NFTs—or “non-fungible tokens”—have recently made repeated headlines for selling for millions of dollars. Like all things crypto, this has perked up the ears of investors who want to cash in on the latest crypto craze.
KEY POINTS
- Only you can decide if investing in NFTs is a good investment for you. This is a risky space and you should spend time understanding the market before you make your decision to invest. Nothing in this article is financial advice.
- There are several key factors you may want to look at in evaluating an NFT, particularly the strength of the community around the NFT project or artist. But also consider if YOU actually like the art/project.
- Whether you decide to invest or not, you should spend time learning about the NFT market, in particular by joining Discord groups.
- NFTs are a new asset class and if you are reading this article, you are very early to this space. The time you spend now learning about NFTs may put you ahead of other investors that join this space in the future.
A quick note on Non-Fungible Tokens
If you are brand new to NFTs and are still wrapping your head around the general concept of NFTs, it’s best to stop here and take a step back before even considering an investment.
The good news is that there are a lot of resources to help you understand NFTs (including a lot of resources here on NFTska!).
Try starting off with the following article to help give you a conceptual idea of how NFTs bring value to the digital world:
An important point to reiterate here is that NFTs are a new concept that require us to re-evaluate our ideas of ownership in a digital world.
And if you are reading this - congratulations - you are very early!
The effort you put in now may put you ahead of other investors that, I believe, will continue to enter this space.
Should you invest in NFTs?
Only you can decide if you should invest in NFTs.
In fact, nothing in this article is financial advice. In addition to reading this article, you should also do your own research and consider consulting a financial advisor.
And just in case you didn’t know - I am not a financial advisor 🙂
Investing in the crypto space has always been risky. In addition to market volatility, there is also the risk of hacks and of bugs which can lead to unexpected losses.
NFTs don’t work quite like other cryptocurrency tokens—but that doesn’t mean they’re not volatile. In fact, they might even be more volatile because most projects are still in the price discovery phase.
In addition, NFTs are typically not nearly as liquid as a fungible token, which means that price can rocket up and down based on demand.
And if no one is interested in your NFT, well then, you can’t sell it!
If you do decide to invest in NFTs, you may want to consider taking it from a personal level, particularly if you are new to the NFT world.
What are your interests? What do you like?
For example, you could visit OpenSea, an NFT marketplace, and browse around to get a sense of what you like.
OpenSea offers NFTs in the categories of:
- Art
- Music
- Domain Names
- Virtual Worlds
- Trading Cards
- Collectibles
- Sports
- Utility (we’ll get a bit into this below)
As you become more experienced in the NFT space, you can really dig in and do your own research (see resources below to help you get started) to find what might be the best investment for you.
The point here is that to be an effective investor in this space, you need to understand this fast changing market by getting involved.
How to Evaluate an NFT?
Because NFTs are currently in the price discovery phase, evaluation is based a lot on speculation and subjective factors.
Below are some key points to consider when evaluating an NFT.
Who is the artist/team? And is there a strong community around them?
Fads aside, artistic works from established or successful artists in the traditional art world could carry clout once the initial buzz of NFTs settles down.
But emerging artists may also be a solid investment as some of these artists have embraced this new technology and are experimenting with art in new and interesting ways.
Whether they come from the traditional world or are up-and-coming, it’s important to evaluate the community that they are able to build around them.
NFTs are a much more engaging space than in the traditional art world. NFTs are native to the Internet where communication has less friction and is more open.
And for many NFTs, you are buying into the community as much as you are buying into the art.
For example, if you purchase an Ape from the Bored Ape Yacht Club collection, you essentially get access to an exclusive club and many people are willing to pay sky high prices to be a member of this community.
Bored Ape's are an example of Profile Pic (PFP) NFTs. Learn more about PFP NFTs here.
As I said before and will say again, it's so important to get involved in this space to really understand it.
And you don't necessarily have to buy an NFT right away to dip your toes in the NFT waters.
Try checking out Twitter or the Discord groups for these projects to experience the engagement in these communities (see resources below).
Does the NFT have any utility?
Some NFTs have utility baked right into it. For example, an artist can offer special access to events or future work.
For example, Gary Vaynerchuk created an NFT collection called VeeFriends where token holders get access to future conferences.
