If you followed the news in 2021 and 2022, you’ve likely heard of them: those JPEGs selling for millions of dollars, a technology that promises to create a digital economy, and people becoming rich seemingly overnight.
Perhaps all the hype has made you wonder: Are NFTs a good investment for me?
In this article, we aim to answer that question by covering the topic of investing in NFTs holistically. Some sections are focused on the basics. Others get to the nitty-gritty of the benefits and risks of investing in NFTs. Towards the end, we touch on the theory and practice of investing:
- Ways to avoid NFT scams
- Strategies to use when investing in NFTs
Let’s begin with the most fundamental question: What is an NFT?
What is an NFT?
To determine whether NFTs are a good investment, first, we need to understand what an NFT is. The answer lies in the meaning of the acronym itself. Let’s take the first part of the acronym — non-fungible —and break it down.
First, let’s start with the differences between fungibility and non-fungibility. A widely accepted definition of an NFT is a one-of-a-kind digital asset stored on a blockchain. The one-of-a-kind part of that definition comes from the assets’ non-fungibility. And non-fungibility is crucial for understanding why NFTs might be a good investment.
Fungibility is a legal term that means replaceable. When something is fungible, you can trade, swap, or replace it for another thing without losing any of its value. For instance, currency or even cryptocurrency like Bitcoin is fungible, as are crude materials.
Non-fungibility is the opposite. You cannot swap or replace a non-fungible item for another non-fungible item without losing or gaining in value. This uniqueness of non-fungible tokens poses consequences for a digital economy. In the past, there was no scarcity of digital items. People could reproduce them with abandon. Today, with non-fungible tokens, there is scarcity in the digital marketplace because NFTs combined with blockchain technology allows for both digital ownership and proof of ownership.
The second part of that acronym is “token.” In cryptocurrency, tokens are simply types of assets that have underlying value. One token of BTC might have monetary value, while a non-fungible token might represent any number of different assets.
Digital tokens are strange things in the context of an economy. They lack physical characteristics, and developers created them using code. You can’t hold them in your hand like a penny or fill a safe with them in your home.
And at their heart, NFTs are just packets of code — a smart contract — with unique signifiers like metadata to distinguish them from other packets of code and are brought to life using blockchain technology. Viewing NFTs as a form of technology opens the door for any number of applications, some fascinating. These are the use cases of NFTs.
What are some use cases for NFTs?
Bored-looking Apes. Parcels of virtual land. Deeds to real-world items like houses.
When we discuss investing in NFTs, the second step to determining whether they are suitable investments is seeing the wide range of applications for NFT technology. Here are six:
- Art. Probably the first significant use case for NFTs and certainly one of the most popular. NFT art can range from 1/1s to derivatives of popular collections. They come in different styles, formats, and types. Like most NFTs, you sell these on a platform. You might consider the files used in these art NFTs as JPEG or PNG images.
- Profile Pic Collections. These collections surround a common theme, then vary different attributes shown in the art pieces. The two most famous are the Bored Ape Yacht Club and CryptoPunks. People use the NFTs in these collections as profile pictures on popular social media platforms. Like with art NFTs, an individual often uploads the profile picture NFTs as images.
- Membership to Exclusive Clubs. In these NFT collections, the non-fungible token serves as a membership badge into a club. They can even designate which membership tier the person has. One of the more famous examples is LinksDAO, which has NFTs corresponding to two membership levels in a future golf club.
- Link to Real-World Items. These NFTs are attached to real-world items. The most common example is when an NFT allows you to receive a unique product from a manufacturer. These companies take advantage of the blockchain’s easy ability to prove ownership of an NFT and sometimes issue a certificate of ownership to the NFT holder. The use of a digital image here isn’t as important as the NFT’s IRL utility.
- Digital land. NFTs often represent parcels of digital land. These parcels are part of metaverses or shared social spaces built for virtual and augmented reality. Like IRL land, they usually have characteristics, like different types of terrain. Like all NFTs, you may consider digital land parcels virtual assets.
- Gaming items. An NFT can often function as a digital item used in video games. These can include weapons, armor, spell books, creatures, bags, and more. The most popular blockchain game, Axie Infinity, has designated many of its in-game items as NFTs. Because they are NFTs, gamers can buy and sell the items on marketplaces.
Those are six broad use cases for non-fungible tokens, and there are many more. Keep in mind that within a category, there can be niche uses. For instance, in the category of the real-world items, some companies are creating NFTs based on your genetic sequence, which you’d then be able to rent out to companies doing gene studies. That’s just one of the many ways developers, teams, and companies are innovating in the space.
Observers may call some NFTs collectibles as well. Digital collectibles function much like physical collectibles or game collectibles and can have many of the same characteristics.
What are the benefits of investing in an NFT?
The benefits of investing in non-fungible tokens are truly astronomical, though they don’t come without risks. In this section, our primary focus will be on the financial benefits.
