How to Invest in NFTs
First Published date: 20. August, 2022Last Updated: 16. February, 2023Fact-checked by Adrian Müller
NFTs are a high-reward investment for savvy investors. It is a relatively recent domain that has immense potential for new people. But being novel also means that there are not enough well-trodden paths. Hence, finding adequate guidelines for those new to the industry becomes challenging.
Investing in NFTs is a simple process. You’ll start by opening a suitable crypto wallet. Then you’ll need to fund the wallet and use those funds to buy your preferred NFTs from an NFT marketplace.
But there are many things you should consider before taking those steps. Today’s article aims to help you move in the right direction by providing detailed and comprehensive guidelines. Here, you will find the ins and outs of the NFT industry and its drawbacks and benefits.
Table of Content
NFT Overview
An NFT is a unique commodity. Money and cryptocurrency are fungible because you can trade them based on a set value. In comparison, NFTs mean non-fungible tokens, so each token has an independent value margin.
It is also a decentralized commodity; the value margin is volatile. But that is fine since the volatility creates a high-risk, high-reward environment.
Furthermore, NFTs encompass a massive range of products. You can turn almost anything into an NFT as long as it is in a digital format. People can convert things like artwork, sports memorabilia, collectibles, and properties into NFTs.
How Do NFTs Work?
NFTs are digital cryptographic assets that stay in a Blockchain. Think of it as a massive, decentralized ledger. It records and oversees all the transactions.
Each NFT has a unique code affixed to them, giving them its unique quality. That unique code distinguishes an NFT from all other similar digital assets.
Trading an NFT with someone will mean giving up your right to that unique code. That is how Blockchain keeps track of the transactions.
Things You Have To Know Before Investing In NFTs
The NFT market fluctuates rapidly, meaning it can get tricky to spot opportunities if you don’t know what the corresponding signs mean. That’s why understanding the various parameters and metrics of the NFT market is crucial for savvy investors.
Here are some of the more critical aspects you should pay attention to before seriously investing in NFTs:
1. Trade Volume
As an investor, you become aware of the importance of trade volume. Trade volume refers to the magnitude of transactions in a select time frame.
The NFT market is highly volatile, so spikes in trade volume often represent a project’s potential. You can find trade volume information on any decent NFT marketplace like OpenSea, and Coinbase.
2. Community Size
You can also evaluate the number of unique owners of NFTs. Unique owner refers to how many different people have ownership of NFTs from a particular project.
Larger communities often mean better stability and increased investment safety. Many commodities and perks in NFT circles are community-based. Therefore, the value of a project is intrinsically tied to the number of people involved.
3. Project Background
Check the background of a project’s founder team before investing in NFTs. Most creators are transparent about their project history to promote a future project.
You could invest in brand-new creators and take a gamble, but that is usually only wise if you have a good grasp of the market.
As a novice, it would be better to find reputable developers. This way, you’ll have a more stable environment for gaining experience.
4. On-Chain/ Off-Chain
The concept of On-Chain and Off-Chain NFT relates to the storage method of any particular NFT. On-chain NFTs are permanently stored on a blockchain, along with its metadata and the smart contract.
The off-chain NFTs do not find their place on the blockchain directly. Instead, blockchain stores a pointer or a referral that leads to off-chain storage.
Generally, the on-chain NFTs have more value due to their more secure foundation. However, the off-chain NFTs can be a good choice too. It all depends on the supply and demand at the time.
5. Market Capitalization Estimate
Market Capitalization or market cap is an excellent indicator for an NFT project. You can use it to see a project’s estimated value.
The market cap for NFTs does not fluctuate as much as crypto, so it is a relatively stable gauge. The problem is the lack of accurate assessment tools. Some websites help track market cap, but none are precise enough. But you still use them as reference points.
A large market cap implies the existence of many shareholders. You will need to do some thorough research to analyze it accurately.
6. High-risk Tolerance
High-risk tolerance refers to holding on to a highly volatile stock or asset, even when selling it may seem like a wise decision.
NFTs are fundamentally a high-risk, high-reward investment, so the number of high-risk tolerant people is a crucial indicator for determining which project has the greatest potential.
Suppose you see that a project has a lot of people who are not selling their tokens. That is a good sign, as it will likely be a profitable venture in the long run.
7. Supply, Demand & Scarcity
The intrinsic connection between supply, demand, and scarcity drives the NFT market. Rare NFTs have a higher cost and trade value than less popular ones. However, trades between highly rare NFTs don’t happen as often.
You can either choose to go with rarity or decide to go for volume by trading less rare ones. The result depends on your intuition and judgment as a savvy investor.
Award-Winning Trading Brokers:
Rating:
Regulated By:
FCA, CySEC, ASIC, FMA, FSA, FSCA
CySEC (EU), FCA (UK), ASIC (Australia)
BaFin, FCA
Demo Account:
✔ Free
✔ Free
✔ Free
Live Account:
$100
$200
0
Spreads From:
Variable from 0.5 bps
Variable from 1.0 bps in EUR/USD
Variable from 0.4 bps
Selection Of Instruments:
2000+
1000+
17.000+ (FX, Stocks, CFDs, Commodities and more)
Support:
24/7
24/7
24/7
Payout:
1 – 3 Days
1 – 3 Days
1 – 3 Days
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
How To Invest In NFTs (Step-by-step)
Initially, investing in NFTs can seem complex. It’s a natural feeling to have when trying out anything new. But, with the right guidance, things should make much more sense. The following are a few easy steps to investing in NFTs.
