When I first heard about NFTs, I thought it was a load of nonsense. I couldn't understand what all the fuss was about, and I figured that the bubble would soon burst. But after doing some research and getting to grips with the underlying technology, I realized just how powerful this new phenomenon could be. So, the question remained: Should I invest in NFTs?
NFTs are essentially digital assets that exist on a blockchain. They can be used to represent anything from virtual currency to real-world assets like property or gold. And because they're stored on a blockchain, they're secure and tamper-proof. This makes them perfect for storing and exchanging value in a trustless environment.
I think we're still only scratching the surface of what's possible with them, and I think many people won't want to miss the boat like the majority of us did with Bitcoin. So, without further ado, if you're thinking about investing in NFTs, you should know what they are, the potential, the downsides, and if investing is a smart or risky idea.
First Things First, What Is an NFT?
When most people think of tokens, they think of cryptocurrencies such as Bitcoin or Ethereum, which are digital representations of money that can be traded on exchanges all over the world. However, there is a new type of token that is quickly gaining popularity called a non-fungible token, or NFT for short.
Fungible vs. Non-Fungible
First off, what does fungible mean? Well, the word fungible means that the unit is interchangeable and NOT unique. Think of this like Bitcoin or the US dollar. They are completely exchangeable, and one dollar is just as valuable as another dollar.
Non-fungible items, though, are unique and cannot be exchanged for one another. No two items are the same. That brings us to NFTs, which are unique pieces of digital data, typically connected to a digital asset that is stored on a blockchain.
Think of an NFT like a digital “record” attached to an item. It's written on a public ledger (blockchain) that can be seen by everyone, and this record contains all sorts of important information such as who minted it and every transaction thereafter.
Still confused? Here's a scenario to help with the concept.
The NBA Top Shot sells NFTs tied to video clips of important moments for NBA players. This is like the modern version of selling baseball cards with one exception: authentication. You know you are purchasing an official NBA video clip because the NBA minted it on a public blockchain ledger, and every time the NFT resells, every transaction is completely visible. You're not worried that this video NBA NFT is a forgery, because you can clearly see the transactions and the original minter. Now, how can you say with 100% certainty that no one forged your physical baseball card? You can't.
The Blockchain Behind NFT
As a general recap, blockchains (like Bitcoin) are simply an online digital ledger. They work similarly to a bank, except the transactions are not stored in one centralized system but on a decentralized system accessible to everyone. For the purposes of this article, what's important to know is what blockchain NFTs are minted on. If an NFT is minted on Ethereum, then that record of transaction will always be on Ethereum. You can't move it to another blockchain like Bitcoin.
Ethereum was one of the first blockchains to adopt NFTs, and it has become the go-to platform for their development. In fact, there are now dozens of projects built on Ethereum that use NFTs to represent everything from digital art to real estate.
Another blockchain that has been quickly embracing NFTs is Solana. Solana is a new blockchain that focuses on scalability and security.
Types of NFTs
What can you attach to an NFT? Literally anything.
This makes them perfect for representing digital assets like artwork, music, and videos. NFTs are so versatile that they can even be used to represent physical assets like cars and houses. We'll discuss this in more detail later. But first, let’s go into the different types of NFTs to illustrate the vast potential.
NFT Digital Art and Collectibles
When most people think of NFTs, they think of NFT digital art and collectibles.
Here are some examples:
- Beeple's Everydays: This was a compilation of 5,000 digital artworks created by an artist called Beeple that was sold by Christie’s for $69 million.
- CryptoPunks: These were some of the very first NFTs ever produced, and they are small pixel characters. With only a limited amount in circulation, owning a CryptoPunk is a major status symbol. Jay-Z has one set as his Twitter profile picture.
- NBA Top Shot: As we discussed before, the NBA has released its own NFTs. These are photos and videos of NBA players’ major moments. Now other sports groups are jumping on board, like the NFL.
