A Primer for Investors New to Digital Assets
Chances are you’ve heard the term “NFTs” since they basically took the world by storm over the last year, but if you’re fuzzy on the details of non-fungible tokens, then this article is for you. We’ll discuss what NFTs are, why investors are excited about them, how to buy them – and whether it’s the right move for you.
NFTs: The Basics
Non-fungible tokens – NFTs for short – are a type of digital asset. They represent assets like music, videos, or in-game tokens, but the current most popular use is to buy and sell digital artwork. In essence, they provide documentation that the digital asset they represent is, in fact, the original and not a copy.
Why is this important? Well, when it comes to anything digital, there can be an infinite number of copies. Anyone can download digital artwork, for example. However, just as there is only one original of Picasso’s Weeping Woman, there exists only one original of a digital work of art, too. (Sometimes, NFTs are also used in conjunction with rare physical products, too.)
Now, you might be thinking, “Don’t NFTs have something to do with cryptocurrencies?” And you’re right, they do. Every NFT is a token on a blockchain, and most have been built on the Ethereum blockchain, in particular.
Why Invest in NFTs?
The fact that these tokens are “non-fungible” means they can’t be replaced by another identical item. Rather, they are one-of-a-kind or, in the case of something like a sought-after baseball card, there is an extremely limited number of them.
You might choose to buy an NFT for various reasons. Many people do it because they expect the token to increase substantially in value over time. Others do it to support a favorite artist or musician, who can enable a feature whereby they get a percentage of the purchase price every time their NFT changes hands.
How You Can Buy NFTs
Since NFTs represent one-of-a-kind or incredibly limited availability assets, buying them isn’t as simple as buying crypto (though there are similarities). In fact, you can’t buy them on crypto exchanges. If you’re in the market for these digital tokens, here’s how to go about buying them:
- Start by setting up a crypto wallet and buying some cryptocurrency. Make sure it’s a currency that is compatible with the Ethereum blockchain, since that’s mostly where you’ll find NFTs. When you’ve got your wallet set up, buy some ether – it’s like the “fuel” of the Ethereum blockchain.
- Take your time looking at a few NFT marketplaces. Some reputable options are io, Rarible, and Mintable.
- Find the NFT you want to buy by searching for it specifically, or by browsing categories.
- Once you find what you want, place a bid. (Most NFT marketplaces will function like an auction house.)
An important thing to note is that when you buy an NFT, you’ll also pay a “gas fee.” When you’re transacting in ether, the gas fee is the amount you’ll pay to carry out your transaction. These fees can go up and down – and sometimes you’ll pay more in fees than you will for the NFT itself – so pay attention when buying.
Alternatives to Outright Purchases
Let’s say you’re interested in NFTs, but you don’t want to purchase them outright. Instead, you could buy an ETF with an NFT focus, such as the Defiance Digital Revolution ETF, which gives you exposure to blockchain, crypto infrastructure, and NFT stocks.
You could also gain exposure to NFTs without an outright purchase by investing in a venture capital fund that invests in NFTs and/or crypto infrastructure. (Note that you must be an accredited investor to explore this option.)
Are NFTs the Right Investment for You?
Digital assets are still an emerging asset class, and this space is constantly evolving. When choosing whether to buy NFTs, be thoughtful and get educated. NFTs are speculative investments and come with increased risk as compared to more traditional investments, and they aren’t right for every investor. If you’re hoping to make a quick buck, be cautious. On the other hand, if you want to purchase an NFT because a piece of artwork is meaningful to you or because you want to support a favorite artist, then it is probably a worthwhile investment.
Think of it this way: NFTs are only worth what you or someone else is willing to pay for them. If you pay good money for an NFT and then you can’t re-sell it, it becomes essentially worthless – at least from a financial perspective.
Final Thoughts on Whether You Should Invest in Non-Fungible Tokens (NFTs)
NFTs are trendy and exciting, and some of them are tremendously valuable, too. As their use cases continue to evolve, it’s possible we’ll see them in use with more physical products in the future, too. However, just as with any other investment – end especially with riskier asset classes – it’s important to do your research before purchasing an NFT.
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