How to Invest in NFTs

Non-fungible tokens, or NFTs for short, took the world by storm in 2021, with some selling for millions of dollars. Many people who have heard about NFTs are aware that they have something to do with cryptocurrency, but they might not really understand them. Here's what you need to know about NFTs to invest in them and how to do it.

What are NFTs?

NFTs are digital assets that represent assets such as art, music, videos, or in-game tokens. Perhaps the most popular use of NFTs is to buy and sell digital artwork, although they can represent other real-world assets. NFTs essentially provide documentation proving that the digital asset they represent is the original.

Whenever you're talking about digital items like artwork or music, there can be an infinite number of copies. Anyone can download a copy of anything digital, but, like anything that exists in the real world, there is only one original.

The Verge explained NFTs very simply by pointing out that anyone can purchase a print of a famous artwork like a Monet. For example, we see images of Vincent van Gogh's Starry Night on all sorts of products, but there is only one original painting.

NFTs represent the original version of something digital. In some cases, they can be in-game items like plots of land or a unique helmet, while in other cases, some people have tried to use them as documentation to represent real-world items. According to digital marketing expert Dennis Consorte, a crypto enthusiast, NFTs have utility in ecommerce, too. 

“The next frontier for ecommerce is the metaverse. Luxury brands like Louis Vuitton are already inserting RFID chips into their products, making every item unique. Once brands cross over into the NFT space, they’ll be able to sell non-fungible products that have digital counterparts in the metaverse with special characteristics.”

Why invest in them?

NFTs are "non-fungible" because they can't be replaced by another identical item. Either they are one-of-a-kind, or there is an extremely small number of them, like baseball cards of famous players. NFTs are connected to cryptocurrencies because they are tokens on a blockchain. Most NFTs are built on the Ethereum blockchain.

Those who have bought NFTs probably did so because they expect the tokens to increase in value or because they enabled them to support their favorite artist. However, some may question whether this trend has gotten out of hand.

Some of the more outrageous NFT purchases include a $390,000 payment for a 50-second video by Grimes, $6.6 million for a video from Beeple, $3 million for Twitter co-founder Jack Dorsey's first tweet, and $69 million for an image by Beeple that was auctioned off at renowned auction house Christie's. To put that last one into context, Monet's Nympheas sold for $15 million less than Beeple's famous digital image less than 10 years ago.

Artists can even enable a feature that pays them a percentage of the purchase price whenever their NFT changes hands.

How to buy NFTs

Based on everything you now know about NFTs, it might seem rather difficult to purchase one. It isn't as simple as just buying ether, the native cryptocurrency of the Ethereum blockchain. You can't buy NFTs through crypto exchanges (although Coinbase is working on its own marketplace for NFTs), so you'll have to look elsewhere. Here's a step-by-step process of how to buy these digital tokens.

1. Set up a crypto wallet and buy some cryptocurrency. You'll need one that's compatible with the Ethereum blockchain because NFTs are almost always on Ethereum. Once your wallet is set up, buy some ether.
2. Look at some NFT marketplaces. The most popular one right now is OpenSea.io, which touts itself as a seller of "rare digital items and collectibles." Other reputable NFT marketplaces include Rarible, Axie, SuperRare, Nifty Gateway, Mintable, and Foundation.
3. Search for the NFT you want to buy. Most of the above marketplaces allow you to browse NFTs by category.
4. Place a bid on the NFT you want. Most NFT marketplaces function like an auction house.

One thing you should pay attention to if buying NFTs is the gas fees. If you haven't transacted in ether before, you should be aware that they come with an additional gas fee, which is the amount of money paid to carry out the transaction. Some NFT buyers have paid more in gas fees than they did for the NFT, so you might want to hold off on your purchase if gas fees are high to see if they come back down.

If you don't want to buy NFTs outright, you could consider investing in them in other ways, like through an investment in a venture capital fund that's investing in NFTs and crypto infrastructure. However, you will have to be an accredited investor to go the VC route.

If you aren't accredited, you have other options, like buying an NFT-focused exchange-traded fund like the Defiance Digital Revolution ETF, which invests in blockchain, cryptocurrency and NFT stocks.

Should you buy NFTs?

The decision of whether to buy NFTs should be approached with care. This kind of investment isn't for everyone, and it's extremely risky. If you are purchasing NFTs because you think the price will go up, you might want to rethink your investment.

On the other hand, if you've come across a digital piece of artwork that means a lot to you, it may be worth the investment from a sentimental point of view. You might also want to financially support the artist so that they can keep doing their art. 

Additionally, Kris Barton, chief product officer of Gannett, thinks NFTs provide a great opportunity to further build community and share compelling content, although he thinks this opportunity could manifest itself in different ways.

“We will continue to monitor the space as it continues to develop, but NFTs are a part of a more significant opportunity to engage new audiences in creative and innovative ways. Gannett sees opportunities with NFTs to encapsulate moments in time, which may attract large or niche audiences, and as a draw for subscriptions using creative bundles.”

Ultimately, NFTs are only worth whatever someone is willing to pay for them, so if you can't resell an NFT you paid good money for, it will be essentially worthless. While cryptocurrencies are speculative investments, NFTs are even more so, making them extremely risky. It's never a good idea to invest money you can't afford to lose.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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