In recent years, NFTs have exploded in popularity. While anyone can buy and trade NFTs, much of the hype surrounding them is created by well-known figures publicising their purchases.
Celebrities from Paris Hilton to John Terry have invested in NFTs that may one day be worth considerably more than it was when they purchased it.
Like cryptocurrency, NFT investments can be volatile as the hype surrounding the market is what drives much of the valuation. However, unlike cryptocurrency, NFTs are non-fungible and cannot be directly exchanged for other assets of equal value.
Understanding what all this means can be tricky, so whether you want to buy NFTs, sell NFTs, or simply find out more about them, we are going to find out what they are and how you can invest in them.
What are NFTs?
Non-fungible tokens (NFTs) are unique digital assets recorded on a blockchain that cannot be divided, replicated, or substituted. NFTs normally contain files of digital art such as pictures, videos, and audio.
Like regular art, NFTs are not easily valued as their worth comes from the value projected onto them with regards to their history, craftwork, or aesthetic appeal. Therefore, the value of NFTs can fluctuate significantly.
What does fungible mean?
If something is “fungible,” it means that it is mutually interchangeable with another good, asset, or commodity of like kind or value.
For example, money is fungible. You can exchange a £5 note for five £1 coins or ten 50p coins, and you would still have the same amount of money as there is no more value in the note than there is in the coins.
What does non-fungible mean?
If something is “non-fungible,” it means that it is not easily exchangeable with other goods, assets, or commodities because it is unique.
For example, as we have seen, a £5 note is fungible. However, if that £5 note is signed by a celebrity, it becomes non-fungible because there is nothing else like it. The signed £5 note may be valued and sold by the owner, but the value is not linked to the actual value of the note.
How do NFTs work?
NFTs are digital tokens that prove the token owner’s authority and ownership of the work, product, or item the token represents. The tokens are stored within a blockchain which makes it almost impossible for them to be hacked.
Most NFTs are part of the Ethereum blockchain, but other blockchains have started using their own versions of NFTs. Ethereum is a cryptocurrency – which isn’t an NFT – but it also tracks who is holding and trading NFTs.
When you buy an NFT, you receive a token that shows that you own the unique digital work that the token represents.
Are NFTs a good investment?
The NFT market is still fairly new, so it remains to be seen how profitable NFT trading becomes. You should remember that each NFT is unique and can only be judged by its own merits and value and not by the wider market.
You should be wary of investing in a digital asset just because it is tokenised. You need to understand the value of the underlying asset for the investment to be potentially profitable. You should conduct extensive research and consult market professionals before investing and think about what you would get from the asset if you were unable to sell it.
So let’s look at some of the pros and cons of investing in NFTs.
- Accessibility. Like cryptocurrency, anyone can invest in NFTs. The market is easily accessible, and an NFT can be easily transferred between people worldwide.
- Security. A blockchain secures NFTs, and blockchains are known to be one of the safest stores of digital assets.
- Opportunity. Investing in NFTs could potentially yield significant profits, but it also allows users to explore the wider opportunities provided by blockchain technology. As you learn more about it, you may see a good opportunity to invest in crypto that is more likely to provide high returns on your investment.
- Volatility. Like cryptocurrency, the hype and misinformation surrounding NFTs can lead to the values becoming inflated and then crashing. There isn’t much stability in the NFT market, and you may experience the negative side.
- Energy. As we saw earlier, most NFTs are supported by the Ethereum blockchain, which uses a very high-energy operating process. To put it into context, one NFT transaction takes the same amount of electricity the average home uses in 36 hours.
- Cryptocurrency. As most NFT sales take place on the Ethereum platform, you usually need to own the cryptocurrency Ether to make NFT purchases. While Ether is available for all, the value of Ether can be volatile, which might put some people off.
How can you invest in NFTs?
