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How to Invest in NFTs

how to invest in nft
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Non-fungible tokens (NFTs) have become one of the hottest trends in cryptocurrency over the past year. We know the popularity of artwork on the blockchain will leave most of you wondering: “…What is happening with this?”

With that in mind, this article will cover everything you need to know about investing in NFTs 

It’s reasonable to start with the absolute basics about NFTs because they are so new. 

So, NFT means “non-fungible token.” Basically, fungible means identical to something else. For instance, a $1 bill is fungible because every $1 bill is the same as every other $1 bill. The same applies to bitcoin – bitcoin #45509 is worth the same as bitcoin #45510 because the two coins are exactly the same as each other.

On the other hand, non-fungible refers to an asset that is one-of-a-kind. For example, there is only one Mona Lisa in the world. Sure, a replica of it can be made, but that is not the same thing nor is it worth the same as the original. Baseball cards, real estate, artwork, original recordings of music, memorabilia, and any other unique asset fall into this category. 

Only one of them exists in the world. 

How Do NFTs Work?

The idea of how NFTs work is actually pretty simple. Basically, an artist, celebrity, or other entity creates some sort of digital artwork. The artwork can then be tokenized on a blockchain. 

This tokenization is a digital way to show it’s an original rather than a reproduction. It is the same way that an original work of art has an authentication paper that shows it’s an original. Or that a piece of real estate or car will have a title that proves ownership. 

A real example of this are NBA Top Shots products. The NBA licensed out the NFT tokenization of footage of top moments throughout NBA history to a company called Dapper Labs. Dapper Labs turns highlight reels and/or clips of top NBA moments into NFTs. They then turn around and sell these NFTs to NBA fans. 

The program launched in 2020 and has generated nearly $250 million in sales, basically profit since the costs are so low, for Dapper Labs. This is a good indicator of the viability of NFTs as it shows people are willing to pay a lot of money for NFTs. 

Note: The vast majority of NFTs are on the Ethereum blockchain. You should not bother investing in NFTs not on the Ethereum blockchain at the moment

The Types of NFTs

NFTs can, and likely will, digitally represent just about everything in the real world and any digital creation. However, at the present time NFTs only represent a handful of different things. Most of these things exist in the digital world rather than the meatspace world. 

Here are some examples of the different types of NFTs:

  • Blockchain art.
    • Cryptopunks, Beeple, etc.
      • Artists create digital art and tokenize it on the blockchain.
  • NFTs used in blockchain games.
    • CryptoKitties, Skyweaver, Wanaka Farms, etc.
      • Games that allow players to create NFTs as special items.
  • Celebrity NFTs.
    • Deadmau5, Tony Hawk, Paris Hilton, etc.
      • Celebrities release NFTs about famous moments in their life. These NFTs often involve meeting the celebrity or access to memorabilia. 
  • Music NFTs.
    • Deadmau5, Steve Aoki, Snoop Dogg, etc.
      • Music NFTs are the equivalent of owning an original record. Artists have gotten extremely creative in adding value to music NFTs by attaching them to real-life memorabilia, meetups, backstage passes, song rights, and more.
  • Sports Related NFTs
    • NBA Top Shots and H2H Legends of Football Collection. Every sports league will eventually release an NFT line similar to NBA Top Shots after the success of Top Shots.

Why Would Someone Buy NFT Art When They Could Get a Reproduction For Free?

The most common rebuttal to NFTs goes something like: Why would someone buy an NBA Top Shot (or other NFT art) for millions of dollars when they could download the footage from YouTube for free?

This is a very good question for a few reasons. The most important reason being that understanding the answer to this question allows you to understand how to properly invest in NFTs. So, what is the answer to the question?

People buy NFT art for the following reasons:

  • The same reason people buy baseball cards, original art, original comic books, and so on… It is a hobby they like and they can afford it
  • To flip it for a profit. 
  • Money laundering (ie. physical art).
  • As a way to hold wealth (ie. artwork, vintage cars).

Everything You Need To Know About Investing in NFTs

Investing in NFTs is actually a lot trickier than you might think because there are so many NFTs. The abundance of NFTs means that most NFTs are trash. 

That is simply a function of how creative markets operate. If everyone can create an NFT, then the majority of NFTs will be junk. 

With that in mind, this section will breakdown how to successfully invest in NFTs. 

Choose The Most Popular NFTs

As mentioned in the previous section, there are a lot of junk NFTs that will never be worth anything. This is why investing in popular NFTs is the safest investment option. 

Basically, you want to stick to the 1% of NFTs that will be worth something in the future. 

Some examples of popular NFTs include Cryptopunks, Beeple, NBA Top Shots, CryptoKitties, and NFTs from popular blockchain games. NFTs from blockchain games almost fall into their own investment category. 