From the VeeFriends website:
"All VeeFriends token owners get access to VeeCon. VeeCon is a multi-day event exclusively for NFT holders. Your NFT will give you a three year access pass. The conference will be focused around business, marketing, ideas, creativity, entrepreneurship, innovation, competition and of course, fun."
Many NFT projects outline "road maps" that promise various types of utility that will come along with an NFT. How many of these projects will actually deliver on their promises is questionable, but there is no doubt that this is an important aspect of owning an NFT, particularly if you believe that the team behind the project can actually deliver on their promises.
Do you get any Intellectual Property Rights (IP) along with the NFT?
Intellectual property rights and copyrights are probably the least understood in this industry - likely because we are dealing with a new asset class and norms (or even case law) has not caught up with this fast moving space.
It's worth making a couple of points right up front -
1. I am not a lawyer and if you are planning to be a large investor in this space, you'll likely want to consult a lawyer.
2. Just because you buy an NFT doesn't necessarily (or automatically) mean you own the copyright to the underlying work.
And this is where things get tricky, because certain IP rights to your NFT can add significantly to the value of the NFT.
Taking the example of the Bored Ape Yacht Club, if you own an Ape, you have IP rights over that Ape and can create products featuring your Ape. As a result, Ape owners have been creating everything from t-shirts to wine using their IP.
Screenshot taken of Bored Wine Company homepage on August 28, 2021.
The issue is that not every project makes clear what rights you actually get over your NFT, so it is important to check the project's website and join the project's Discord to get as much information as you can on what you can actually do with your NFT.
For NFT collections, what is the rarity of the particular NFT in the collection?
The rarity of an NFT might have a strong effect on its current and future value. At OpenSea, you can see the rarity of an item in a collection under “properties.”
And Rarity Tools tries to rank rarity for NFTs within collections. For example, to check the rarity of the traits of a particular CryptoPunk, you could visit https://rarity.tools/cryptopunks.
What blockchain is the NFT on?
To keep things simple, all you need to know is that there are different blockchains in the cryptocurrency universe and each blockchain is a kind of public ledger - an account of all the transactions that take place that the world can see and verify.
Ethereum is by far the most popular blockchain for NFTs.
NFTs can be "minted" (created) on the Ethereum blockchain, but they also can be minted on other blockchains such as Flow or Binance Smart Chain (there are many, many others).
So what's the difference?
Well, think of it like this -
The exact same physical museum could be built in Manhattan or it could be built in Albany. It would be far cheaper to built it in Albany due to the lower cost of real estate.
So is building the museum in Albany the obvious choice?
No.
Because there are other factors to consider, for example, the number of visitors in Manhattan is likely to be a lot higher due to tourism to the area and population density.
A similar analogy could be made between the Ethereum blockchain and other blockchains.
Other blockchains offer far lower transaction (gas) fees, but that doesn't make it the obvious choice, because the activity (network effects) for NFTs may be far greater on the Ethereum blockchain, which is why projects typically choose to mint on Ethereum.
But that doesn't mean it will be this way in the future. Only time will tell what blockchains will be preferred for NFTs.
Layer 2 Blockchains
A kind of compromise to this issue are what are known as "Layer 2" blockchains on Ethereum.
“Layer 2” blockchains such as Polygon (previously called Matic), offer optimizations to the base blockchain, most notably lower transaction fees.
To state very simply, Layer 2 solutions sit “above” the original blockchain, handling transactions outside of the main chain, but are still compatible with Ethereum.
The issue with Layer 2's is that they require additional tools and/or processes (such as bridging assets over to the Layer 2) that make it more difficult for someone to use.
But some projects choose to go with a Layer 2 solution, particularly games that might require a lot of transactions. For example, Zed Run is an NFT horse racing game that runs on Polygon.
Do you like it?
Speculation aside, some art collectors pay for art because they either like the art or are personally moved by it in some way. If you purchase an NFT for the love or prestige of owning it, then it will continue to have value to you regardless of its future price.
How do you invest in NFTs?
Anyone can buy an NFT. NFTs are part of the crypto world, which is permissionless at its core.
But if you are unfamiliar with the tools of the trade, it can be a bit tricky.
Purchasing an NFT on a Secondary Market
Most people buy NFTs on secondary markets. There are many NFT marketplaces around, most notably:
It's not particularly difficult to make a purchase, but you do need to have some ETH as well as a wallet, such as Metamask.
