How to invest in NFTs

Key takeaways

  • NFTs or non-fungible tokens are digital assets that can be purchased as an alternative investment.

  • While these have been around since 2014, the market has boomed in 2021, with the total value of NFTs rising from USD 100 million in 2020 to more than USD 21 billion last year.

  • Yieldstreet offers its investors an opportunity to access crypto managers on its platform.
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What is a non-fungible token (NFT)?

Essentially, NFTs are digital assets that represent physical objects – such as, for instance, art pieces – that are bought and sold online. They enable creators to sell unique objects that either are one of a kind or have a very limited run and give investors ownership of a unique digital file, with the potential to create digital scarcity. 

Indeed, the economic meaning of fungible is something that is – as the word suggests – interchangeable. Options, securities, and commodities are a few of the types of fungible assets. Financial instruments – such as cash, shares of a company, or bonds of a single issue – tend to be fungible. Other financial assets such as real estate are not – intuitively.  

“Tokens” are non-fungible as they are units of value housed on a blockchain. Each one is unique because it is tied to a series (a “chain”) of previous transactions, each one with a unique number.  Bitcoin and Ether, two widely used cryptocurrencies, are basically NFTs, which can be exchanged to buy digital art pieces or intangible goods such as access to space on a cloud server.

Why should you consider investing in NFTs?

The reasons NFTs are increasingly popular include:

  • Accessibility. Anyone can invest in non-fungible tokens; that’s part of their appeal. In fact, most NFTs can be bought for between $10 and $500.
  • Blockchain security. The blockchain technology that’s behind NFTs is usually considered the most secure. It records information in a way that prevents hacking, alteration, or deletion. In other words, blockchains are virtual transaction logs – digital databases — that are duplicated and allocated across a network. Because data added to the blockchain cannot be modified or erased, scarcity, authenticity, and proof of ownership are assured.
  • Promotion of marketplace efficiency. If you’re transforming a physical asset into a digital one, you’re simplifying processes, locking out intermediaries, bolstering supply chains, and heightening security. Look at what’s happening in art. Because of NFTs, artists can reach their audiences directly without the need for pricey agents and unwieldy transactions. What’s more, technology has improved authentication in art, helping to streamline transactions and further lowering costs.
  • Fractionalization. In real estate, for example, it’s much simpler to divide a digitized iteration of a property among owners than it is to fractionalize physical ownership. For some assets, digitization can expand markets, leading to increased liquidity as well as potential appreciation.
  • Portfolio diversification. Because of their distinct risk profile, NFTs as an investment can potentially improve your portfolio’s efficiency by increasing diversification. 

How can you invest in NFTs?

Now that you know what NFTs are and why you may want to consider investing in them, let’s consider how to enter the market. Although the NFT marketplace is steadily expanding, the most common forms of NFTs available now include:

  • Art. This is the most popular form of NFT for some of the reasons we discussed earlier . NFTs have increased transparency within the art world. They are also changing the ways art is bought and sold, as well as the kind of art and artists that are valued. 
  • Music. By selling music through the blockchain, artists can develop a direct relationship with their fanbase — without the need to use a music-streaming service or record label.
  • Video game items. In gaming, NFTs can be avatars, collectibles, and in-game items. 
  • Trading cards or similar collectibles. You can purchase and trade virtual iterations of trading cards or anything else on the market that is deemed to be a collectible.
  • Memorable sports moments. These are seconds-long clips of big moments in sports history, such as a game-changing touchdown or an extraordinary slam-dunk.
  • Memes. It is not uncommon for people depicted in them to sometimes sell their own memes.
  • Domain names. You can register a domain name and then sell it on the NFT market, with no “middleman” involved.
  • Virtual fashion. These NFTs are tokenized outfits, accessories, and other wearables produced for virtual environments.

Learn More About Alternatives

Now, here are steps you should take to invest in NFTs:

Determine what is available

When researching options, it is preferable to be thorough, rather than rely on word of mouth. For NFT sources, you can search Google or Twitter or check out sites such as NFTcatcher.io or Rarity.tools for upcoming new launches.  For the latter, look at the sale’s timing and cryptocurrency requirements, so you get an idea of the scarcity involved, along with the number of NFTs  that are scheduled to be sold.

Make sure there’s a reputable team behind the NFT in which you are interested. That will help increase value. You also want to determine whether the NFT is on- or off-chain, since the latter utilizes centralized servers that can result in lost images if they go down. There are also Discord and Telegram groups that you can join to see what the buzz is about your chosen NFT.

Buy cryptocurrency

To buy an NFT , you must choose a brokerage or exchange through which to purchase crypto. Brokerages facilitate the buying and selling of cryptocurrencies, while an exchange is an online platform on which buyers and sellers trade based on existing market conditions. 

You can buy Ethereum, with which most NFTs are bought, as well as other cryptocurrencies at a brokerage or exchange such as Kraken, Gemini, Binance.US, or Coinbase.

Note that there are fees associated with the purchase of cryptocurrency that start at around .99 for trades of USD 10 or less. Generally speaking, the larger the trade size, the higher the fee, but there may be different fee structures depending on the brokerage or exchange you select.  

Choose your marketplace

A marketplace is an online location where NFTs are bought and sold. Some of the most popular markets are Larva Labs, Axie Marketplace, Rarible, and OpenSea. After you’ve determined where you would like to purchase your NFT, register and connect your “crypto wallet” where, upon purchase, your NFT will be stored, to the marketplace. Note that each marketplace has its own wallet requirements.

The item can either be sold at a flat rate or can be auctioned.  An NFT price or latest bid does not include additional fees such as those paid to miners for computing power. 

Pros and cons of NFTs

We’ve gone over some of the reasons why NFT investments have gained popularity, including accessibility, security, marketplace efficiency, fractionalization, and diversification. Other pros include an opportunity for capital appreciation, driven by demand and scarcity, the ownership of a unique item as well as the thrill of being at the forefront of a potential major shift in consumer behavior.  

On the flipside, NFTs cannot replace physical art. They can also be hard to value – they often reflect market demand but that can be an extremely volatile measure. NFTs are also energy-intensive just like cryptocurrencies – another feature that may be unwelcome for investors in the days of ESG-focus. In addition, this a new and largely unregulated asset class, and investors have little or no form of protection against potential total loss.  

Is NFT the right investment for your portfolio?

NFTs can be an attractive form of investing for certain individuals, and can be considered too risky by others. Before adding tokens to your portfolio, you should consider your investment goals, potential returns, and current market conditions. 

NFTs in the alts space

NFTs is an exotic form of alternative investment that is recently gaining traction. Price drivers are being identified and trends are slowly emerging despite it being a very niche market for the time being. Rather than investing in the space, Yieldstreet offers access to crypto managers on its platform, as it believes that offering access to multiple forms of private market investments can help investors diversify their portfolios.   

Take a look at Yieldstreet, you might just find the alternative opportunity you’ve been seeking.

1. For more information on the concept of blockchain – see Satoshi Nakamoto’s Bitcoin White Paper https://bitcoin.org/bitcoin.pdf

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