You may have seen NFTs selling for millions of dollars. Or the NFT auctions at major art houses. NFTs — non-fungible tokens — are catching fire, and it’s typically the selling prices headlines that dominate conversations.
If you’re new to the scene, you may wonder how people invest in NFTs. After all, they can be tough to evaluate as a product. There’s not much information out there about them, and wading through that information can be challenging.
Investing in NFTs is a daunting task.
That’s why we have put together this guide. We walk you through the investment process: evaluating NFTs, common investment strategies, and some typical NFT investment tactics. We also answer three questions along the way:
- Can you invest in NFTs?
- How do you invest in NFTs?
- Should you invest in NFTs?
Throughout, we’ll touch on some reasons to invest in NFTs. Let’s learn how to make some magic internet money.
Can You Invest in NFTs?
The quick answer is an unequivocal “yes.”
It all starts with buying an NFT. All you need are four things:
- An electronic device
- Internet access
- A crypto wallet
- Enough crypto to cover your purchase
There are many types of wallets available for different blockchains. For the Ethereum blockchain, we recommend the hot wallet MetaMask. For Solana, the Phantom wallet. Both are compatible with the top marketplaces on those chains.
To buy the cryptocurrency needed to purchase an NFT, you can create an account with a centralized exchange and buy some crypto using fiat currency. Once you do, simply transfer the cryptocurrency to your MetaMask or Phantom wallet.
Then connect to an NFT marketplace, find something you like, and click “buy.”
Now, you’re the proud owner of an NFT. But buying NFTs is different from investing in them, and much more challenging. Fortunately, there is good news: To start investing in NFTs, few barriers to entry exist. All it takes is the steps above.
Unlike investing in stocks and securities, NFTs are an unregulated market. No rules, no red tape. Anyone can get in, anyone can play.
Then there’s the bad news: Along with the million-dollar NFT sales are rug pulls, frauds, and scams. And you, as an investor, need to sort through it all. Fortunately, there are several ways to gauge if a potential investment will appreciate.
How do I evaluate NFTs?
In this section, we’ll cover six ways you can gauge whether your investment is worthwhile or not. None of these (or anything in this guide) constitutes financial advice. The six ways are simply characteristics by which you can approach your NFT investments.
The top investments often do well in multiple categories.
#1 – Art
Art is our first method to determine the value of an NFT.
While great art can be hard to quantify, terrible art is easy to see. Watch out for NFTs that lack technique, have sloppy coloring, or look very unappealing. Remember that you’ll be looking at this NFT in your wallet every time you check. And so will potential buyers down the road.
If you don’t think you will want to look at your NFT regularly, you might want to reconsider buying it.
If you’re looking for the positive qualities of pieces to determine whether you want to buy, you can ask yourself if the art has cultural significance, if the technique is interesting, and if it’s something you’d one day like to hang up on a wall in your home.
As an investor, you can look at other parts of an NFT art piece to determine if you want to buy, such as the floor price of the collection and the sales history of a particular NFT artwork.
The best marketplaces for NFT art are SuperRare, Foundation, Nifty Gateway, and OpenSea.
#2 – Community
Often cited as one of the top reasons to buy an NFT, “community” is sometimes tough to define. But it also can be clear as day when evaluating individual collections.
For instance, the Bored Ape Yacht Club was once at the level of several other collections. But time after time, #ApeFollowApe trended on Twitter, and tons of users with their Ape profile pics responded, raising the public profile of the collection.
Soon, based on the strength of its community, BAYC would ascend to a level of sales for a collection that only CryptoPunk owners had seen.
An NFT community is like a club — you can find friends, make business connections, meet a mentor. You can have thoughtful discussions about any number of topics, say “gm” every day, launch new projects, and more.
The best way to gauge community is to dip a toe in first. Most NFT collections have dedicated servers set up on Discord where their NFT holders and general community members can chat.
In some NFT servers, the talk will be upbeat, positive, and helpful. In others, you will hear crickets.
This method of scoping out a community can give you pertinent information — how active community members are, the personalities of community leaders, the vibes within the community.