The NFT should generally be useful to the game (ie. a cool skin, special weapon, unique name, etc.). The blockchain game itself should be popular as well. It’s even better if the blockchain game has cross-compatibility with other blockchain games, which is common with games that rely on Enjin. 

To summarize, focus on popular NFTs or NFTs that exist in popular video games. Yes, these NFTs will cost more money upfront, but they have the best chance of earning money.

Hold

Another solid piece of advice is to hold your NFTs. You should not worry too much about minor price drops of your NFT (assuming it’s a popular one). 

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For one, NFTs are difficult to value because they are worth whatever someone is willing to pay for them. If a random billionaire wants your NFT, then it’s quite valuable by nature of the buyer having a lot of money. 

More importantly, NFTs are currently in a sort of excitement bubble. This excitement drives the price despite NFTs not having much use. 

Fortunately, there are some actual uses for NFTs once virtual reality (VR) becomes a thing. We will cover this aspect in a later section.

(Generally) Avoid Celebrity NFTs

This is a controversial point amongst NFT investors. Should you buy celebrity NFTs or not?

In our opinion, celebrity NFTs should generally be avoided. The exception to this rule being an investment in a music NFT or a sports NFT like NBA Top Shots. 

The reason is actually simple. There will likely always be a demand for a music NFT. For instance, a Michael Jackson “Thriller” or “Billie Jean” NFT will almost always have demand just by nature of the amount of Michael Jackson fans out there. The same principle applies to the Top Shot of Lebron James’ first NBA score. 

But those NFTs are top of the line moments from A+ list musicians or athletes.

Most musicians or athletes do not fall into that category. Instead, they could have a controversy that completely destroys their public reputation (ie. Mel Gibson) or just become irrelevant (ie. Paris Hilton). In that case, you are left with a worthless NFT.

The Future Use of NFTs

So, at the moment NFTs do not really have that much use. Sure, some people use them to show off their wealth online. A small minority likely use NFTs to launder money or avoid taxes. 

The general gist is that NFTs, other than video game NFTs, are mostly useless at the moment.

However, this can change quickly if (when, really) VR becomes more realistic. The best example of this is from the movie and book Ready Player One. For those that have not read the book nor watched the movie, imagine having hyper realistic VR.

Now, imagine having a home in that VR world where you can display a trophy case of NFTs like NBA Top Shots or Cryptopunks. It would even be possible for players to build their own NFT items that could be used in the game. 

Basically, just take NFTs that exist on the blockchain and place them into a VR world. This topic is explored quite a bit in the book and movie Ready Player One

To summarize, the release of hyper realistic VR will give NFTs much more use than they currently have in the present moment. This is why we recommend holding your NFTs for a period of time as the popularity will surely increase as the rest of the technology cateches up to the NFTs.

Best Places to Buy NFTs

You can buy NFT on pretty much any marketplace if someone is selling them there. You can purchase an NFT on eBay!

eBay actually is not a bad place to purchase an NFT for what it’s worth. Anyway, here are some popular NFT marketplaces:

  • OpenSea
  • Rarible
  • SuperRare
  • Foundation
  • NBA Top Shots

The One Problem With Investing in NFTs

There is one glaring problem with an investment in an NFT. You generally purchase an NFT with Ether as most NFTs are hosted on the Ethereum blockchain. 

This means that it is actually possible to lose money by purchasing an NFT even if the value of the NFT rises!

How is this possible?

If the price of Ether rises more than the value of your NFT, then you will technically have lost money. You would have made more money by holding the Ether. Instead, you are left with a not as valuable NFT as the Ether you paid for it. 

This has already happened with the price of Ether increasing 10x over the past few months. Many people that purchased NFTs when Ether was ~$300 lost a lot of money in opportunity cost. 

To summarize, NFTs are a good investment under one circumstance:

  • You believe the value of the NFT will outperform Ether.

If the NFT will not outperform Ether, then it’s a bad investment. This is obviously a difficult market to predict, but Ether appears very likely to increase in value more than most NFTs. 

Closing Thoughts

That sums it up for investing in NFTs. We recommend sticking to high quality NFTs if you plan on investing in NFTs. The lower quality NFTs (ie. NFTs from unpopular games) are not worth the investment because they are too risky. 

We only recommend investing in less popular NFTs with the intention of flipping them, but not as an investment that will almost always appreciate over time (ie. Lebron James NBA Top Shot NFT). 

Other than that, you should also hold the NFT for a longish amount of time as the usefulness, and demand, of the NFT will increase over time. 

One last point is to measure the value of the NFT in Ether rather than USD. The price of ETH may increase far more than the price of the NFT.

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