One of the many fascinating aspects of non-fungible tokens is figuring out how to invest in NFTs.
From an outsider’s perspective, it is truly baffling why someone would be willing to pay 400 Ether or about $1.3 Million for a photo of a digital rock. Let’s not forget how Beeple’s digital piece of art — that anyone can view on the internet and download—pulled in $69.3 Million and is now the most expensive NFT. For sure, skeptics scratched their heads when news hit that someone bid $11.8 million for a pixelated avatar wearing a mask (CryptoPunk #7523).
There’s no denying that the eye-watering price tags are one of the reasons why NFTs exploded this year. 2021 is undeniably the year of NFTs. Athletes, celebrities, politicians, business tycoons – dead or alive – have dipped their toes into NFTs. Similarly, brands, franchises, organizations and even countries made a beeline for the most efficient ways to launch an NFT Collection.
With NFT collections dropping like clockwork and projects launching faster than you can digest the latest one, deciding which NFT to buy can get daunting. If at some point you’ve asked yourself: How exactly do NFTs get their valuation? In effect, how do I select which NFT to purchase?
Then, this guide is for you!
We’ll navigate and explain the factors that determine the price of NFTs. What are the things you need to keep an eye out for to make an informed and educated NFT purchase? In short, how can we say that this particular NFT is more valuable than the other?
NFT Wallet Setting Up
Before you can start investing in NFTs, you need to prepare yourself on the technology front. If you’ve bought cryptocurrencies before, you may already have some of this in place. NFTs are generally based on the Ethereum blockchain, meaning the technology is transferrable.
As a first step, you’ll need to get a wallet that can handle your transactions. MetaMask is a popular and easy-to-use option. The good news is that as adoption and demand increase, the available easy-to-use options are also expanding. If you need more help on this aspect, we have a separate guide for you covering “how to choose the best crypto wallets and start buying today.” You’ll be pleased to know that there are other competitive wallets in the space such as Trust Wallet and Enjin.
Adding money to your NFT wallet
Once you’ve got your wallet in place, you need to seed it with some ETH — that’s how you’ll be paying for your NFT investments. How much you keep in your wallet is up to you, but a good rule of thumb is to have at least 0.02 ETH to cover the lowest-price NFTs and associated gas costs.
What are gas costs? Those are the transaction fees to adjust the blockchain, either by creating, changing or destroying NFTs. Gas costs are dependent on how busy the network is at any given moment. The more people interact with NFTs, the more you have to pay to participate. For first-time buyers and sellers, high gas fees mean losing their profit margin or even facing a loss. Check out our full guide on everything you need to know about crypto gas fees and the hidden costs of NFTs.
It’s always good to keep a little bit of extra ETH handy. While you can wait for a cheaper time of day, you may not always have the luxury of postponing a bid. In the past, Ethereum gas fees skyrocketed due to the NFT craze that’s why NFT Collectors are always on the lookout for the cheapest gas fees.
We have a special treat for you! We’ve compiled some tricks and tips to help you plan out your NFT purchase. So if you’re interested to know when are Ethereum gas prices at their lowest then check out our full guide.
Choosing an NFT Marketplace for Investments
An NFT Marketplace is where the creation and selling of NFTs starts. Basically, these are platforms where NFTs can be stored, displayed, traded and in some cases, minted or created. To transact or use an NFT Marketplace, you first need to set up a crypto wallet compatible with the blockchain network that your desired NFTs are using. Most NFTs are still on the Ethreum blockchain, so you would need a MetaMask wallet. Meanwhile, you can buy NFTs on the Solana platform using Sollet.
The easiest way to find NFTs to invest in is to browse one of the many marketplaces on the web. Although new ones are cropping up almost every day, some have established themselves as important anchors to the crypto art community.
OpenSea and Rarible are some of the best-known hosting items by everything from novices to professionals to artist collectives. For more curated lists, try Foundation, hic et Nunc, SuperRare or Nifty Gateway. These sites are either more specialized in their focus or have more selective criteria for accepting artists.
While each of these marketplaces has its own unique qualities, there is no “best” spot to find the artwork you’re looking for.
For instance, OpenSea has the advantage of a highly user-friendly interface. But because it aggregates content from virtually the entire NFT world, it can be overwhelming to new users. You’ll have options, but potentially too many options.
Buying Art Strategically: How to Choose which NFT to Purchase
Once you settle on a marketplace, you need to decide what kind of NFT you’ll invest in. There are many elements to consider when making this kind of decision:
- the quality of the work and the track record of the artist;
- Chain Security
- the team behind the project and the community
- the list price and its bidding history;
- whether it plays into a trend, and how close to the “focal point” of that trend it is.
Remember: the artwork you buy today should appreciate in value over time. This means you need to look at it with a critical eye when making your decision.
Art is King; Scarcity is Supreme
Even if the NFT art scene is flooded with new NFT drops and Collectibles, those with superior art always stand out. Lately, the NFT Community has been fascinated with animal-themed collectibles: cats, apes, elephants, pandas and lions.
In the NFT world, valuation depends on the rarity of the NFT. For example, Sotheby’s auctioned off the Covid Alien CryptoPunk for $11.75 Million. There’s a finite supply of 10,000 CryptoPunks in the NFT World. CryptoPunk 7523 stands out because of its rare cosmetics. It is one of just nine Alien CryptoPunks and the only one wearing a mask alluding to the global pandemic. As such, it is considered one of the rarest of the “punk type” set. Therefore, we can conclude that the scarcity and the cosmetics pushed the value of CryptoPunk 7523 or Covid Alien.
