The financial landscape is in a constant state of flux with new investment opportunities, developments, and changes to evaluate daily. Occasionally, the evolutionary process that exists in the world of finance produces an investment completely different from what was seen in the past. Several hundred years ago, that investment was called stocks. A decade ago, it was called Bitcoin. Today, it is called an NFT.
NFTs, or non-fungible tokens, are a type of investment born out of the cryptocurrency ecosystem that developed thanks to the creation of Bitcoin. The term “non-fungible” means the asset is unique, singular, and irreplaceable. Naturally, these characteristics make NFTs a potential investment opportunity, leading to significant interest from a broad range of investors.
While the NFT mania of the early 2020s may be over, the future of NFTs certainly isn’t. Indeed, NFTs may still provide investors with significant returns for years.
In this article, we will explore the basics of this new type of asset, its potential as an investment opportunity, and what the future of finance may hold for this new and exciting technology. If you’re interested in taking advantage of NFTs but don’t know where to start, this is the article for you.
NFTs Are Not Physical
Not too dissimilar to assets like stocks, REITs, funds, and cryptocurrencies, NFTs are not physical assets. Instead, they exist purely in the digital world. NFTs are essentially digital files that are stored on a blockchain network and can be accessed through digital devices such as computers or smartphones.
As a result of their intangibility, NFTs cannot be held or touched in the physical world. Similarly, they cannot be physically transferred between individuals. Instead, ownership of an NFT must be transferred through a blockchain transaction, while the actual token remains in digital form and cannot be physically handed over like a physical asset.
Since NFTs do not have a physical presence, they do not possess any intrinsic value like physical assets. Physical assets enjoy inherent value thanks to utility, scarcity, or aesthetic appeal. On the other hand, NFTs derive their value solely from the demand for them in the digital marketplace.
However, although NFTs do not have a physical form, nothing prevents an NFT from representing ownership over physical assets. For example, there would be no reason that the deed for a property could not be digitized into an NFT. In this circumstance, the NFT would gain the inherent value of the asset which it represented.
Types of NFTs
As you might imagine, there are various types of NFTs within this asset class. Although it is beyond the scope of this article to comprehensively outline the various types of NFTs, let’s take a brief look at the various NFTs currently available:
- Art NFTs: Art NFTs represent digital artwork. Digital artwork can include anything from digital paintings and illustrations to 3D sculptures and animations. This type of NFT was one of the earliest forms of NFT assets and the most commonly owned NFT on the market today. The popularity of these NFTs led to various celebrities such as Snoop Dog releasing their batch of NFTs for sale to the public.
- Gaming NFTs: These NFTs can be used to represent in-game assets, such as virtual items, skins, and characters. They can also be used to represent ownership of a particular game or game studio. As you might imagine, this form of NFT will continue to grow in popularity as gaming developers continue to incorporate them into their ecosystems. With the growth of technologies such as the Metaverse, it is exciting to think about the future of gaming NFTs.
- Collectible NFTs: Collectible NFTs represent rare or unique items that are meant to be collected, such as virtual trading cards or rare digital items. Collectibles are not a new concept and have been around for centuries. These NFTs represent the next phase in collecting items.
- Music NFTs: These NFTs represent ownership of digital music, such as albums, singles, or individual tracks. Although not much is spoken about this particular type of NFT, the possibilities for its application are considerable. After all, imagine the possibility of being able to claim ownership over your favorite songs and receive royalties as a result.
- Sports NFTs: These NFTs represent ownership of sports-related assets, such as trading cards or memorabilia. Sports NFTs are similar to the collectible NFTs mentioned above. However, these NFTs may offer exclusive access to stadiums, events, or other benefits.
- Domain NFTs: Domain names have existed for as long as the internet. However, in the decentralized web, domain NFTs represent ownership of domain names.
- Virtual Real Estate NFTs: These NFTs represent ownership of virtual land or property in digital worlds and games. You may have already been exposed to this type of NFT if you had experimented with platforms like The Sandbox or Decentraland.
- Metaverse NFTs: Similar to virtual real estate, Metaverse NFTs represent ownership of assets within virtual worlds and gaming platforms, which can include avatars, clothing, and even virtual real estate. This type of NFT is all-encompassing and it could be argued that it includes a number of different NFT types.
As you can see, despite NFTs remaining in their infancy, there are already various types of NFTs. As a result, the possibilities for NFTs are only limited by our collective imaginations. Moving forward, it is reasonable to expect to see even more creative and innovative uses for them in the future.
How Can You Buy NFTs?
Many inexperienced investors have shied away from the prospect of investing in NFTs for many of the same reasons they did not invest in cryptocurrencies. Chief among these reasons, especially in the older demographics, is that investors simply did not know how they could invest in NFTs. If you count yourself among these investors or want to know how you can invest in NFTs, here is a step-by-step guide:
- Selecting a Platform: To buy an NFT, investors will need to go to digital marketplaces where NFTs are available for purchase. Thankfully, there are many platforms to choose from. At the time of writing, platforms such as OpenSea, Rarible, and Nifty Gateway are excellent options for investors looking to buy or sell NFTs. We should note that each platform has its own features, fees, and selection of NFTs. It is important to do your research to find a platform that suits your needs.
