Investing in NFTs: what are they and should I invest?
While Non-Fungible Tokens (NFTs) have become a very popular investment for many, they remain controversial. From concerns over their safety to their financial returns and even how they work, there is a lot to unpack when it comes to NFTs. Here’s everything you need to know.
What are NFTs?
To understand what an NFT is, it’s important to first understand cryptocurrency and blockchain technology.
Cryptocurrencies are digital currencies, the most popular of which are Bitcoin and Ethereum, that can be used to purchase real or digital assets through the internet, without any private bank or authority having oversight on it.
A cryptocurrency uses the blockchain to create an equally distributed record of transactions for all users of that particular cryptocurrency.
So, if you wanted to use Bitcoin to buy something online, you would use the Bitcoin blockchain along with all other Bitcoin users, and the same with Ethereum.
Blockchains use complex encryption technology to create a record of all transactions, meaning that once you use a cryptocurrency to purchase something, a permanent, unalterable and un-hackable record of your transaction is recorded on the blockchain.
With this in mind, NFTs are unique digital artworks and projects that can be bought and sold using cryptocurrencies and blockchains.
How do NFTs work?
NFTs are created in a limited quantity, usually only once, meaning that to get your hands on an NFT, you have to beat other people to it.
Because of this scarcity, NFT sellers set a price on their works meaning that people need to match the selling price, or outbid other people, to become an owner of an NFT.
NFTs can become extremely lucrative due to the people or organizations that are selling them, and the extreme demand that exists to buy these kinds of NFTs.
For example, Twitter founder, Jack Dorsey, sold an NFT of the first ever tweet on the platform for just under $3 million, with other major celebrities, including the likes of Snoop Dogg, both issuing and buying highly priced NFTs.
But while there are some clear principles that create an outline for how NFTs should work, the nature of any digital-only asset, investment or market means that there are always exceptions and issues with how such technology works.
For instance, no matter how exclusive certain NFTs are in principle, there are several ways of reproducing a digital image without paying for it, meaning that often, NFTs aren’t always as scarce as they are in theory.
Types of NFTs
While digital artworks are the most common types of NFTs to be bought and sold, NFTs can be lots of different things, including virtual fashion items for digital avatars, games, exclusive content from online creators, and even memes and popular online jokes.
Due to the level of encryption and unalterable data that goes into the blockchain, you can also buy NFTs of projects through smart contracts.
In principle, NFTs can be used to crowdfund projects as well as speculate and create profits for investors. So really, there’s no limit to what can be turned into an NFT.
Should you invest in NFTs?
As with all investment decisions, only you know whether or not it’s the right investment for you.
You need to ask yourself how comfortable you are investing in risky assets, how much money you’re prepared to spend and potentially lose, and exactly what your financial goals are.
On the one hand, NFTs can be a good investment option for people who are prepared to spend money investing in them, as NFTs can generate large returns.
Through buying the right NFTs and selling them, many people have been able to generate large profits.
For instance, in 2021 around 470 ‘wallets’ were able to generate more than $1 million worth of profits, so there is certainly a lot of money to be made.
And, with the average price of an NFT in late 2021 being just over $1,000, NFTs are a relatively more affordable investment than some other investment classes.
But NFTs are also a significantly more volatile and unpredictable investment than traditional investments and have suffered far worse than almost every other investment during the current period of inflation.
From an August 2021 peak in trading, in July 2022 sales of NFTs have collapsed 99 per cent with the average price per NFT also shrinking rapidly.
Despite being listed with a resale price of $48 million, the NFT of the original Jack Dorsey tweet only received top bids of around $12,000, showing just how unpredictable and risky NFTs can be.
Like all crypto-based investments, prices can rise extremely quickly before dropping just as sharply.
Likewise, there remain questions about the safety of NFTs, with scams and illegal activity not uncommon in the market.
All this means that NFTs should rarely, if ever, be a major part of an investment portfolio and that you shouldn’t base your financial future around them.
Instead, it may be better to build a safer portfolio of investments that generate more consistent returns, keeping NFTs as a small part of your portfolio, so if they do make big profits, it will boost your portfolio nicely. If they make losses, it won’t impact you too much.
Like all crypto-based investments, prices can rise extremely quickly before dropping just as sharply
How do you invest in NFTs?
NFTs are typically sold on online NFT marketplaces, the most popular of which is OpenSea.
Although depending on which NFTs you would like to buy, you may need to look for alternative marketplaces, such as Binance which sells different types of NFTs.
You can then browse marketplaces to find NFTs you would like to buy. You can then go ahead and buy them using the preferred cryptocurrency of the marketplace. For OpenSea, most transactions use Ethereum.
To complete your transaction, you’ll need to create an NFT wallet. These wallets will link your cryptocurrency purchases to the blockchain, which secures your NFT.
There are lots of different providers of NFT wallets, so you’re free to choose which ones suit your needs.
What are the best NFTs to invest in?
There are a few different ways to measure which NFTs are the best options for you.
On the one hand, there are some extremely popular NFT collections, whose artworks are worth sometimes millions of dollars.
Some of the highest priced NFT ranges include:
Bored Ape Yacht Club
Mutant Ape Yacht Club
To buy an NFT from these collections, however, you’ll need to invest a lot and there’s little guarantee that they will increase in value significantly enough to make such an investment worthwhile.
Instead, you may want to look for cheaper priced NFT collections that you can invest in for only a small sum that could grow drastically in price in the future, increasing your profits noticeably.
Kate has written for leading publications and blue chip companies over the last 20 years.