- Disney collectibles: Disney released its first set of NFT memorabilia of famous Disney characters. Word on the street is that Disney is also in the process of building an NFT team.
It’s important to know that the utility of NFTs is not limited to just digital artwork and memorabilia. NFTs are also sweeping their way into the entertainment industry.
Coachella, one of the US's most famous music festivals, has introduced its NFT lifetime festival passes called “Coachella Keys Collection.” Collectively, the collection sold for over $1 million for 10 NFT packages.
The NFL partnered with Ticketmaster to sell commemorative NFT rewards to tickets. This opens a huge door for the future of selling tickets. Even Mark Cuban, the owner of the NBA's Dallas Mavericks, has discussed NFTs and ticketing with his team. If ticketing went full-scale, think about how easy it would be to resell or purchase tickets on the secondary market? You’re no longer afraid of being scammed and purchasing a fake ticket, thanks to blockchain technology.
The digital world and metaverse are even hosting concerts by famous musicians (think Travis Scott concert on Fortnite). Overall, it’s still very early to predict what may happen, but it’s important to realize the possibilities.
NFT Luxury and Rewards
If you haven’t heard of Decentraland, it’s literally an entire digital world. Meanwhile, Gucci, Burberry, and Dolce & Gabbana have all released NFTs that range from designer clothing for gaming characters to rewards during fashion week. It’s estimated to be a multi-billion dollar industry in the next decade, and companies love it because the profit margins are so much higher.
How to Display an NFT
Now that you understand the many different types of NFTs, the common question is: how do you use or display an NFT?
If it’s digital art or a collectible, NFT frames like TokenFrame are a great way to show off your NFT. Home decor will modernize with moving artwork—think of the moving picture frames in the Harry Potter movies. There are also now “video prints,” where you can show off collections like your NBA Top Shots.
Here are some examples:
— Tokenframe (@TokenframeNFT) November 2, 2021
Many people also show off their NFTs to their friends and family via their social media accounts. There are also emerging social media outlets specific for NFTs (think Instagram of NFTs).
Where to Buy an NFT
Once you have an NFT, you need a place to trade them. This is where NFT marketplaces come in, and there are now dozens of them.
OpenSea is going to be the most recognized platform, as it's basically the Amazon of NFTs. As new marketplaces come up, they are starting to niche themselves out. Some marketplaces specialize in rare art while others are for the public.
How to Buy an NFT
Now that you know what NFTs are and where to find them, how do you buy them? You need to first buy crypto and then download a digital NFT wallet.
I think “digital wallet” is a poor term, as it doesn't actually store your NFTs. It's more like your debit card. You need a debit card with a pin to access your money from the bank. You also need an NFT wallet with a seed phrase to access your crypto to purchase NFTs.
How to Invest in NFTs
Now that you've got the basics down, you're probably like me asking “Why on earth are people buying a $20,000 picture of an ape?” How can that hold any value? It just seems like a digital Beanie Baby craze.
But have you seen Kazimir Malevich’s Black Square? If you haven’t, it’s a black square painted on a white canvas that was created in 1916 and sold for $60 million dollars in 2008. I don’t see a difference—other than one is physical and one is digital.
If you're thinking about investing in NFTs, you should be doing so because you believe in the power of the technology of NFTs, followed by if you think that particular NFT is a good investment. Let's deep dive into this more.
NFT Art and Collectibles
If you want to invest in NFT digital art or collectibles, you should do so because you love the piece. Sure, you might be one of the lucky few who makes millions, but let's be real. That's not likely to happen.
Purchasing an NFT art piece is no different than purchasing a physical work of art. It only gets high monetary value because people give it value.
Jay-Z purchased a CryptoPunk and set it as his profile picture. Why? Because it’s a status symbol. It's no different than you putting on that Rolex. Is a Rolex honestly that much better than any other type of watch? No, it is not. But we've given it value. Digital artwork is no different.
