding a non-fungible token. Some of these gains may include royalty payments, licensing, and other revenue streams. In this case, investors will evaluate the royalty rate of an NFT to project its royalty income stream. The higher the earning capacity of your NFTs, the greater its market value.

How do Investors purchase NFTs?

Investing in NFTs is a straightforward process. Here are some fundamentals of trading NFTs that will help you get started.

[1] Get a Digital Wallet

A digital wallet is an electronic system used to facilitate digital payments when running transactions online. When investing in NFTs, an eWallet will come in handy in storing your digital assets and other cryptos.

[2] Create Your NFT Marketplace Account

A marketplace account is the medium investors use to buy or sell non-fungible tokens. Today, there is a vast array of account providers. Depending on the service provider you choose, you will have access to a range of digital assets.

Here is a list of today’s most prominent marketplaces for NFTs.

OpenSea.io

This is one of the leading marketplaces for trading NFTs. The platform operates on the Ethereum blockchain technology, allowing investors to exchange NFTs for cryptos. With an OpenSea account, you can trade varying digital assets, including digital artwork, video games, and collectibles. OpenSea.io requires you to have a web3 eWallet designed to interact with the marketplace like the MetaMask wallet.

Rarible

Rarible is an NFT trading medium through which artists can buy and sell their artwork without intermediaries. Its network is built on Ethereum, enabling you to protect your work instantly via blockchain. Rarible hosts a portfolio of multimedia assets, including music, collectibles, art, and videos.

SuperRare

This is another NFT marketplace designed to provide investors with unique and original digital pieces for trade. Recently, SuperRare has hit new record sales, accumulating to tens of millions, making it one of the fastest-growing NFT marketplaces.

Foundation

Foundation is the go-to marketplace for investors interested in live auctioning of NFTs. Investors using Foundation rely on the MetaMask eWallet to process payments and store their non-fungible tokens. You can bid your artwork via Foundation while enjoying the financial and educational offered by the platform. Foundation also allows you to access NFTs that suit you from reputable issuers.

Nifty Gateway

Nifty Gateway is another NFT auctioning platform owned by the famous crypto company, Gemini. Investors can buy, store, and sell their NFTs over the Ethereum blockchain. Non-fungible tokens on Nifty Gateway are well known as nifty, most of which are issued by renowned artists and musicians from across the world. The platform is enabled with the royalty payment functionality, giving artists an avenue to make money from their artwork.

[3] Fund Your Marketplace Account

Once you have identified the most suitable platform for your investment, you will be required to fund your account to activate it for transactions. In most cases, investors use the ETH coins to top up their accounts. This is because most NFTs are powered by the Ethereum blockchain technology, which operates using the Ether (ETH) coins. These coins are purchased on a cryptocurrency exchange, such as eToro and Coinbase.

[4] Purchase Your Non-Fungible Token

With a well-funded marketplace account, it is easy to purchase your NFTs. All you need to do is make a bid for the non-fungible token you are interested in, especially for auction-based marketplaces. Also, you might want to evaluate the subscription fees, monthly payments, and other charges associated with running an NFT account.

Wrap up

Non-fungible tokens are the future of digital and crypto investments. These digital tokens are shifting how individuals create, buy, and sell tangible and intangible items that can be digitized. With NFTs, investors can enjoy high-yield returns, while artists get the most out of their art without going through intermediaries. With a marketplace account, such as Nifty Gateway, Foundation, SuperRare, and Rarible, you can trade your preferred digital assets with a click of a button.