This is a guest post from Fiona Smith from The Millennial Money Woman. I'm fascinated by the upsurge in crypto assets, and she provides a quick primer on NFTs. I've written about NFTs on other sites, as well as made and sold my own NFTs. I hope you enjoy this quick look at this digital asset.
You’ve probably heard about the popular new art technology, also known as NFTs or non-fungible tokens.
In fact, it feels like almost every day you find out about a new NFT making headlines.
It comes as no surprise that NFTs are part of the mix when it comes to the exploding blockchain technology markets, coupled with cryptocurrency and smart contracts.
Plus, an NFT investment could help you become a millionaire, if prices keep increasing.
While there continues to be much hype around NFTs, it’s important to do your research before diving into this new art technology and risking too much of your hard-earned money.
Keep reading if you’re ready to learn some NFT basics – and whether this digital art form could be a good investment for you.
What are NFTs?
NFTs (also known as non-fungible tokens) are unique creations that cannot be replaced with something else.
As an example, $1 is a fungible token, because $1 can be replaced by 4 quarters, 10 dimes, or 20 nickels for example.
Similarly, one Bitcoin is also a fungible token because it could be traded for another Bitcoin, and you’ll still end up with the same value.
A non-fungible item, however, is something that cannot be exchanged to replace its value (like a Monet painting or a one-of-a-kind baseball card).
The good news is that NFTs can virtually be anything – as long as it's digital.
Some examples of NFTs include:
- Video clips
On a high level, cryptocurrency uses the blockchain to record all cryptocurrency transactions (so if you spend 1 bitcoin, that transaction is forever recorded on the blockchain).
In the case of NFTs, the Ethereum blockchain is used to record NFT transactions.
Ethereum is a type of cryptocurrency (just like Bitcoin) and Ethereum has its own blockchain infrastructure.
It just happens that not only is the Ethereum cryptocurrency recorded on the Ethereum blockchain, but the majority of NFTs are also recorded on the Ethereum blockchain.
And which currency do you use to buy and sell most NFTs?
You guessed it: Ethereum.
When did NFTs start?
The very first NFT was launched in 2014 and was known as “Quantum.” Back then, NFTs were not yet known to the public.
NFTs first hit the mainstream scene in late 2017 with the rise of the popular NFT collections known as CryptoPunks and CryptoKitties.
However, after the initial NFT explosion in 2017, the NFT market went dark for the next few years, until early 2021, when the popularity of NFTs seemingly exploded across the world.
Back in 2017, many believed CryptoKitties and CryptoPunks to be a short fad that would fizzle out… little did they know that NFTs could very well be the future.
How do you invest in NFTs?
Virtually anyone can start investing in NFTs – but that doesn’t mean that you should risk all of your money on the NFT market.
However, if you feel like you’re ready to invest in NFTs, then keep reading.
Just like buying stocks in the stock market, there are also several NFT platforms where you can buy and sell NFTs.
Here’s a very simplified version of how to buy NFTs:
- Choose an NFT marketplace
- Open a crypto wallet on that NFT marketplace
- Fund the crypto wallet using Ethereum (in most cases)
- Start bidding and buying an NFT
A crypto wallet, in plain English, is like a wallet (just digital) that stores your cryptocurrency that’s needed to fund your NFT purchases.
Keep in mind that the wallet itself needs to be funded with cryptocurrency (typically Ethereum if you’re looking to purchase an NFT).
Some popular NFT marketplaces you could consider exploring include the following:
- Nifty Gateway
Just keep in mind that if you’re looking to consistently buy and sell an NFT on an NFT marketplace, fees could easily get in your way of earning a significant return on your investment.
In fact, selling your digital asset involves multiple fees like:
- Marketplace fees
- Royalty fees (may apply)
- Transfer of crypto to and from the digital wallet fees
It’s important to understand that fees could nibble away at your profits, so before you start buying and selling NFTs, make sure you research your NFT marketplace’s transaction fees associated with buying and selling NFTs.
What’s the most expensive NFT sold?
To date, the record holder of the most expensive NFT ever sold was the digital compilation called “The First 5000 Days,” which sold for a whopping $69.3 Million.