- Create a Digital Wallet: In order to purchase an NFT, you will need a digital wallet that supports the Ethereum blockchain. Digital wallets are just pieces of software that exist as apps on your smartphone or programs on your computer. These pieces of software are capable of storing the necessary data to store your NFTs safely. While it is important that you do your research to determine which wallet suits your specific needs, popular wallets include MetaMask, Trust Wallet, and MyEtherWallet. Security is paramount in the digital world, so it is important to keep your wallet secure by using a strong password and enabling two-factor authentication.
- Ethereum: Unlike other assets, NFTs can not be purchased directly with fiat currencies. In fact, almost all NFTs are bought and sold using the cryptocurrency known as Ethereum (ETH). In order to purchase an NFT, you will first need to purchase ETH from a cryptocurrency exchange such as Coinbase or Binance. Once you have purchased ETH, you can transfer it to your digital wallet.
- Find Your NFTs: Now that you have set up your digital wallet and purchased Ethereum, you can browse the available NFTs on your chosen platform. You can filter by category, artist, price, and more. When you find an NFT you want to purchase, make sure to read the description and verify its authenticity.
- Bid or Buy: NFTs can be sold through auctions or at a fixed price. If the NFT is being sold through an auction, you can place a bid and wait for the auction to end. If the NFT is being sold at a fixed price, you can purchase it outright by clicking the “buy now” button. The process of purchasing an NFT may vary slightly depending on the platform you choose to transact on.
- Transfer Ownership: “Not your keys, not your crypto” is a popular adage among cryptocurrency investors. The phrase is based on the premise that ownership over digital assets is only secure if the assets are stored in your personal wallet. As a result, we strongly recommend that once you have purchased an NFT, you transfer it to your digital wallet. You can check that the ownership of the NFT has been transferred to your wallet by checking the transaction history.
- Showcase Your NFT: Now that you own an NFT, you can enjoy it as a unique piece of art or even resell it in the future. You can showcase your NFT in your digital wallet or on social media platforms.
How Much Are NFTs Trading For?
Volatility appears to be the hallmark of the NFT asset class with prices for NFTs fluctuating wildly. Throughout the NFT mania that dominated the cryptocurrency space in 2020/21, NFTs began trading at astronomically high prices, with prices reaching hundreds of millions of dollars. For example, in late October 2020, a CryptoPunk NFT sold for USD 530 million.
It appears that while many NFTs trade for modest sums of money, a rare few are capable of trading for hundreds of millions. Let’s look at some of the factors that are capable of influencing the price of an NFT:
- Rarity/Scarcity: As you might imagine, rarity has a direct impact on the value of an NFT. The more widely available the NFT, the lower its value. Conversely, rare NFTs are significantly more likely to be higher value. If an NFT is the only one of its kind, or if there are only a few copies available, it enjoys a significantly higher probability of being valuable.
- Creator: The creator or developer of an NFT can also have an impact on its price. If the creator is a well-known artist or celebrity, the NFT may be more valuable because it has the potential to become a collectible item. Examples of this can be found in the numerous celebrities who began developing and selling their own NFT collections for millions of dollars.
- Demand: NFTs are not immune to basic economics. Like any other publicly traded assets, the value of an NFT is ultimately determined by the market demand for it. If there are many people interested in owning a particular NFT, its price is likely to increase regardless of its fundamental value.
- Historical significance: If an NFT is historically significant, such as being the first of its kind or having some other notable achievement associated with it, its value can increase. One historically significant NFT is “Everydays: The First 5000 Days” by the digital artist Beeple (real name Mike Winkelmann). It is a collage of 5,000 images that Beeple created and posted online every day for 13 and a half years, starting in May 2007. In March 2021, “Everydays” was sold at a Christie’s auction for a staggering $69 million, making it the most expensive NFT ever sold at the time. This sale marked a major milestone in the history of NFTs, demonstrating their potential to revolutionize the art world and change how we think about the value of digital art.
- Utility: A major criticism of NFTs is that they serve no practical purpose. While is true for the vast majority of NFTs, some NFTs are designed to have a functional purpose beyond simply being collectible. If an NFT has a useful function, such as granting access to a particular website or service, its value can increase based on the value of its utility.
- Platform: Although this is a relatively minor consideration, different NFT platforms may have different fees, royalties, and user bases which can impact the price and perceived value of the NFTs traded on them.
Are NFTs The Future?
While few human beings throughout our shared history have accurately predicted the future consistently, many often try. In relation to NFTs, more than a few notable figures have expressed support and belief in their value and prosperous future.
Gary Vaynerchuk is one such supporter of NFTs who has described them as “the next big thing” publicly stating his belief in their value and outlining the various ways that NFTs could skyrocket in value.
That said, as with any new technology, a number of commentators have expressed concerns over the investment thesis behind this technology, drawing comparisons to various asset bubbles throughout history that were driven largely by greed and speculation which ended in financial ruin for many involved.
Ultimately, NFTs, much like cryptocurrencies, remain a speculative investment. As such, investors would be well-advised to exercise caution when allocating capital to these asset types. Although it is not feasible to tailor specific investment advice to the general public, the good rule of thumb for NFTs may be to not invest more than you are willing to lose.