1. Complete Your Research
Market research is an intrinsic part of any investment venture. Therefore, you must search the larger NFT marketplaces for available NFT selections.
Then identify the ones that suit your financial requirements and create a list. Do in-depth research to verify the potential of the ones on that list. You may refer to the metrics and parameters listed above to seek aid in this endeavor.
After finding a suitable investment candidate, check its compatible currency list. This is because different marketplaces use different currencies, and you need to take note of it for the next step.
2. Decide On A Digital Wallet
The first step towards NFT investing with NFTs is to get a compatible crypto wallet that can complete the necessary transactions.
Even though NFTs are listed using real-world currency, it’s not easy to use those to purchase NFTs without having a digital wallet. Converting your money into crypto will make things significantly easier.
That’s why every NFT marketplace uses separate wallets. Some can do cross-platform transactions, but you’ll have to verify that beforehand.
You must get a digital wallet compatible with the NFT you choose. Wallets are not compatible with every type of cryptocurrency. So, you’ll need to consider your NFT selection and the corresponding cryptocurrency compatibility.
It is usually wise to stick with more popular or commonly used choices. Popular cryptocurrencies are compatible with most NFT marketplaces.
3. Create The Wallet
You can create a digital wallet for free because the initial registration does not have fees. The process is also beginner-friendly, and you can complete it on any internet device.
Next, you will need to connect it to your chosen marketplace. From here, you can input funds into your wallet. This completes the setup stage.
4. Complete The Transaction
Since you now have some currency in your digital wallet, you can finally start buying the NFTs of your choosing.
This technical process of the marketplace website is highly intuitive, and you will figure it out on your own. But you need to take note of the selling style.
There are usually two types:
Fixed price sales: Fixed price sale is very self-explanatory. These NFTs have a fixed price tag and are sold on a first-come-first-serve basis.
Auction sales: Some of the more popular NFTs don’t have fixed prices. Instead, they are sold through auction systems.
The exact details can vary based on the marketplace you choose. But it’s always sold to the bidder with the highest buying asset. You must also consider the transaction fee, which is separate from the final bid.
The fee is dependent on the amount of congestion in the platform. It can reach hundreds of dollars, so you should always check this beforehand.
This fee is called “gas” in the NFT world. Some websites keep track of gas fees on various platforms. You can utilize those to figure out your potential fee in advance.
Benefits Of Investing In NFTs
The NFT market is a very new environment. It has immense potential for future trade and commercial development. Below are some benefits of investing in NFTs that you should know.
Marketplace Efficiency
NFT trading is a highly efficient process for trading physical assets in digital form. This conversion of physical assets into digital ones helps open up various development avenues within the commercial sectors.
This system has a promising future and will likely revolutionize transaction systems. Being a pioneer in this front, you stand to glean significant profits.
It’s not just material trades. The non-fungible nature of NFTs can be used for many more things. For example, ticket counters can use the uniqueness of these assets to make more efficient substitutes.
Fractional Ownership
Fractional ownership is one of the best aspects of NFTs. Usually, jointly owning expensive art pieces, jewels, or other such assets was never feasible.
But now, people can fractionalize such assets and distribute them between multiple buyers. This makes certain assets more accessible to more people. Accessible markets will help expand the price range of the assets and enhance their liquidity.
Blockchain Technology
Blockchain technology is a leading form of an online database that is harder to hack, alter, or delete. It is much safer than any centralized digital database.
Blockchain technology has shown its usefulness by being the most reliable digital alternative to ledgers and records.
NFTs stored in Blockchain have detailed records of their authenticity and are the safest digital environment for investing.
Drawbacks Of Investing In NFTs
Just like any other investment, NFTs have a certain level of risk to them. Let’s check out some of the potential risks of investing in NFTs that you should consider.
Illiquid and Volatile
NFTs are still in their infancy, so they lack stability. Due to their volatile nature, it is an investment that is somewhat illiquid.
You can still quickly liquify NFTs. It just takes a bit more time than other, more conventional assets.
Environmental Impact
NFT and Blockchain technology takes a lot of computing power to operate. The computing power of this scale and magnitude consumes a significant amount of energy.
As such, there’s an unsolved debate about whether it will affect the environment in the long run. Regardless, people are actively researching ways to make this system more sustainable.
Ownership and Control
As an owner, you do not get to decide what people do with this digital asset. Instead, you only gain proof of ownership.
People can still freely distribute and use the original asset. Still, they won’t have any claim over the value of the original.
Conclusion
Hopefully, this article has helped you understand the NFT marketplace better. It is, no doubt, a risky investment. But the potential rewards are just as alluring. People can easily navigate this sector once they interact with it for some time.
With the right guidance, landing a successful investment is more than possible. We hope that this write-up provides that.
About the author – D. Schmidt
I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.