NFT Real Estate
Although we tend to think of NFTs in the form of digital art and gaming characters, I think the true value of NFTs is the transaction potential.
Think about when you purchased your home. How long was the process? It takes a month for the banks, title agencies, notaries, and everyone else involved to make one simple transaction.
What if it didn't have to be that way? That's what Propy is setting out to change. The company was the first to sell a house with an NFT, sold in Florida for about $650,000.
How did Propy accomplish this? When a buyer is found, the blockchain technology automatically generates a purchase and sale agreement. From there, the title reports and the deed still have to be integrated, but in the end, the home buyer has a deed with a blockchain address.
There are definitely hurdles with this process. As this is very new technology, I speculate it’s going to take some time for regulations to catch up with technology before it becomes more mainstream.
Another way to invest in NFTs is to invest in the companies that are building and creating in the NFT space. With this new area, we are seeing tons of startups across the US that are pushing the boundaries of what’s possible, all competing for their share in a new market.
Many people are investing in companies like eBay and Shopify, which are currently working on developing methods to trade NFTs on their platforms. Fiverr is another company that provides freelancing services, and it's opened a new sector of entrepreneurs who can help with the building of NFTs for businesses.
Coinbase announced it will be launching its own NFT marketplace—interest is very high, as they already have a huge audience through their cryptocurrency exchange platform.
Even the New York Stock Exchange (NYSE) is filing for trademarks to launch its own NFT marketplace.
I would look at this as you would in investing in any other new company. It usually comes with a high risk but with the potential for high rewards. [Editor's Note: WCI typically doesn't endorse the practice of buying individual stocks or investing in individual companies, as laid out in this 2019 post, Picking Individual Stocks Is a Loser's Game.]
Concerns with NFTs
There are a few concerns to be cautious of when investing in the NFT realm.
High Energy Consumption
Blockchains work by utilizing two different models: proof-of-work and proof-of-stake. Proof-of-work is the original model (like Bitcoin) where computers compete to solve a problem, and the fastest is rewarded. Unfortunately, this uses a ton of energy consumption and limits the scalability of the blockchain. That’s where proof-of-stake comes in. Instead of every computer working on the same problem, it selects users to participate, which greatly reduces the energy consumption.
Ethereum is the major blockchain that NFTs are minted on. They were originally based on the proof-of-work model but have been rolling out Ethereum 2.0, which is a proof-of-stake model. It should be completed in 2022.
High Gas Costs
“Gas” is the cost of doing a transaction, and the price depends on how many users are online. What if your $40 shirt had a $45 transaction fee? It wouldn't be worth it. Also, the transaction fee is not determined until the actual transaction goes through, making cost projections difficult. You just have a “projected cost.”
NFTs are largely based on using cryptocurrency, which is highly volatile. Lots of people are expecting a bubble to pop, but that has yet to be seen. Either way, you could go from your NFT being worth thousands of dollars to virtually nothing overnight.
Should You Invest in NFTs?
NFTs are a very new and emerging piece of technology. It's based on a blockchain that is very volatile, which is concerning as an investment. I would not consider betting your retirement on the future of NFTs and crypto, but I think it is certainly worth exploring and considering as a very small part of your investment portfolio.
Personally, I see the potential of NFTs beyond the artwork. I could see it revolutionizing the way we conduct transactions in 10 or 20 years, and so I invest a little bit in Ethereum, as it is the backbone blockchain of NFTs. I also invest in company stocks that are on the ground floor of the NFT world, but I definitely don't stake my retirement on them. Like all high-risk (speculative) investments, you should be OK with losing anything you put into it.
What do you think about NFTs? How much of your portfolio are you using for these non-fungible tokens and other kinds of crypto? Do you believe NFTs can change the world—or at least how we see it? Comment below!
[Editor's Note: Samantha Brandon Boartfield is a pharmacist and mother entrepreneur (Mamapreneur) passionate about generating passive income and financial independence. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]