First, for people optimistic about NFTS, we are witnessing the birth of an entirely new industry. It is an industry based on the intersection of technology, art, community, entrepreneurial instinct, and unusual types of utility that build on cryptocurrency and micro-economies.
Even though NFTs have been around since 2014-15, they didn’t gain popularity until 2021. That makes us a little more than a year into the beginnings of a sector that could be integral to Web3.
Because we are so early — even with the growing number of NFT holders, wallet counts remain very low compared to the world population — there are opportunities to find deals at prices most traditional investors would laugh at. And the gains can be enormous.
Consider that most people consider 10-12% gains in the stock market annually as a good year. If the numbers get a little crazy, you might see 20-25% returns. With NFTs, it is not uncommon to see 100, 200, 500, and 1000% yields in a year.
Take the most extreme case — that of the Bored Ape Yacht Club. The NFTs for that collection minted at .08 ETH in May of 2021, or around $192 per NFT. Today, the floor price (the price of the lowest listed NFT in the collection) is 128 ETH or $381,000. That’s a return in about a year of 198,000% or $380,808.
While that’s the most extreme case, others more moderate would still put the ROIs of the stock, bond, and commodities markets to shame. The most profound benefit is that you can make a ton of money in NFTs in a relatively short period.
There are undoubtedly other benefits aside from money — joining an excellent community or finding a team to build in the space with — but because this is an article about investing, we’ll keep it to the money.
How do you evaluate an NFT as an investment?
Because non-fungible tokens are such a unique and complex asset, it helps to know some tried and true ways of evaluating an NFT as an investment. These are in no particular order, and multiple can apply when assessing an NFT. Here are five investment strategies.
Art. One of the quickest ways to determine if an NFT is a good investment is to look at the art. Ask yourself some basic questions: “Is the quality of the artwork good?” or “Does it look like the artist has put a lot of effort into creating this piece?” Keep in mind that even though good original artwork is often subjective, a lousy piece of art is easy to spot.
Community. Often a nebulous term, “community” can be hard to spot and instantly recognizable. Check out the collection’s Twitter engagement and Discord server. Is there lively dialogue, or do you hear crickets? Are people focused on building, or is there a lot of talk about the floor price? Most importantly, choose a community that you vibe with. Not every single community is suitable for everyone.
Utility. Frequently a buzzword in NFT circles, the utility of a collection can mean many things. Some collections allow you to stake your NFT for a token. Some companies will attach real-life items to NFTs. Then there is metaverse land itself, which, if you own, you can generally build experiences on. Finally, some collections are creating large-scale utility like Jenkins the Valet and Pixel Vault.
Meme. Although memes are good for laughs and culture, they can also be robust investments when immortalized as NFTs. There are two categories of meme NFTs: actual famous memes that the creator has minted into an NFT and collections that utilize a popular meme but put a spin on it. An example of the former is the “Disaster Girl” meme that sold for $500,000 as an NFT. An example of the latter is the Pepe the Frog meme, which someone took and made a spin-off NFT collection.
Team. There’s a phrase in the NFT space: Bet on the jockey rather than the horse. The underlying premise is that good teams can build-out projects, create utility, deliver value to holders, and turn a lousy project around. Bad teams, even with a great concept, may struggle to execute. Within NFT art, you might consider the digital artist the “team” with that person’s digital artwork the NFT.
As said, multiple of these categories can apply to an individual NFT. When assessing whether an NFT is a good investment, it is helpful to run through all categories and see where the NFT falls.
What are the risks of investing in NFTs?
There’s no doubt you’re wondering, “With gains like that, what’s the catch?”
And it’s true: With the possibility of gaining hundreds of thousands of dollars in a year, there will be a sizeable risk. There are three categories of financial risk in the NFT space — speculation influencing prices, rug pulls, and scams.
First, let’s cover the category of speculation influencing NFT prices. While you have tools or can do functional analysis to determine a stock or traditional security’s value, that is impossible with most NFT projects or collections. Even the best evaluations of NFT collections often come down to nebulous terms — community or art being the most common.
Because there is a lack of functional analysis in the NFT space, most NFT investments have steep rises and dramatic falls in prices as people buy based on hype, what an influencer said, FOMO, and other reasons more emotional than rational. If an NFT goes on a skid, you could quickly lose most of your investment. Your NFT that looks nice sitting at $50,000 might drop 30% or more in a week.
Then there are the rug pulls.
Because there is such a gold rush mentality in the NFT space, and people are minting just about anything, hoping the NFT takes them to “Valhalla,” project creators can roll out a project, hold a mint, make millions of dollars, and abandon the project. This practice is so widespread in the crypto and NFT spaces that someone coined “rug pull” to describe it.
While it’s not the end of the world if there’s a rug pull, as some communities have taken over projects, it does hurt the value of your NFTs. And because there is little to no regulation in the NFT space, rug pullers can abandon projects at will, create more, and generate more money without consequence.
