How To Invest In NFTs: 3 Steps

By November 23, 2021NFT
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NFT non fungible token

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NFT Basics

NFT is the acronym for non-fungible token. These tokens are digital representations of real-world things such as art, music, videos, and in-game purchases. Each token is unique, which is what makes it non-fungible. They've become quite popular with collectors of all types including sports trading card collectors. They use blockchain technology to handle the transaction and encode the identity of the owner of the NFT.

Most NFT marketplaces use the cryptocurrency Ethereum (ETH-USD), but they may use other cryptos as well that include Polygon (MATIC-USD) Solana (SOL-USD) and Polkadot (DOT-USD).

These NFT tokens take a physical certificate of ownership and make it digital and secured. Some NFTs actually guarantee ownership of unique physical assets, though the most prominent NFTs are digital assets.

Note: While NFTs have become very popular during the pandemic, there are many who feel this is a bubble that won't last. Invest cautiously.

3 Steps To Invest In NFTs

1. Research Available NFTs

You'll want to choose an NFT that you feel has an upside value potential. The NFT can be some art, music, video, or even an item within a video game. You can search Google or Twitter for NFTs. Sites like Rarity.tools or NFTcatcher.io have an upcoming list of Ethereum and Solana NFTs that will be released in the near future.

When looking at the upcoming NFTs, note when the sale is, what the cryptocurrency requirements are, and how many of the NFT are being sold. This helps you better understand the scarcity behind the NFT you are choosing.

Some things that you want to confirm about the NFT include the team behind it and whether it is on-chain or off-chain. Off-chain uses centralized servers that could lead to the image being lost if the server goes down. The team is important because you want a reputable team that helps drive the value of the NFT up.

Tip: Be leery of NFTs that are held completely off-chain. Be sure that you can trust the custodian with your valuable NFT.

You will also want to join the NFT's Discord and Telegram chats to learn more about the project and get a feel for what others are saying about this particular line of NFTs.

2. Select A Brokerage Or Exchange To Purchase Crypto

You'll next need to buy the cryptocurrency to get the NFT. Most NFTs are purchased with Ethereum, though there are some exceptions. You can buy Ethereum and other cryptocurrencies at a specialized crypto brokerage or exchange such as Coinbase (NASDAQ:COIN), Robinhood (NASDAQ:HOOD), Gemini, Binance.US or Kraken.

A cryptocurrency brokerage is either a firm or individual acting as the middleman to facilitate buying and selling of cryptocurrencies. An exchange is an online platform where buyers and sellers trade with each other based on current market conditions.

Keep in mind that fees are something that you should consider when buying cryptocurrency. For example, Coinbase charges $0.99 for a trade of $10 or less. This fee goes up the bigger the trade is. SoFi Active Invest charges up to 1.25% for crypto trades.

Fees may be a flat fee per trade or a percentage of the 30-day trading volume of an account. Review fees based on the transaction sizes you plan on conducting to get an estimate of what you'll be spending.

3. Select A Marketplace To Purchase Your NFT

The marketplace is where the NFT is bought or sold. Once you find the marketplace where your NFT will be sold, you register and connect your crypto wallet. Each marketplace has its own crypto wallet requirements. A marketplace will either sell the item for a flat rate or it will hold an auction for the NFT.

Popular marketplaces include:

  • OpenSea

  • Rarible

Make sure that there is enough crypto to conduct the transaction including any relevant fees. Fees can include the costs of purchasing and transferring cryptos, converting one crypto into another, and gas fees. Gas fees are the fees paid to miners in exchange for the computing power they use while recording transactions on the blockchain.

Tip: Keep in mind that the listed price or the latest bid for an NFT is not the total purchase price. For example, the final cost of an NFT priced at the equivalent of $40 in Ethereum might reach $150 to $200 due to gas fees.

When the NFT is purchased, it is stored in a crypto wallet on the same blockchain, on a different blockchain, or in decentralized storage. Because the NFT is digital, you can only display it on a screen, often as part of a website. While you own the NFT, in most cases you don't own the copyright on the original asset, meaning you can't reproduce it, and you can't sue someone for copyright infringement.

Examples of crypto storage wallets for NFTs include Cybavo, Trust Wallet, Alpha Wallet, and MetaMask. These wallets allow the storage of your crypto as well as the NFTs that you purchase from the marketplace.

FAQ

How Do NFTs Gain Value?

The value is based on four primary factors: utility, ownership history, future value, and liquidity premium. The utility is how it is used such as a token used in gaming. High ownership values also play a role if the token is created by a famous person or brand name. The future value involves the speculation of where the NFT will move over time. Liquidity premium refers to how much demand there is for the NFT with NFTs with higher traffic yielding higher premiums.

Can You Turn NFTs Into Cash?

An NFT can be sold in the marketplace for cash or cryptocurrency. All transactions are recorded on the blockchain, securing the right of ownership of the NFT. Savvy investors are buying NFTs that they believe will appreciate in the future to then sell them at a marketplace for a profit.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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