This was also considered to be one of the most expensive artworks ever sold in history.
The famous digital artist Beeple (also known as Mike Winkelmann) sold this artwork through Christie’s, which also marked the first time that Christie’s ever sold a digital piece of art.
Where do you store your NFTs?
Since NFTs aren’t a physical or tangible asset (like the Monet painting, for instance), you can’t just simply store your NFT in an underground bunker.
You’ll have to be a little more tech-savvy than that.
To securely store your NFT, you’ll want to store your digital assets in a crypto or digital wallet, which often takes safety to the next level (similar to what you would do with any cryptocurrency investments).
In general, there are 2 types of digital wallets:
- A hot wallet
- A cold wallet
For maximum security, you’ll want to consider storing your NFTs in cold wallets, which are digital wallets that are kept offline (and away from any potential hackers looking to steal your personal information).
Hot wallets, on the other hand, are digital wallets that are kept online.
Digital wallets are typically very secure. As an example, most are protected by up to 3 things: What is known as a “12-word seed phrase,” a regular password, and a biometric touch authentication.
What is the point of NFTs?
Honestly, whether you see any value in NFTs depends on your position in the NFT market – and your perception of the value of a singular NFT.
Typically, there are 3 types of positions in the NFT market that you could take:
- The buyer
- The creator
- The investor
As a buyer of NFT art, you can accomplish several things like financially supporting your favorite NFT artists and obtaining some sort of use for the NFT itself (like posting the NFT image online without being sued).
As a creator, NFT artwork might allow you to create art in a way that you may have never been able to express yourself before. It’s also a way to make money through either a single transaction or even through royalties if your NFT is sold in the future.
As an NFT investor, you could speculate in the NFT market and invest your money in NFT pieces that you believe could increase in future value. This could be a very profitable or a very risky niche.
NFT pros and cons
NFTs have become very popular in the past few years, which has consequently attracted a lot of attention from individual investors as well as the media.
Pros of NFTs
- They are unique
- All transactions are recorded
- They use the blockchain to verify transactions
- Could offer very high returns for NFT investors
- Due to the size of the internet, NFTs can reach more investors
- They could use smart contracts, which typically ensure the original NFT artists are paid royalties should their works be resold in the future
While there are seemingly many positives when it comes to investing in NFTs, you should also always consider the negatives.
Cons of NFTs
- Pricing of NFTs is not guaranteed
- NFT marketplace fees could eat into profits
- As an investor, you could lose a lot of money
- Fairly new technology, so there still could be some bugs to fix
- The value of NFTs is highly subjective (based on buyer demand)
- NFTs require a lot of energy use, so it’s not the greenest technology
Remember to weigh the pros and the cons and do your research before you start investing your money in NFTs.
Why would you pay millions for digital work?
It’s hard to explain why some pieces of NFT artwork are valued at several million dollars – especially if you could construct the same image online in a matter of minutes.
In the end, just as with most physical artwork, NFTs are valued based on how much a person is willing to pay for an item.
For example, an art collector (or even a car collector) would pay a lot of money for a rare item that was created by a popular artist (or car manufacturer).
The same concept applies to the NFT world.
While NFTs certainly could be seen as a potential opportunity to grow your investments substantially, they also pose some risks that you should consider before investing your money.
In the short term, it appears that copyright use could be a potential issue as well as some of the security threats NFT owners may face.
With that being said, it does appear that NFTs are here to stay.
Some journalists and NFT enthusiasts even predict that NFTs will be around for another 500+ years to come.
While we don’t know if that prediction is optimistic, NFTs have proven in the past that they can be a great source of passive income to boost your net worth.
How much you plan to invest in NFTs ultimately depends on your comfort level.
Fiona Smith is the Founder of The Millennial Money Woman, she’s been featured on Forbes, she’s a speaker at the national FinCon 2021 conference, and she’s a co-founder of a local non-profit charity, promoting financial literacy with underprivileged minorities. Fiona earned her Master of Science degree in Personal Financial Planning and is a self-proclaimed finance ninja. Fiona’s passion is helping others take control of their money to build a better future.
Newsletter: Fiona's Newsletter
Feature photo by Morthy Jameson from Pexels