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Recently, Brian, a friend of mine, made $7,000 flipping NFTs in 6 hours. That’s nice for a college student. I am a long-term investor, and I didn’t sell much of the NFTs and other digital assets I own. Still, I decided to write down everything I know to guide anyone interested in investing in NFTs.
I’d like to provide you with a mental model on how to think about investing in NFTs. The purpose of this guide is to be suitable for newcomers and folks who are familiar with this area but want to learn more. Hopefully, you will be able to make winning investment decisions.
What is NFT?
It is safe to assume you already know NFT, given that you are reading this page. Otherwise, NFT stands for Non-Fungible Tokens. To describe NFTs, it’s much better to understand what a Fungible token is? A Fungible token is something of value that can be exchanged with a similar token without any loss or gain in value. Think of a dollar bill. Although each dollar bill comes with a unique serial number, it can be exchanged with another one without any loss or gain today or in ten years from now.
A non-fungible asset has a unique flavor that can’t be replicated. Imagine two unique baseball cards with different faces. Although they might have the same value today tomorrow, they might differ. Thus, the person who exchanges them might lose or gain value.
Although this definition is excellent and exciting, it leaves a slight grey area behind: how about a set of 100 baseball cards with the same athlete and print year in the same condition? If we are talking about something of a rarity (like less than 1000 copies), it’s fair to say it’s unique and Non-Fungible.
The invention of blockchains enabled creators to generate a unique token for this artwork and sell it. The owner of this token can claim they are the sole owner of the painting, even though it’s possible to make infinite digital copies of the work.
Is NFT a good investment?
Like any other investment, the answer is: it depends. If you buy the right NFT and manage the risk of your portfolio correctly, it might make you very rich! On the other hand, most of the NFTs in circulation today will not have any value shortly, and their owners will lose their shirts in buying them. That’s why we need to talk about risk management for your portfolio and also things to consider before buying an NFT.
In the long term, I believe NFTs will be very valuable because:
- On the demand side, they are the best way to communicate status on social media. In a world where wealth and economic inequality increases every day, its importance will grow. It also is a good way for art fans to show their support and appreciation in the world.
- NFTs provides a unique way for artists and creative folks to monetize their work on the supply side. More and more video games, movies, and other forms of creative work will be converted to NFTs, and the high-quality supply will grow.
There are also a few catches in buying NFTs:
- You don’t buy the actual artwork. You buy a URL to the location where it’s permanently stored. Hopefully, permanently, though!
- There are different methods to create (mint) NFTs, impacting their value.
- The growth of your asset depends on the quality of the community that supports it for the long term.
- Buying NFT doesn’t automatically make you the copyright owner. You need to have an additional contract for that.
The first thing you need to know for buying NFTs is risk management. There are two essential things to consider here:
- How much money do you have in total, and how much can you allocate to buying a high-risk/high reward asset like NFTs? A good piece of advice is to use a small part of your net value (like 1%) to buy Cryptocurrencies and NFTs, and other high-risk assets.
- How much is your personal appetite for risk? For example, if you are young and have most of your earning years ahead of you, it might be acceptable to use a larger part of your net value on buying Crypto and NFTs.
In general, you should expect the value of your NFT (and other digital assets) to change a lot, either because of the price change or the change in the underlying crypto price. If you buy too much, you will sell under pressure, and you’ll lose the upward potential in the future.
Things to consider before buying NFTs?
There is a lot to say about how to select NFTs. We share things that should be considered educational guidelines and not investment advice.
- Do you trade NFTs, or do you invest in them? Many people are confused about the time horizon they have for their investment. If you have a short period (like weeks) in your mind, you are a trader. If you have a more extended period, like months or years, you need to consider it an investment.
- If you are a trader, here are a few things you need to consider:
- Do not trade your total budget. No trade should put you out of the market. A common rule of thumb is to keep any trade below 5% of your budget.
- Have a stop loss in mind before entering a trade! It’s important to understand you are also exposing yourself to a foreign exchange risk (the risk of the underlying crypto value going down). Have a realistic number in your mind and stick to it.
- On the flip side, have a take profit number too. In addition to the possibility of market reversals, you will face opportunity costs if you sit on a single trade for too long. Do not let greed take the best of you.
- Consider the ebbs and flows of the market. An excellent way to do it is to check the crypto market sentiment and volume sales for each type of crypto, as well as macro-economic factors.
- On the other hand, if you are an investor, you need to consider the following:
- You want a high-quality product that endures for a long time. Study the team which published the artwork, the founders, the community, and the underlying blockchain quality. More on it below.
- Diversify your investment.
- Understand NFT market will have very high volatility (ups and downs in price) in the long term. Make sure you are OK with it.
Where to buy NFTs?
There are many reputable platforms to buy and sell NFTs. Depending on which crypto you want to use, you can buy NFTs on these platforms.
- OpenSea: is by far the dominant platform for selling and buying NFTs. It works on top of the Ethereum blockchain. OpenSea was founded in 2017 and is backed by the famous venture capital firm YCombinator.