From a mathematical standpoint, the more people that want to be involved in a community, the less likely they are to sell their NFTs in the collection, which can create a supply shock and push the floor price of the collection up. This situation can increase the resale value of the NFT you purchase.
The community behind a project can make or break it. The most successful projects have it.
#3 – Team
A popular phrase in the NFT world speaks to the importance of a collection’s team: “Bet on the jockey, not the horse.”
That is to say, a good team with a so-so product is often better than a bad team with a good product. A good team can do all the things a bad team can’t: Turn a project around, keep a project running during difficult times, and find solutions to problems quickly.
To determine if a team is solid, you’ll need to do a little research.
One way to start your search is to see if a team is “doxxed” (“doxxed” means the team has revealed the identities of its members). A doxxed team is less likely to rug because people know who they are, and there could be real-life repercussions for stealing money.
You can search through the team’s website, Discord, or Twitter to find the leaders and other influencers behind the project. Often, high-profile projects will have advisors that carry a lot of clout within the community. They may also have invested money in the project.
An example of a strong doxxed team is the one behind the collection Doodles. On its collection’s website, you can see the full names and social handles of the three team members, the companies they’ve worked for in the past, and their work experience.
A weak team or one setting up for a rug pull might have fewer details or none at all.
#4 – Utility
Utility for NFTs is akin to function. In other words, what you get by holding the NFT.
As an investor, you might be looking for a particular utility. And even if you’re not, you can know that an NFT that has a lot of utility might command higher prices down the road.
But utility can mean different things to different people. And NFT collections have varied types of utility. Consider the following projects and the utility they now or have stated they will eventually offer:
- Jenkins the Valet: Mass IP licensing for a novel written by an NYT best-selling author
- Curious Addy’s Trading Club: Access to the “Duolingo” of cryptocurrency
- BYOPills: Psychedelic experiences in the metaverse
And then there are less narrow utilities. Take, for instance, the Gutter Cat Gang. Since launching in the summer of 2021, the team has put on two official in-person events, created a line of merchandise, and airdropped artwork to GCG NFT holders.
The best teams give some type of utility for holders and tend to stick around as more projects go bankrupt. The utility of an NFT can provide something a little more tangible for your investment as well.
One way to look at it comes from traditional investing: Your NFT purchase is seed funding for a small company that provides value to investors like you.
#5 – Historical Value
While there will always be more NFT collections, there is a limit to the number of “first” collections. Curio Cards, Mooncats, Ether Rocks, and several other collections represent the beginnings of NFTs as we know them, and for some people, this first legacy will always stand out.
Take no further look than the CryptoPunks.
The trend-setters for the 10,000 NFT generative art collection, the CryptoPunks sold for modest amounts after launching in 2017. This year, the floor price is in the hundreds of thousands, and that’s without any advertising or perceived utility delivered from the team behind them.
Many believe that these genesis collections will soon be viewed as “artifacts” and treated no differently than something from the 1700s. And as time goes on, they will be worth more simply for the virtue that they were first.
If you’re an investor that likes historical items, the quickest way to determine a buy in this area is to research the earliest Ethereum collections. Don’t expect to see much utility from these projects, assuming their teams even exist anymore. Instead, these NFTs are the kind you throw in your cold wallet and forget about for 20 years.
#6 – Meme
You may have noticed how certain coins in the crypto world skyrocket even if they have no utility. Doge, Shib, Mongoose Coin, all coins with little promise other than people pumping them. These are the meme coins of crypto, and the NFT world has its share of meme NFTs. These come in two forms:
- Actual popular memes minted as NFTs
- Derivative collections that feature a meme
The first ones are lucrative. For instance, the Disaster Girl — a meme of a young girl smirking while firefighters try to put out a controlled blaze — sold for nearly half a million dollars as an NFT. On the animated side, a GIF of the Nyan Cat meme sold as an NFT for $590,000.
The derivative collections are a little harder to describe. These collections take a popular meme figure and make derivatives of it, often as generative art. For instance, there was one popular collection of “Pepe the Frog” in various poses and outfits.
If you’re looking to collect, the first ones might suit you a little more. Those NFTs will age well and possibly rise in value over time. If you’re looking to ride a hype wave, the derivative collections might be more your style. These have the potential to rise fast as people get excited about the meme before the hype dies quickly.
