Non-fungible tokens (NFTs) have exploded in popularity recently as a new digital asset class. As with any new investment opportunity, it’s important to educate yourself before buying NFTs. This beginner’s guide covers everything you need to know to start investing in NFTs.
What are NFTs?
A non-fungible token (NFT) is a unique digital asset that represents ownership of a specific item like art, music, videos, or other collectibles. NFTs run on blockchain technology, creating a permanent public record and allowing the asset to be securely traded.
NFTs differ from cryptocurrencies like Bitcoin because each token is completely unique and not interchangeable. The content linked to the token is what gives an NFT its value, not just supply and demand.
Why Buy NFTs?
There are several reasons why NFTs have become popular investment assets:
- Scarcity: Each NFT is unique, and there is a limited supply. This makes them potentially valuable as collectibles.
- Ownership: When you buy an NFT, you gain sole ownership rights similar to owning an original physical work of art.
- Creator Royalties: NFTs often have royalties coded into their smart contracts so the original creators get paid each time it’s resold.
- Status: For some people, owning certain NFTs can be a status symbol or give social capital within online communities.
- Future Applications: NFT technology has many proposed use cases like digital identity, licenses, real estate, etc. Early adopters could benefit down the road.
Getting Started with NFT Investing
If you’re new to NFT investing, follow these steps to get started:
- Set up a cryptocurrency wallet – To purchase NFTs you need a crypto wallet that supports NFTs like MetaMask. Make sure to keep your password and recovery phrase secure.
- Acquire cryptocurrency – You’ll need Ethereum (ETH) in your wallet to purchase most NFTs. Use a crypto exchange like Coinbase to buy ETH with your local currency.
- Choose an NFT marketplace – Popular marketplaces include OpenSea, Rarible, NBA Top Shot etc. Browse to find NFTs you’re interested in.
- Learn about minting – Minting is how new NFTs are created. You can mint your own or buy mint passes from NFT projects.
- Join Discord communities – Many NFT projects have Discord channels for discussing new drops, airdrops, and trading.
- Research carefully – As with any investment, research historical sales data, community interest, and creator reputation of any NFT before purchasing.
Assessing NFT Investments
You can assess potential value of an NFT based on various qualitative and quantitative factors:
- Creator reputation – The reputation and popularity of the original NFT creator can impact price.
- Rarity – How rare or scarce is the NFT? Lower supply increases scarcity value.
- Utility – Does the NFT provide any utility like unlocking access, rewards, or voting rights? Useful perks improve value.
- Community – How strong and engaged is the community around the NFT project? Stronger communities increase demand.
- Historical sales – Check price history on marketplaces. Steady rising floors indicate higher demand.
- Volume – Higher trading volumes signal greater liquidity which supports higher valuations.
- Market conditions – The overall NFT and crypto market conditions influence investor sentiment and prices.
Here are some example qualitative and quantitative factors to assess:
|NFT Project||Creator||Rarity||Utility||Community||Price History||Volume|
|Bored Ape Yacht Club||High, established||Low, 10k supply||High, access to club||Strong, high engagement||Rising floor||High liquidity|
|CryptoPunks||High, Larva Labs||High, only 10k||Low||Strong historically||Established bluechip||Low currently|
|Lazy Lions||Low, unknown||High, under 300||Low||Weak currently||Volatile||Low liquidity|
Risks of NFT Investing
While the upside potential of NFTs is high, there are also notable risks to consider:
- High volatility – NFT prices can see dramatic swings, making them riskier short term holds. Set stop losses.
- Subjective value – Beauty is in the eye of the beholder, and not all NFTs will appeal to all investors. Tastes change over time.
- Platform risk – If the blockchain platform or NFT marketplace fails, you could lose access. Use established platforms.
- Infrastructure risk – Technical errors in smart contracts, minting etc. could compromise your investment.
- Regulatory uncertainty – Laws around NFTs are still evolving, and future regulations could impact their value.
- Scams – There are fake NFT projects that run “pump and dump” schemes. Vet projects thoroughly.
Tips for Responsible NFT Investing
Here are some tips to invest in NFTs responsibly:
- Only invest what you can afford to lose. NFTs are risky and volatile.
- Dollar cost average into positions instead of all at once. This smooths out risk.
- Diversify across multiple NFT projects and asset types. Don’t put all eggs in one basket.
- Hold NFTs you like long-term, rather than flipping for short-term profits. Good projects gain value over time.
- Keep an emergency cash reserve so you don’t have to sell at a loss during downturns. Give projects time to recover.
- Beware of scams. Vet all projects thoroughly and don’t believe promises that seem too good to be true.
- Use trusted platforms and take security precautions. Buy hardware wallet to store NFTs safely.
- Stay up to date on NFT trends and news. Follow thought leaders on Twitter or Discords.
NFTs represent an exciting new digital asset class for investors and collectors. With proper education, research and risk management, NFT investing can be an rewarding part of a diversified crypto portfolio. But always invest cautiously as the market is highly speculative. By following the guidance in this beginner’s guide, you’ll give yourself the best chance for responsible success in the world of NFT investing.
-Coindesk. (2021). What Are NFTs? https://www.coindesk.com/learn/what-are-nfts/
-CoinMarketCap. (2021). Why are NFTs Valuable? https://coinmarketcap.com/alexandria/article/why-are-nfts-valuable
-Binance. (2021). How to Identify Valuable NFTs. https://academy.binance.com/en/articles/how-to-identify-valuable-nfts