What are NFTs? What makes NFTs a great investment?
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If you're like me you've probably heard of NFTs in passing either through news, social media, or just through your friends and you're probably wondering why are they so expensive? Why are they costing millions of dollars for images that I can just download to my computer?
So, you may have done a little bit of reading about it and at the end of it thought - I still don't get it! And like many of you, I was in that same boat.
So, over the past few months I've been researching, listening, engaging with the community, reading social media, looking at the projects, buying, and selling some NFTs just so I can get a bit of a feel for what's going on in the space.
So, in this article I wanted to cover:
What an NFT actually is,
Why I started buying,
How you can start buying,
How to find out what projects are actually valuable,
How to do it in a safe and secure method, and
Have a bit of fun while you're doing it.
WHAT IS AN NFT?
NFT stands for ‘Non-Fungible Token’ - and essentially what that means, is that it can't be exchanged for another asset of the same type. For example, if we use Bitcoin - which is a form of cryptocurrency: one bitcoin can be exchanged for another bitcoin, and they are interchangeable, but when it comes to NFTs you can't do that because it has a unique digital signature, or a token ID. Hence, the term non-fungible.
NFTs use blockchain technology to store anything digital and this can be art, music, videos, tickets, or collectibles. The biggest benefit of NFTs is the proof of ownership and traceability. Now, you don't actually need to understand blockchain technology, all you need to know is essentially it's a long ledger of all the transactions and information that have occurred from the inception of that NFT. So, you can always see who the owner is, who created it, all the buyers before you, and all this information is publicly available.
If you've ever bought comics, trading cards, sports memorabilia, first-edition books, sneakers - you'll probably understand this a little bit easier. Essentially, people who love collecting will get this.
WHY BUY DIGITAL, WHY NOT PHYSICAL?
You may be thinking, I still don't get it. Why would you buy digital? Wouldn't you prefer something physical? First up, some projects actually do address this. They provide you with the option to claim or redeem a physical item. But essentially, it's a little bit easier to understand if you bought anything digital - such as:
Accessories in gaming,
Avatars,
In-app purchases to enhance your experience, or
Downloadable content for gaming.
When you're in this community, or this space it gives you a sense of uniqueness. It can also enhance your experience depending on what project you go with, or it can just give you a sense of joy for actually owning that NFT.
The biggest advantage in my opinion is that it's easier to buy and sell online and there's safe and secure measures to do so. Let's say you want to buy something physical - let's say a 1980's baseball card. Well firstly, you've got to find a community that actually trades that, then you've got to get in touch, negotiate, package it up, deliver it - but there could be issues with payment, there could be issues with delivery, or how do you prove the authenticity of that trading card, or is it damaged when it arrives.
Essentially, all these issues are addressed with the blockchain technology and NFTs. There are NFT marketplaces where people can buy and sell NFTs and this process is almost instantaneous. If you were to buy an NFT the money leaves your account and the NFT goes straight to your digital wallet. People can also directly check on the marketplace whether the NFT that they're buying is original and is authentic.
Another benefit is the creator actually has the opportunity to get royalties from future sales. So, if they were to sell art for let's say a hundred dollars, once that art is sold again for another two hundred dollars, they could potentially make 10% on each of those sales.
WHAT MAKES AN NFT VALUABLE?
Some NFTs actually have utility. So, this could be memberships, exclusive access to content, or it could be collaborations with high profile brands, others could be royalties where the community actually gets a percentage of the money that is generated from secondary sales.
Another massive criteria for an NFT being valued is who's behind it. So, is it either a team or a person? Does that person have work that people value highly? Are they equipped to manage a project and maybe add a lot of value in future years? The people behind the project may have connections in the industry or they may just be really passionate about the project and you know that their passion is going to push this even further.
Some NFT projects actually have a road map, which shows their short and long term objectives. So, this kind of dictates what their vision is, how they're going to get there, and it shows some of their key milestones which shows how they're going to reinvest some of those funds that they've earned from selling the NFT in the primary market and the sales that they've generated in the secondary market.