So if you’re shopping for NFTs, apart from the overall aesthetics, you should definitely check out the rarity. This is determined by the traits, accessories, facial expressions and even the tiniest detail for example, which way the character is facing.
Factors like historical significance and scarcity drive the value of NFTs. For example, CryptoKitties and CryptoPunks have always enjoyed high floor prices because of their status as the OG NFT Collectible. Mooncat Rescue, an Ethereum-based NFT Collectible launched back in 2017, was rescued this year by cat-loving NFT Holders.
Ponderware developed MoonCat Rescue in 2017; then, the NFT Twitterverse discovered that it was just collecting dust mid-March this year. In a matter of hours, all the Collectibles were gone. By chronology, Mooncat is the second oldest NFT on Ethereum after CryptoPunks making it a potential goldmine in the eyes of NFT enthusiasts and collectors.
In the NFT ecosystem, we’ve seen creators release NFTs as 1/1 or multi editions of hundreds and thousands. Obviously, the 1 of 1s are hyper-scarce, so they’re more valuable in theory. However, this doesn’t mean multi-editions cannot appreciate in value. As the project soars so will the floor price for the NFTs, leaving everyone happy with their purchase.
Chain Security and On-chainness
At its core, NFTs are non-fungible, indivisible, indestructible and verifiable. These characteristics elevate NFTs and enable them to be used for virtually anything the can be stored digitally such as gameplay, music files and digital art.
However, NFTs are only as good as their underlying blockchain infrastructure. Basically, they will stay immutable and guaranteed as long as the blockchain that supports them remains secure.
As such, despite high gas fees, competitors can’t edge out Ethereum as the reigning NFT Network. Tech-wise, it still remains to be the most secure smart contract platform running today. With the launch of Ethereum 2.0 promising to solve high gas fees among other pain points, the network is poised to continue its dominance.
So as a potential NFT consumer, how should this affect your purchasing decisions? Before purchasing an NFT, you also need to scrutinize the blockchain network backing it. It is crucial to make sure that the host chain is secure and it is sufficiently decentralized.
Apart from Ethereum, Polygon, Enjin and Cardano networks are on the rise. Furthermore, some NFT projects opt for ease and flexibility by making their NFTs rely on external, off-chain providers like AWS. This introduces a dimension of trust because the NFTs will only exist as long as the projects keep their servers running. So you should also be cautious of this aspect.
Investments Are About People: The Team and the Community
In many cases, NFTs will contain or link to biographical information about the artist. While you’re not necessarily looking for a New York darling making their first foray into crypto art, you should also be wary of creators who are only interested in NFTs to make a quick buck.
Sparse biographical information and lightweight write-ups about the piece are bad signs. It suggests that the work is mass-produced with no real thought behind it. You’re buying a slice of the artist’s reputation as much as an image, so try to avoid people who won’t even be artists a year from now.
Bored Ape Yacht Club is the poster child of how an immersed, solid and dynamic community can propel a project to new heights. Bored Apes instantly became Twitter Famous. Celebrities and NFT space figures flocked to OpenSea to score some of the original Bored Apes in the Collection. Bored Apes were used as an avatar or a display picture in social media accounts, much like CryptoPunks. Now it is one of the industry leaders, even Jimmy Fallon and Post Malone aped in!
As a buyer, you should definitely watch out for anon projects. Don’t get swayed by the hype. Knowing the team should be one of the first things you cover when doing your due diligence. Rug pulls and misrepresentations are less likely to occur when you have an established team backing the project. What happened with Bored Cat Club, The Tokyo Ten, UncOvered and Evolved Apes should sufficiently explain why knowing the team is crucial.
Watch the Numbers
The list price and bidding history can also help guide your decision-making process. If an NFT was created six months ago and has yet to earn a single bid, or if its price is being regularly reduced, that may be a bad sign. Granted, you may have stumbled upon an undiscovered gem — but weigh these factors carefully before investing.
If the artwork is obviously cashing in on a trend, ask yourself if this interpretation adds anything to the conversation. If it’s merely mimicking something that was popular in the past, give it a pass. An “also-ran” piece is not likely to appreciate in value.
Perhaps most importantly, though, is how you feel about the work. Sometimes all logical cues say “no,” but you just can’t look away. In that case, go with your gut.
After all, the difference between an obscure undiscovered artist and a superstar can often come down to their making that first fateful sale.
NFT Indexes For Cautious Investors
Since backing a single work by a single artist can be something of a gamble, there are other ways to invest in NFTs without having to become an amateur art expert. NFT Indexes allow you to purchase a portion of an existing well-known NFT so that as the base artwork rises in value, so does your investment. NFTX does this for popular NFT brands, while NFT20 allows you to invest in fractional amounts over time.
The Dawn of a New Era
No matter how you go about it, investing in NFTs — especially now, in the earliest days of the craze — should be an important part of any investment strategy. This is a new frontier in wealth creation, so whether you’re up for speculative bets or slow-and-steady growth, there are already many good choices available to you. It’s only a matter of deciding which ones you want to try first.