Blockchain technology has created a whole new type of investment with cryptocurrency. Blockchain is also responsible for another trendy investment that’s taken off in 2021: non-fungible tokens, or NFTs. NFT investing is becoming more and more popular and for good reason.
If you want to expand your investment portfolio and take on a high-risk investment, NFTs might be a good option for you. Learning how to invest in NFTs can be complex from the outside looking in, but it is easier to understand than one might think. This guide will cover how to invest in NFTs, and whether or not you should.
What is an NFT?
A non-fungible token (NFT) is a digital asset that represents a real-world asset.
You might have heard of a “non-fungible” asset. A non-fungible asset is an asset that is unique or one-of-a-kind. Because it’s one-of-a-kind, it can’t be exchanged for an asset of equal value, and it has no recognized market price.
A plot of land, for example, would be a non-fungible asset. The plot of land only exists in one place and cannot be reproduced, so it does not have a widely recognized market price, and it can’t be exchanged for equal value.
A dollar bill, on the other hand, can be produced in large quantities. You can exchange a dollar bill for another dollar bill, with each retaining the same value.
An NFT usually represents a digital asset, like:
Video game data (in-game items, virtual avatars, skins, etc.)
Generally, digital creations are unlimited in supply (which would make them a fungible asset). Anything online can be copied and shared.
NFTs try to fix this by creating scarcity and designating a digital creation as the “original.” If you own an NFT of any digital asset, then you own the original asset. For example, if you purchase the NFT of a meme, then you technically own the meme.
Pro Tip: NFTs are a very new type of investment, so there may be rules and regulations pertaining to copyrights and profit models. It’s possible that, for legal purposes, NFTs will be treated the same as cryptocurrency.
[ Want to start investing in Bitcoin & other crypto assets? Take a 60-minute online training class and learn how to launch your portfolio today! ]
How Do NFTs Work?
Like cryptocurrencies, NFTs also utilize blockchain technology. Most NFTs are linked to Ether, which is the cryptocurrency of Ethereum.
Every time an NFT is purchased, the transaction is registered on a network of computers, and the owner is given an access code. Every NFT has a unique digital signature, so one can’t be exchanged for another (unlike cryptocurrencies like Bitcoin).
Even if you own an NFT, understand that people can still view or copy the digital asset. Anything that’s on the internet can be easily duplicated. If you own a digital photo, for instance, someone else online can still download or screenshot it if it’s posted somewhere on the internet.
Most people buy NFTs for “bragging rights.” They’re passionate about the NFT and they want to enjoy being the official owner of it. Many NFTs are created by celebrities, who auction them off to superfans. It’s not entirely different from selling an autograph.
For that reason, NFTs are a dubious investment. The vast majority of NFTs do not provide any cash flow, like stocks, and there’s no evidence to suggest that they will appreciate in value, like an investment property.
Most investors buy NFTs based on speculation. They think the NFT will be worth more money someday, so they will buy and hold until they can sell for a higher price.
This is not a particularly safe or rewarding investment strategy, but if you believe that an NFT will grow in value, then it may be a suitable high-risk investment for your portfolio.
What Makes an NFT Valuable?
NFTs have no intrinsic value. Like cryptocurrencies, they’re only worth as much as people are willing to pay for them. Unlike a stock, the value of an NFT is not based on shareholder dividends, projected company growth, or annual profit margins.
Some NFTs have sold for millions of dollars, but even those NFTs are not guaranteed to be worth that much. NFTs do not appreciate in value in the same way that real estate does.
NFTs have become popular for selling digital art. Digital artists can sell their artwork online and even receive royalties if the NFT is sold to a new owner. It’s unclear whether or not digital art will appreciate any more than a meme or GIF will.
Remember that many NFTs can be rather cheeky. For example, Charmin (the toilet paper manufacturer) released an NFT for “non-fungible toilet paper.” For some investors, that may indicate that NFTs are more of a trend than a legitimate, long-term investment.
How To Invest in NFTs
It’s easy to invest in NFTs. Just follow these steps:
Open An Account at an NFT Marketplace: An NFT marketplace is an online marketplace where NFTs are listed for sale. The most popular ones are Open Sea and Rarible. Be sure to vet the person you’re buying from—many creators and celebrities have impersonators that try to sell fraudulent NFTs.
Create a Digital Wallet: You’ll need to create a digital wallet to store your NFT keys and cryptocurrency tokens. You can use an external hardware wallet or an integrated wallet with a cryptocurrency exchange (Coinbase, for example, has an integrated wallet where you can store your keys).
Fund Your Account: Whether you use a crypto exchange or external wallet, you’ll need to connect your bank account or credit card so you can make crypto for your transactions. You may need to go through an identity verification process that’s run by the software/exchange platform.
Buy NFT: Find the NFT that you want to purchase and buy it! The NFT marketplace will usually walk you through the process. It’s not much different than buying something from Amazon.
How To Sell An NFT
Once you’ve purchased an NFT, it’s up to you to decide what to do with it. If you decide to sell it, you can list it in a marketplace for a fee. Before you attempt to upload an NFT to a marketplace, make sure that it supports the blockchain that the NFT was built on. Then, you can list it at a set price, or opt for a buyer auction. Once your NFT sells, the marketplace will handle transferring the asset between you and your buyer, upon which the crypto funds will be transferred to your digital wallet.
Pros And Cons of Investing in NFTs
It’s a good idea to weigh potential drawbacks against advantages before investing in any type of asset. The value of many NFTs have increased significantly in the recent past, and thus creating a buzz amongst the investing community. Physical collectibles are historically reliable in terms of their value appreciation, and many believe that the market will behave similarly for digital art. Artists and creators will also get paid fairly when the asset is used or resold through smart contract technology.
On the other hand, NFTs are static assets and don’t generate income on their own. Their value is subjective and will fluctuate based on buyer demand. For instance, the Nyan Cat GIF was created and sold as an NFT. However, who is to say that Nyan Cat will hold any cultural relevance 20 to 30 years from now? It’s hard to say, and that’s the risk that NFT buyers are willing to take. NFTs and other assets using blockchain technology are also garnering negative attention due to their environmental impact. Creating and verifying transactions uses up a significant amount of energy.
Should You Buy NFTs?
Are NFTs the right investment for you?
Ask yourself why you’re investing.
If you’re trying to earn a passive income or save for retirement, NFTs are probably not the best investment for you because they’re highly volatile (fluctuate wildly in value) and may not appreciate over the long term. They also do not pay recording dividends or interest. Better to invest in:
NFTs are a high-risk investment. Many investors portfolios around reliable low-risk and medium-risk investments that are safe and pay steady dividends. They only invest in high-risk investments like NFTs after they’ve built a diversified portfolio. That way, if they lose money on the high-risk investment, the losses will be covered by the other investments. Consider using this strategy for successful investing.
A non-fungible token (NFT) is a digital asset that represents a one-of-a-kind creation on the internet, like a meme, video, GIF, or digital artwork. NFTs imply ownership of the digital asset, but most NFTs can still be copied or accessed if they’re viewable on the web. NFTs have no intrinsic value and don’t pay dividends or interest—most people buy them just for the personal satisfaction of ownership. Due to a rise in popularity in 2021, many investors want to learn how to invest in NFTs. However, they may not be a lucrative investment due to their lack of value and trendy nature. Consider using an NFT as a high-risk investment—but prioritize low-risk investments first.
Ready to start investing in Bitcoin & other crypto assets?
Click the banner below to take a 60-minute online training class — and learn how to launch your portfolio today!
The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.