Some projects have really fostered a great culture in their community and people are contributing and being really positive. This also draws more people to actually participate in that project and want to support it to go further. Likewise, there's also celebrities and influencers also jumping into these projects which obviously gets publicity and that also drives prices up.
Something else to look for is originality so are projects bringing something new to the space or adding elements that improve the industry as the space grows and evolves. You'll find there's a lot of copycat NFTs - where they just take the same concept and try and make it a little bit different but adding no real value to the space.
Artwork is also another great indicator of value and this is super subjective, but essentially creators can add value through their talent. This could be where they add maybe motion design to it, or it's 3D, or they add some really cool music to it. These unique styles differentiate them from other NFTs on the market and ultimately will drive their price higher if people value it.
Another indicator is ownership and people tend to pick this one apart when it comes to NFTs because what's the actual value in owning that NFT when I can just download it as a jpeg and then have it on my computer. There are many ways of replicating physical art in the real world, but it doesn't hold the same value because it lacks the proof of authenticity and many collectors want that just to say that they own the original.
Entertainment can also bring value if people are having fun or positive emotions with that project or that NFT. Other value can be bragging rights where NFT provides status. This is evident in crypto punks which sell for tens of thousands, to millions.
You can also look at some of the benefits that the NFT offers - so, this could be IP. So, do you get Intellectual Property rights when you buy an NFT? So, can you use that for commercial purposes and get money for that or are you benefiting from collaborations or initiatives that the project is doing?
Sometimes, you hear the term provenance used. For example, if Jay-Z owns a crypto punk and somebody were to buy that off him, maybe they would pay slightly more knowing that Jay-Z previously owned that. Ultimately people will find intrinsic value based on the previous history of that NFT and where it's come from.
Lastly it could be connection - where it's unspoken and you just have a connection to that particular piece of art, or music. You just feel like that's you, that's part of your community, or it resonates with you.
WHAT RESOURCES CAN I USE TO CHECK THE VALUE OF AN NFT?
For this, I won't be going into any of the data around the valuation. I won't be going trading volume rarity number of holders. I'm going to be talking more in general terms.
Now, there's going to be NFTs in different phases depending on how you look at it. Some sellers may actually have a private sale or a pre-sale where you can buy that NFT for a lower cost, but you commit to the project before it reaches success. Or some projects may have recently just launched and they're starting to progress and fulfill some of the objectives that they said they were going to do. So, they're all going to have their little nuances in how you value them, but for the purposes of this - let's just look at it from a high level.
A website is a great place to start if you want to find out a bit about the project or the artist and kind of see what their general vision is. Hopefully, they'll include some objectives or their mission what they intend to do with the project and at specific stages. So, this space changes daily so it can be hard to plan out some of these things. But, essentially you want to look for high level objectives that seem achievable and actually going to add value to you holding on to that NFT.
Find out who the team members are, find out what you're getting, is the structured well, how original is the project or their art. If you're unsuccessful with their website, check social media. This is probably where you're going to find more information about the actual creators and the people working on that project. So, you can see what projects they've previously done, the work they post, how they engage with the community, and how the community responds to their project or art.
Another thing to check when you're looking at their socials is the number of followers that they have, because this shows whether they have a big influence in the space or if there's a lot of interest around a particular project or artist.
Join their discord, see how they communicate with their audience, see how frequently they engage, what they contribute, whether they're giving frequent updates, see if the team is being transparent. Or join their Clubhouse, their Twitter spaces, or Facebook live audio. Listen to what people are saying, hear how they respond, see if they're passionate about their project, and just in general get an understanding of who they are and what they hope to accomplish.
Lastly, I think you just have to speculate with some of these things. Do you think this project is going to take off or this art is going to be really prominent in that space? Is the concept that they're trying to get across complex? People are more likely to readily adopt something that already exists in the real world, let alone the digital world.
You could also have a gut feeling based on inside knowledge that you know from your particular industry or your hobby or just generally what you're interested in.
WHAT ARE THE RISKS OF BUYING AN NFT?
First and foremost, is actually making sure that it is original so if using platforms such as Opensea, make sure that you can see the verified blue tick - that shows that the NFT is official.