Investing in NFTs is simple. To do so, you need to do the following:
- Create an account with an NFT marketplace. NFT marketplaces (sometimes called “NFT platforms”) are online platforms where NFTs are bought and sold. Popular examples include Open Sea, Binance, and Rarible.
- Get a digital wallet. You need a digital wallet (sometimes known as a “crypto wallet”) to store your cryptocurrency and NFTs. You can either get a digital wallet using external hardware or an integrated wallet on the NFT marketplace (only some have this option available).
- Put funds into your account. You need to connect your bank account to buy crypto for your transactions and then transfer money into your NFT marketplace account.
- Purchase NFTs. Search and find NFTs you want to buy and buy them. The NFT marketplace platform you sign to will have its own process that it should walk you through, but it is much like buying anything from an online retailer. Make sure you research the person you are buying from, as there are many false impersonators fraudulently posing as celebrities or well-known artists.
- Be sure to vet the person you’re buying from—many creators and celebrities have impersonators that try to sell fraudulent NFTs.
Once you have bought an NFT, you can do what you want with it. If you want to sell it, you need to list it in the marketplace, which costs a small fee. You can either list it at a specific price, or you can auction it amongst potential buyers. Once the NFT is sold, the marketplace platform will facilitate the transfer of the NFT.
What are some alternatives to investing in NFTs?
If you are interested in trades and investments but are unsure about NFT investing, there are plenty of exciting alternatives for you to consider.
Stocks and shares
Investing in regular stocks and shares has become much more accessible in recent years as there are now apps and websites that allow regular people to buy and trade on the stock market.
Buying stock online is simple and, if you stick to safe investments, is far more stable than investing in crypto or NFTs. Also, unlike NFTs, stocks and shares are fungible, which means their value is more secure. While this does mean you are less likely to make huge returns on your investments, it also means you are much less likely to lose large sums as well.
Cryptocurrency experienced a boom in 2017 in which some people made huge amounts of money as the hype and popularity of crypto surged. However, this was followed by an enormous crash in 2018 when the value of bitcoin fell by around 65% in a single month. Such volatility has led many to be sceptical and cautious of the crypto market, but it has levelled out considerably since then.
If you are sensible with your investments and do a good amount of preliminary research, investing in cryptocurrency can still be very profitable. Many people speculate that if/when governments start to recognise crypto, the value will rocket once more. But until then, there are still plenty of cryptocurrencies with significant growth potential within the crypto market.
Investing in fine art is similar to investing in NFTs, as there is no guarantee your investment will yield any returns. However, the fine art market is more established than the NFT market and therefore has a wider reach.
Gold has a stable value and is not impacted by variables such as interest rates. It is one of the safest investments as the price of gold is directly linked to the amount of gold mined, and it is valued worldwide.
So if you are looking for a more stable alternative to crypto or NFTs, your best option may be to invest in gold.
What are some examples of NFTs?
Let’s now take a look at some of the best-known examples of NFTs:
- Everyday: the first 5,000 days. The artist Mike Winkelmann (better known as “Beeple”) created this digital artwork by creating a collage of 5,000 digital images. It is known for being the most expensive NFT yet, having sold at an auction in 2021 for $69.3 million.
- WarNymph. The music artist and erstwhile partner of Elon Musk, Grimes, made around $6 million from selling a collection of her art and music as NFTs.
- Bored Ape Yacht Club. Bored Ape is a collection of NFTs that are sold individually. Each depicts a cartoon image of an ape in various different poses and costumes. Many celebrities have bought Bored Ape NFTs, and their total sales are now in excess of $1 billion.
Investing and trading in NFTs is simple and accessible. All you need is a digital wallet and an account on an NFT trading platform. While you may be keen to jump into NFT investment, you should do careful research and talk to professional traders beforehand. The market is volatile, so you should tread carefully.
So whether you are into online games, digital art, videos, music, or any other form of NFT, once you have made your purchase, you know that you have something in your possession that no one else in the world has!