Finally, there are scams. Because the NFT space is unregulated and the rules of this digital economy are not “set in stone” yet, scammers have come out in force with tricks to steal digital assets. There is no way to “hack” a wallet outside of figuring out that wallet’s password or seed phrase, but scammers may use psychological tactics to get you to hand over your assets.
You will always have to be on your guard if you own a high-priced digital asset, as these tricks have become more sophisticated by the month. We’ll cover some tips about avoiding rug pulls and scams in a later section.
Without risk, there is no reward, and generally, the higher the reward, the higher the risk. The same holds for investing in the NFT space.
It is hard to consider these crypto assets as a safe investment, but a safe investment generally does not yield as much money as top NFTs.
How do you avoid scams when investing in NFTs?
Determining whether NFTs are a good investment for you is evaluating the risks associated with the non-fungible token space. Although there are scams in every part of investing, the NFT sector of Web3 is particularly ripe with them. The lack of regulation in the industry contributes to this. Another factor is the gold rush environment at the moment that leaves people susceptible to FOMO and emotional trading.
Here are five ways to avoid scams in the space and protect your NFTs if you were to invest. The first two involve evaluating the project itself and avoiding the dreaded rug pull:
- Choose doxxed teams whenever possible. Although a doxxed team is not a fail-safe sign that the team will not rug, it is a sign they will have to deal with the collateral damage to their reputations if they do. A doxxed team, where the members reveal their identity before an NFT drop, will have photos and social media accounts available for easy perusal if they run off with their community’s money. Easy access to identity information could lead to repercussions, including legal. It should be a deterrent to stealing.
- Evaluate teams’ social media accounts for engagement rather than follower count. It’s easy to buy followers but slightly more challenging to build engagement. When analyzing a team, look for likes, retweets or shares, comments, and more. An important note is that this isn’t a fail-safe method of avoiding a rug. But like doxxed teams, it can help.
The last three involve avoiding scams from outside entities who are after your hard-earned NFTs and ETH.
- Shut off your direct messages in Discord. A popular way of scamming someone is to send them a fake link through social media or Discord, then having that link take them to a phony site where the user will be prompted to sign off on “transfer” transactions that steal their NFTs. Thieves often couple these scams with a FOMO-inducing message like “free mint” or “airdrop qualification.”
- Use a hardware wallet rather than a digital wallet for all valuable NFTs. Hardware wallets store your hot wallet’s private keys off-line, protecting them. Hardware wallets also generally require you to sign off twice on a transaction, which gives you extra time to think. They are a must for any serious NFT trader or one with a valuable NFT.
- Buy a computer solely for NFT trading. One of the most common scams involves infecting your computer with malware that steals your hot wallet’s private keys. You can avoid this by purchasing a device just for NFT trading. On that computer, you’d interact with websites needed for buying, selling, and moving NFTs. That keeps the threat of malware affecting your computer at a significant low, which can protect your NFTs.
Those are just five ways of avoiding NFT scams. Now, for the final question.
Are NFTs a good investment?
We’ve come to the last question: Are NFTs a good investment? The truth is, that’s a decision every person needs to make for themselves. However, we’ve put together three essential questions to ask yourself when deciding if you want to invest. They should help provide some clarity.
What is your risk tolerance? We’ve already noted that NFTs are a high-risk investment. If you don’t like to take risks with money, you might prefer lower-risk investments like stocks, bonds, CDs, or real estate. If you’re someone who likes risking money to gain much more of it, maybe NFTs are for you.
Do you have the spare cash? NFTs are investments that require an initial start-up. While you can flip your way to a decent-sized portfolio, that is generally considered advanced trading. If you’re looking to buy a few NFTs and sit on them, waiting to see if they moon, you’ll need money to cover gas fees, transfer fees for cryptocurrency, and have enough cash to get into worthwhile investments. Though you can make money at the lower levels, often, the best bets in the market currently are sitting at floor prices of 1 ETH or higher.
Do you have an interest in the underlying technology? As an NFT investor, it helps if you believe in the underlying technology and direction of the space. This conviction can keep you in investments for the longer term and enables you to ride out the volatility that naturally comes in the NFT sector. It can also lead to building opportunities, where you create a product rather than invest. If you don’t believe in the space, it’ll be difficult to stomach the ups and downs or hold longer-term where the most significant gains occur.
Those three questions can help determine if NFTs are a good investment for you.
NFTs are high-risk investments. The market is volatile, and traders often invest based on emotional reasons rather than fundamentals. But a skilled trader can make more money in NFTs than in most other asset classes, including stocks, bonds, and real estate.
Whether NFTs are a good idea for investment depends on your risk tolerance, cash on hand, and interest in the underlying technology. If you think you want to try your hand at investing in NFTs, keep in mind that some people may position themselves as “experts” in the field. These claims to be “experts” are generally untrue as the space has been around for such little time.
Stick to reputable Twitter authorities or sites like Rarity Sniper for your NFT insights to avoid losing your hard-earned money to so-called “experts.”