Learn More About Metamask
Check out this video posted by the Coin Bureau. Although the focus of the video is to use Metamask for decentralized finance (DeFi), the principals are the same for NFTs. I chose to include this video because the presenter puts emphasis on security, particularly writing down your seed phrase (and not sharing it with anyone!). Please be careful in crypto land!
Buying NFTs on First Mint
If you follow a new NFT project on Twitter or its Discord server, usually they will announce their mint dates to their community. Typically, the project will allow for the purchase of a certain number of NFTs through their website—you connect your Metamask wallet to their site and then attempt to make the purchase at the date and time specified in the announcement.
This is a risky method of investing, but can lead to high rewards, particularly at this stage of the game when it appears that we are in an NFT bubble.
To find projects pre-mint, you can go to Rarity Tools’s Upcoming page.
And to learn a bit more about what's it's like to try to mint using this method, you can read more about it in this article on profile pic NFTs.
Fractional Ownership of NFTs (F-NFTs)
As prices for top NFT projects such as CryptoPunks and others have soared, smaller investors have essentially been priced out of the market for these items.
As a result, there has been an increased interest in fractional ownership of NFTs, sometimes called "F-NFTs".
Examples of platforms in this space include niftex.org and fractional.art.
As with anything crypto and NFT, please take the time to understand the risk as these are new offerings in a new asset class. There have even been some legal questions around fractionalizing NFTs .
Additional Resources to Explore
I will say it again - Explore, get involved, and do your own research - it will be worth it in the long run.
Terms
Before you dive into these resources, here are a few terms you should understand that are particular to NFT collections.
Floor Price: The lowest price for an item in an NFT collection. This may be the item that is this least desirable in the collection or an item that someone wants to liquidate quickly. The floor price is an important metric as it is the lowest price that someone can buy into a collection. It also suggests to holders the price at which they could quickly liquidate their item. The floor price is tracked closely by potential investors and holders.
Screenshot taken on August 28, 2021 showing the floor price of Art Blocks (Curated) on OpenSea.
Number of Owners: As the name suggests, it is the number of unique owners (more technically, unique wallets) of a collection. For example, if there are 10,000 items in a collection and there are 5,000 unique owners, then the average is 2 items per owner. A high percentage of unique owners is considered a strength.
Volume: Sales volume (may be tracked in the last 24 hours or last 7 days). High sales volume suggests liquidity of the collection.
Websites
nonfungiable.com
Real-time NFT sales tracking across major NFT marketplaces
coingecko.com/en/nft
NFT collections by trading volume. Includes floor price and unique owners for each collection
rarity.tools
Ranks items in collections by rarity. Click into a collection to see how an item is ranked in the collection. Note that this ranking is done by Rarity Tools, not the project or community.
playtoearn.net
Ranks and provides information on NFT related games.
cryptoartpulse.com
Sales data on NFT art across multiple marketplaces.
Discords
Zen Academy
Zeneca_33 puts out some great information via Twitter (you should follow him). He also has a Discord where new people to the NFT space can ask general questions, including how-to type questions, in the group.
VeeFriends
This is the Discord server for Gary Vaynerchuk's VeeFriends NFT project.
Art Blocks
Art Blocks is a is a generative art project that has recently exploded in popularity. Art Blocks seems to be becoming the "MoMA" of the NFT/digital art world. Although there are no guarantees for what the future may hold, following their Discord is an important step in bettering your understanding of this space.
Friends with Benefits (FWB)
FWB has become a kind of exclusive club in the NFT space. They have a Discord, but to join you must fill out an application and hold their FWB token. Recently the token price has appreciated significantly, making the price of membership prohibitive for many.
Will NFTs hold their value in the Future?
Anything can happen in the crypto world. But, realistically speaking, it’s unlikely that all NFTs will continue to sell at their current prices once the buzz dies down and the bubble bursts.
It’s curious to note that the NFT market exploded even as Bitcoin was going into its nosedive and the cryptocurrency market, in general, was down starting in about May of 2021.
Does this mean that NFTs can ride a wave independent of other cryptocurrency trends? It’s possible. Time will tell.
What is interesting here is that NFTs have attracted a lot of people who weren’t initially into cryptocurrency. In other words, NFTs seem to be attracting the "main stream".
Will this continue? We'll see.
The future looks bright for NFTs but we are still in the very early days.
Please note: I am active in the NFT and crypto space and I may own NFTs and crypto mentioned in this article.