- Rarible: It is another large marketplace for the NFTs, which provides access to different types of digital art. They are famous for their collaborations with major companies such as Adobe and Yum Brands. However, to trade on this platform, you need to use their own token RARI.
- SuperRare: also published its own toke, with the same name, on the Ethereum blockchain. It’s one of the largest
- Nifty Gateway: If you have heard about the artist Beeple who made a fortune in selling NFTs, you need to know Nifty Gateway is the platform for trading his artwork. This marketplace is powered by the crypto exchange Gemini.
- Binance NFT: Binance exchange also entered the NFT game by introducing its marketplace. You can use Ether or BNB, Binance exclusive token, or BUSD to trade NFTs on this platform. BUSD is their stable coin (read more about it in “True Digital Dollar: your ultimate guide to stable coins”).
- Foundation: is an invite-only marketplace that is exclusive to well-known artists. Although their unusual strategy to limit participation in their market provided them fame and access to high-quality creators, their trade volume is below other marketplaces.
- Mintable: A famous Shark in the Shark Tank TV show, Mark Cuban, has backed this platform. Mintable is based on the Ethereum blockchain.
- Magic Eden: Is one of the leading Solana-based platforms for NFTs. The low fees of Solana made it an exciting blockchain for the art creators to share and sell their work.
- Solana Art: Another central platform for trading NFTs on Solana is SolanaArt.
- Larva Labs: Any list about NFT marketplaces is incomplete without mentioning the leading creators of Cryptopunks. While Cryptopunks is the most successful NFT collection, their website is not really a marketplace in the sense that it’s open to other artists and collections.
- Axie Marketplace: Similar to Larva Labs, this marketplace is exclusive to selling mythical creatures in the video game Axis Infinity. Soon, buying and selling NFTs inside video games will be a significant market. You can read about “Guide to crypto-games” to learn more about it.
- NBA Top Shot Marketplace: Another famous and successful collection is NBA Top Shot. This collection includes a short video of the best NBA shots, and it’s based on the Flow blockchain.
If you like to learn more about the marketplaces to participate in, please see our post about “The ultimate guide to NFT marketplaces in 2022”.
Which NFT to buy?
Given your strategy and your budget, there are different winning tactics for each strategy. First, we need to learn about the life cycle of an NFT:
- Inception: In this step, the project team puts together their idea on what they want to release, creates a website and social media accounts for it, and communicates the project’s existence. A select few celebrities get heads-up about the project. They get exclusive access to part of the collection, technically called an airdrop.
- Minting: The minting process is the process of formal registration of the NFTs on the blockchain. Professional teams manage a pre-sale of their unminted collection. You can buy at a discount, and you will pay the price for formal registration (minting) of the NFT.
- Initial Release: Released NFT collections have a floor price, which determines the minimum price for buying anything in the collection after its release. The difference between the floor price and the pre-minting price is your profit. It’s technically possible that the price goes below the floor price, but often it doesn’t happen.
- Resale: If the project is successful, it will attract the attention of the collectors and speculators. At this step, you’d observe many trades happen, and usually, the price of the elements in the collection goes up. This is another time for making profitable trades in the lifetime of NFTs.
- Maturing: Very few collections achieve this step in which the collection is well-known, and most owners hold on to their assets. If you are a long-term investor, this is a perfect step to buy because the long-term growth of the collection will follow a similar pattern to the artwork.
A few characteristics of good NFTs are:
- Blockchain: the underlying blockchain is essential. Minting on Etherium includes high fees, but it’s the largest coin in terms of market cap. Fees on Solana are cheaper, but the Ethereum community usually doesn’t buy from the Solana and the other way around. Tether is a stable coin but has a bad reputation. There are other coins too. Make sure you understand the risks and life cycle of the underlying blockchain before buying NFTs.
- Good community: you can check the artists’ Twitter followers. Then join their Discord community and check if the founders are active and if they provide answers to the community or not. Depending on the budget you want to spend, you can target accounts with between 1K to 3K followers (small investment), 3K to 10K (mid-size), or 10K+ (competing with whales).
- Reliable team: A team of artists and developers with a track record of launching successful projects is something you can invest in for the long term. If you want to assume more risk, you can invest in raising artists.
- The rarity of the NFT: Each NFT in a collection comes with particular attributes like eye and hair color, clothing, and other features. They get a rarity score based on how much these attributes are rare within the collection. The higher the rarity score, the better.
Suppose it’s something rich people can connect to. In that case, chances are one buys it at a considerable price and set it as their Twitter profile image! Also, check for the likability of the persona in the image.
When to sell your NFT?
This decision is pretty straightforward if you read the other parts: you can close your position (sell) when you hit your goal or your stop loss. Another reason to sell is when your assumptions prove to be wrong. For example, you assumed a specific marketplace would be an excellent long-term place with a good token, but their management failed. It’s probably a good time to sell all the assets on that blockchain.
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