What are some NFT investment techniques?
You may know some general investment strategies from ventures in other types of assets:
- Buy low, sell high
- Be fearful when others are greedy and greedy when others are fearful
- In investing, what is comfortable is rarely profitable
And they can hold true for NFT investing as well. But what NFT degens have developed are techniques easily-applicable to NFTs that take advantage of the industry’s infancy and volatile nature.
They come with their own lingo as well. Here are four.
#1 – Diamond Hands
As an investor, you probably have a time horizon for investments. And you know the market can challenge that time horizon when it gets volatile. But — as much as the value of, say, stocks can swing — NFT market volatility is different.
While in most types of investments, gains and losses stay in the single-digit percentage points in a day, it is not unusual in NFTs to see gains or losses in the double-digit percentages in hours.
In that volatility was born the concept of “diamond hands.” This concept simply means holding your asset through the good times and bad times. The most famous NFT investor with this strategy is the legendary @dingaling, who still has the over 100 Bored Apes that he minted back in May.
Diamond hands can be a potent strategy, especially when you want to sell. While taking profits is never a bad thing, and cutting losses isn’t necessarily either, many NFT investors understand that the market is prone to quick swings and that holding long-term may be the best strategy to get rich.
#2 – Red Clipping
Red clipping is the opposite of diamond-handing. While diamond handing is about holding for a long time, red clipping involves flipping assets for better assets. Essentially, you use the profits from one sale to buy a better asset — or one that will perform better in the future.
When you take profits from that sale, you reinvest in another and repeat the process.
Red clipping got its name from an unusual source: an individual who started with a unique red clip and flipped it in a series of trades for a house. Because many investors start with little liquid for investments, they use this method to amass better assets.
In the NFT world, people who red clip are often called “flippers” and the term is used slightly in derision. But regardless of how socially acceptable it is, red clipping is a popular strategy. A flipper can start with relatively little liquid and build wealth quickly, disproportionate to their fiat income.
It’s a technique for how to invest in NFTs with little money.
#3 – Buying the Dip
“Be fearful when others are greedy, and greedy when others are fearful.”
This saying — coined by the great investor himself, Warren Buffet — calls on investors to take advantage of the psychology of traders. When people are greedy, the prices of assets are usually spiking, possibly creating a bubble. In those moments, it might be better to sell your assets or stay out of the fray.
“Buying the dip” speaks to the other side of the phrase. When people are fearful, they are likely selling off assets too early and lowering the price artificially. A dip can be a good opportunity to find deals. Hence when prices are dipping, the goal can be to buy.
Some NFT investors look at red numbers as a kind of discount sale. It’s a time when assets are priced lower due to panic selling. The thought is that the price of the assets will rise again, netting the investor a healthy return.
The underlying assumption is that investments in the crypto and NFT field will generally go up. This assumption is not always true, and you should use the “buy-the-dip” strategy with prudence.
#4 – 10x-ing
Back in the early NFT days when just about everything was spiking in price, people began coining a term called “10x-ing.” When you “10x,” you purchase an asset, then ride a spike in demand to a price 10x higher.
Some traders take 10x-ing a step further. After the first asset gains 10 times its value, the investor sells the asset. After selling, they use the profits to buy more assets at a lower price. Then the investor waits for those investments to 10x before selling again and repeating the process.
Using this method, an investor can gain profits quickly. Although this method is more difficult to implement today with the high number of projects launching every week, it is still possible with thorough research and a little luck.
What are some common NFT investment tactics?
And then there are tactics. While the above strategies are broad approaches for NFT investing, these tactics are used in more specific situations. Investors often apply them in individual trades and combine them depending on the situation.
Here are three.
#1 – Rarity
Probably the most well-known buying tactic used when purchasing NFTs is choosing an NFT based on its rarity. Many collections, especially those that contain 10,000 NFTs, are created using generative art. This process involves creating NFTs with different traits and making some traits rarer than others.
