How to Invest In NFTs

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Let’s face it, non-fungible tokens (NFTs) have been the image of crypto and Web3 over the past few months, pun fully intended. It seems like most celebrities and public-facing figures have voiced their opinions on NFTs, either by silently updating their social media profile pictures or by more explicitly mentioning them in public appearances. The presence of NFTs in the internet culture and meme space has dominated. An equally publicized aspect of the space is the market value for some of these NFT projects, as well as the absurd returns on investment over a relatively short period of time.

As to whether or not they’re visually appealing is subjective and completely up to the viewer; the empirical returns on some of these NFT projects are harder to argue against, especially with how active secondary market platforms like OpenSea and LooksRare are. So how do you, a casual investor, get in on the NFT action?

Different Ways to Invest in NFTs

You can tap into a few different categories of NFTs with differing risk and profit characteristics, in addition to ways to invest in the space using tokens, without being exposed to the NFTs themselves. 

1. NFT Profile Picture Projects

NFT profile picture projects (PFP) constitute much of the recent wave of NFT hype, with examples of PFP projects being CryptoPunks, Crypto Coven and the Bored Ape Yacht Club (BAYC), all of which have been adopted by various celebrities. In general PFP projects consist of relatively small, static generative avatars that usually consist of a common avatar base with a number of traits that are mixed and matched across the collection, with differing rarities for each trait. Value fluctuations here are largely based on hype and on airdrops, like with BAYC’s airdrops for companion NFT projects.

Digital art projects are a broader category of NFT projects composed of art in all forms stored on the blockchain, which technically encompass PFP projects. In addition to PFP projects, digital art projects like art blocks can have animated and 3D content, while other subcategories of NFT projects (chiefly music NFT projects like Audius) are also a part of the proliferation of digital art NFT projects. Value fluctuations here can come from hype or from utility, especially in the case of music NFTs.

Metaverse land NFTs are tokens that represent virtual land ownership in metaverse spaces. Their value is contingent on the perceived utility of space in the project, which in turn means that the development of the project as well as the choices of other land holders can dictate the value of the associated tokens. These tokens also hold governance values as these projects further decentralize so as to differentiate themselves from centralized metaverse offerings like Meta Platforms Inc. (NASDAQ: FB). Some examples of metaverse land projects are Decentraland (MANA) and The Sandbox (SAND), both of which can be used to purchase land in their respective projects.

NFT cryptocurrencies are usually governance or value tokens for decentralized NFT projects like LooksRare, Axie Infinity and Star Atlas, which also hold exchange value contingent on the success of the project that they correspond to. Another class of NFT cryptocurrencies that’s proven to be especially interesting over the past few months is airdropped tokens based on engagement in the space, with the one of the most prominent examples being the LOOKS token, which commemorated the launch of LooksRare and was airdropped (in tiers depending on activity) to OpenSea users who listed an NFT on LooksRare, as long as their trading volume over the last 6 months of 2021 was higher than 3 ETH. In this sense, buying and selling NFT cryptocurrencies also can have the implicit value of incentivizing and rewarding engagement in NFT projects.

Broadly speaking, you can invest in NFTs in two ways — buying on the secondary market and minting. Generally speaking, these methods reflect different risk strategies. Minting is generally relatively cheap but uncertain with regard to returns, as you’ll need to be early to a project in order to mint a piece for yourself. This process is analogous to investing in a company pre-IPO or being airdropped a token. Purchasing on the secondary market allows you to avoid the uncertainty regarding the market value of a project as a whole, functioning as a direct trade-off with potential upside.

NFT Marketplaces to Invest in NFTs

To purchase an NFT on the secondary markets for Ethereum-based projects, you’ll need to purchase Ether to make a bid on a listed NFT. A similar line of logic applies to projects on other chains, such as Solana, Polygon or Terra. 

Ether can be purchased at nearly any centralized exchange, such as Gemini or Coinbase Global Inc. (NASDAQ: COIN), but to interact with most Web3 sites, including NFT marketplaces and minting sites, you need to have a browser extension-based wallet that directly controls tokens, which is often referred to as a non-custodial wallet.

How to Mint NFTs

In order to mint an NFT project (assuming that you’re early enough to the project that there are still opportunities to mint), you need a connected cryptocurrency wallet extension with tokens corresponding to the NFT project’s blockchain. By connecting your wallet to the mint site, you can spend tokens on the transaction (and separate fee) to mint an NFT, which is then associated with your wallet and is free to be transferred or resold.

Keep Your NFTs Safe

The best way to keep NFTs safe is using a cold wallet, which is a hardware wallet that spends the majority of its life disconnected from the internet and is thus much more secure than even the most secure hot wallet. Ledger makes some of the most popular wallets with support for ERC-721 tokens (which most NFTs are) in addition to most other chains with active NFT communities.

Where to Buy Ethereum

In addition to decentralized exchanges DEXs, Ether can be purchased at most centralized exchanges, including Gemini, Coinbase and Voyager. 

Is Investing in NFTs Worth It?

NFTs are among the most speculative assets within the cryptocurrency space and have caught a lot of flack for being one of the most popular methods of scamming newcomers to the cryptocurrency space. As such, exercise extreme caution in the space, even when dealing with trusted parties like OpenSea, especially given the existence of recent bugs that have cost people significant sums of tokens.

Every NFT project has the potential to be a total dud or a hidden gem that could yield the highest imaginable returns by next month. Maybe even both. Regardless, NFTs definitely shouldn’t be your entry point into the digital assets space, and you probably shouldn’t buy an NFT that you subjectively find to be ugly with the sole intent of potentially flipping it for profit in the future, since NFTs are, after all, pieces of art with the subjective ability to look nice irrespective of their market value.

Frequently Asked Questions