Another risk is scams and this could be people sending you links or asking you for your seed phrase - which is your last line of defense when it comes to protecting what's in your wallet. Or it could be false giveaways and rewards. Another scam, is offering you cryptocurrency which is valued much lower than the one traditionally used on the platform.
I've put a resource below of some of the potential scams that can happen and how to avoid them. What are common scams and how to avoid them:
https://www.garyvaynerchuk.com/10-ways-to-protect-yourself-from-scams/
NFTs are super risky by nature and the biggest part is due to the volatility, and this can be markets going up or down with no warning whatsoever. With more and more NFTs being released every single day, week, month - it only increases the supply of NFTs in the market and the demand isn't growing as fast, so most projects won't actually do as well as you think they will.
Other volatility can be in cryptocurrency - as this is what you use to buy NFTs, if they go up and down, that can also have a significant impact on the pricing of NFTs. As everything's relatively new in this space, regulations and law haven't quite caught up so this could be a potential issue in the future as they do implement some of these to combat some of the issues that are occurring.
Valuation is a risk in itself, it's hard to predict, hard to calculate, it's very speculative, and there's large investors that can have a large impact on the market and pricing.
HOW DO I BUY AN NFT?
Okay, so you've done a bit of research, you're ready to take that next step. Below are some resources which show you all the steps that you need, from from taking your money out of your bank account to buying an NFT. There are many approaches, wallets, trading platforms, and you have to figure out what suits you best, but I've given one general approach down there just so you can get started.
How to make a Binance (trading platform):
https://www.binance.com/en/support/faq/c780097f75dd450a82d17f1e84153276How to transfer USD (fiat) into Binance:
https://academy.binance.com/en/articles/how-to-depositHow to purchase Ethereum (cryptocurrency) on Binance:
https://www.binance.com/en/support/faq/227497e9e2bf4beb958ffc6bb94fbbe8How to create a MetaMask (digital wallet):
https://www.youtube.com/watch?v=Af_lQ1zUnoMHow to transfer Ethereum from Binance to MetaMask:
https://academy.binance.com/en/articles/how-to-withdrawHow to create an Opensea (NFT marketplace) account and connect to MetaMask:
https://support.opensea.io/hc/en-us/articles/360061676254-How-do-I-create-an-OpenSea-account-How to search for an NFT on Opensea:
https://support.opensea.io/hc/en-us/articles/1500003245962-How-do-I-search-for-NFTs-How to bid or buy an NFT on Opensea:
https://support.opensea.io/hc/en-us/sections/1500000462261-BuyingHow to sell or auction an NFT on Opensea:
How to sell Ethereum for USD:
https://www.binance.com/en/support/faq/227497e9e2bf4beb958ffc6bb94fbbe8How to transfer USD back to personal bank account:
https://academy.binance.com/en/articles/how-to-withdrawDone - rinse and repeat!
Alternatively:
How to trade NFTs:
https://www.nfttrader.io/how-to-tradeHow to transfer NFTs to another wallet:
https://metamask.zendesk.com/hc/en-us/articles/360058961911-How-do-I-send-receive-or-cash-out-an-NFT-
Try these steps out, make sure you're comfortable with using them. Use a little amount of money and transfer that between wallets and accounts just to make sure that you're comfortable and you get an understanding of how things work.
WHAT NEXT?
If you haven't jumped in yet or you're new to this space, I recommend doing your own research, starting to follow some of these pages on social media, jumping into some Clubhouses, engaging with the communities, and kind of understanding what the space is about. Most of all, make sure you have fun! This is an exciting space, there's a lot of growth in this area, and it's going to be a dominant force in years to come.
WANT TO LEARN MORE ABOUT NFTs?
There is so much more to learn around this topic, check out some of the other NFT articles in my blog or head over to my NFT & Crypto playlist on my YouTube channel.
Reach out to me on Twitter or Instagram and let me know how these tips helped you understand NFTs better or if you have any suggestions for me.
If you want to see short-form content like this, check out my TikTok channel.