An example of generative art and rarity is the Cool Cats collection. In that collection, a Cool Cat can have numerous different traits, such as its facial expressions or clothes. Some traits are rarer than others. For instance, the “special zombie” face trait only occurs once throughout the entire collection. This single occurrence makes the special zombie face trait super rare.
Another way to look at rarity in generative art collections is to think of your NFT as a product. If you have an NFT with common traits, you will face competition from other NFTs that look like yours.
On the other hand, if you have an NFT with a rare trait and someone wants an NFT with that specific trait, they will have much fewer options. You might be able to set the price of your NFT higher here, knowing there aren’t any other competitors.
Often, NFTs with rare traits have a floor price much higher than the floor price of the total collection.
#2 – Floor Liquidity
The floor of a collection refers to the bottom-level price — the lowest list price for one NFT out of all NFTs in a collection. There are many ways you, as an investor, can use the floor price to your advantage. First, it is one of the more useful statistics to judge a collection.
For instance, the floor price of a collection can indicate its supply and demand trend. A rising floor price implies higher demand than supply. A falling floor price indicates the opposite.
Floor prices also can help with NFT investor liquidity. A floor-priced NFT is often easier to sell than a higher-priced, rarer NFT because much of the buying and selling action takes place around the floor. Therefore, if you want to enter and exit a collection quickly, the floor is where to trade.
This method can decrease your chances of getting stuck with an illiquid asset.
#3 – Riding the Hype
Riding the hype is one way to make profits quickly, although it has a great deal of risk.
When “riding the hype,” you don’t evaluate an NFT necessarily on those six criteria mentioned above. Rather, you base your evaluation on how much hype there is for an NFT drop. There are a few ways to do this:
- Researching a project’s number of Twitter followers and post engagement
- Seeing the activity and number of people in a project’s Discord
- Noting how many mentions the project has on social media
By using these methods, you can see whether a project will likely have a lot of buyers on the secondary market. A lot of buyers can spike the floor price of a collection. Even if the project doesn’t look good to you personally, it may look good to other people, and demand is demand.
After you purchase, you ride the hype to a higher floor price before selling and netting returns.
How does gas affect NFT investing?
If you’ve traded other assets before, you’ve likely dealt with low fees. Unfortunately, low fees in NFT trading are a mirage of the past in some cases. This section walks you through something called “gas” and how you can limit how much you pay for it.
A quick primer is this: Investors trade NFTs on a technology called “the blockchain.” And on blockchains, transactions are verified on blocks for security. Some people receive money to open up new blocks or verify transactions, and this is where “gas” comes in.
“Gas” is like a network’s fee for completing your transaction on the blockchain. On some blockchains, the cost of gas is higher than others. As an investor starting out, you’ll want to keep gas fees to a minimum. And on certain blockchains, gas fees can run into the hundreds. Here are the four primary blockchains for NFT trading and how each ranks regarding gas fees:
- Worst NFT blockchain for gas: Ethereum
- NFT blockchains with little to very little gas: Solana, Tezos, WAX
If you’re minting on Ethereum, here are some tips on how to reduce the amount of gas you pay:
- Mint during low gas periods like after midnight
- Set gas to “low” on non-competitive purchases
You’ll also want to avoid “gas wars” where a large number of people are trying to mint a relatively small number of NFTs. Gas wars can drive up the cost of gas as people are adding more and more gas to get their transactions finished first.
During gas wars, you can lose money without even completing your purchase. Losing gas money can happen on canceled transactions or those that simply don’t go through.
Should I invest in NFTs?
In an industry that is nowhere near maturity, the million-dollar question is this: Should you invest in NFTs?
Fortunately, it is a question only you can answer. But if you do, always adhere to perhaps the most important maxim in trading: Don’t invest any more money than you can afford to lose.
Because NFTs are still in their infancy, many projects could “go to zero,” costing you money. But at the same time, some of these projects could create a great deal of wealth for you.
If you hold to the rule of investing just what you can afford, you can limit losses. If a project turns out to be a rug pull or gets abandoned, you can sleep easy knowing you didn’t lose money needed for something more important.
Conclusion
NFTs are speculative investments that hold promise for the future. They combine art and utility to achieve things that weren’t thought possible before Web 3.0 and stand to make many people very wealthy.