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How to Invest in NFTs

August 22, 2022
6
min

To buy an NFT, investors must buy crypto and link their crypto wallets to the marketplace. Then, they purchase the item outright or win it in an auction-style sale.

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Artwork made with rubik cubes as a representation of NFTs

NFTs have upended the world of art and collectibles, opening a new market for digital artists and investors. These digital artworks—which come in formats like JPGs, GIFs, music clips, and videos—have in some cases fetched eye-popping prices in the millions of dollars. In March 2021, digital artist Beeple’s JPG collage “Everydays: The First 5000 Days” sold for the equivalent of $69.3 million, paid in Ethereum. And NFTs became a $41 billion market that same year.

For investors interested in supporting their favorite artists, or buying and selling NFTs as assets to try to make a profit, here’s how to invest in NFTs.

What is an NFT?

The abbreviation“NFT” stands for non-fungible token, meaning a unique cryptographic token that can contain information about who owns an item. That item could be a real-world or digital asset, but right now the term is used mostly to refer to digital artwork, as well as other digital collectibles like sports cards.

NFTs ensure that the ownership of these digital items is clear. They also create scarcity because only one person can own a given token and it can’t be copied—that’s what the “non-fungible” part refers to. A fungible token, by contrast, is something that can be exchanged 1-for-1 because each unit has the same value, like a $1 bill or Bitcoin.

At this point in the NFT field’s lifecycle, the tokens are largely used to buy and sell these digital artworks and collectibles, but they could have other uses. Some organizations are already leveraging NFTs in business, like the National Football League’s issuing of Super Bowl LVI tickets as collectible NFTs. In the physical world, NFTs might someday be used to validate certificates like diplomas or title deeds.

How buying and selling NFTs works

Artists can choose to sell an NFT as a unique item, or they might opt to sell a set of NFTs, similar to limited-edition prints of a physical artwork or a limited run of sports cards. 

When an artist “mints,” or creates a new NFT, it goes live on the blockchain—which acts like a public digital ledger. It’s both transparent and anonymous: Anyone can see the transactions and trace ownership on the blockchain, but buyers and sellers are identified by only their crypto wallet ID numbers.

NFTs tend to be priced in cryptocurrency—usually Ethereum (ETH). That’s because the Ethereum blockchain can store additional information such as ownership of a work, allowing the blockchain technology to function as a sort of database.

All transactions on the Ethereum blockchain—including when artists mint a new NFT—are subject to gas fees that keep the network running, sort of like an ATM charge for taking out money. Gas, or user, fees are paid in a denomination of ETH, and they rise and fall based on market conditions. These fees may be paid by the artist or patron, depending on the terms in the listing, and buyers may have the option to pay higher gas fees to receive their NFT more quickly.

Artists and investors can buy and sell NFTs on a variety of marketplaces. Two of the largest and most popular are OpenSea and Rarible, and each offers thousands of works available for purchase and auction.

How to invest in NFTs: 4 steps 

1. Buy crypto 

To buy an NFT, investors might first need to buy Ethereum—or whichever crypto the artist accepts—on a crypto exchange like Coinbase or eToro. Users connect their bank account to transfer money into a crypto wallet, which stores information to access the crypto they buy on the exchange. For security, experts recommend using a hardware wallet—these are typically in a form like an external hard drive or USB drive—that can be disconnected from the Internet.

2. Link the crypto wallet to an NFT platform

Investors will need to connect their crypto wallet to the marketplace platform of their choice. After investors create an account on the platform, they’ll be prompted step-by-step to sign into their wallet and connect it to their account so they can start making transactions.

3. Buy, submit an offer, or make a bid

Artists may allow customers to purchase an NFT in a variety of ways. Some may simply list a set price, others allow buyers to make offers, or they may also choose to sell in an auction that runs for a limited time. After an investor successfully makes a purchase, the information to access their NFT is transferred to their crypto wallet. 

4. Pay additional fees, if applicable

Investors should note their total purchase or sale price will include additional fees beyond just the cost of the artwork. Gas fees apply to any transaction on the Ethereum blockchain (and many others). And if an investor goes on to resell the artwork, they may also pay a royalty fee to the artist, as creators can choose to structure their NFTs this way to receive payment whenever the work is sold in the future.

Potential benefits and risks of investing in NFTs

Are NFTs a good investment? As with any asset, investing in NFTs offers both advantages and drawbacks. The NFT space is hot right now, and some works appreciate in value quickly. But their value is determined by what other collectors are willing to pay, and they’re inherently tied to the volatile cryptocurrency market.

Potential benefits of investing in NFTs include:  

  • Potential appreciation. NFTs may appreciate in value; some works have appreciated immediately after a primary purchase, allowing investors to make a profit on the secondary market.
  • Ease of transactions. Buying and selling is relatively easy, even for beginners just getting started investing in NFTs.
  • Support for artists. It’s a way for investors to give direct support to an artist whose work or mission they admire.

Risks of investing in NFTs include: 

  • Volatile. NFT investments are inherently linked to cryptocurrency, a market that is famously volatile.
  • May be difficult to assess value. NFTs’ values are set entirely by what another collector is willing to pay, and this can vary based on the specific market or the economic picture at large. And their unique nature means it can be challenging to estimate demand for certain works or artists
  • Transaction costs. Trading NFTs always costs money in the form of gas fees.

The bottom line

Non-fungible tokens, or NFTs, are unique cryptographic tokens that can contain information about who owns an item. Currently the term is largely used to refer to digital artwork in the form of images, graphics, music, and more, along with digital collectibles such as sports cards. They do offer other potential use cases in the business and physical world, like validating titles to a home.

Several NFT marketplaces are available, and many artworks are priced in the cryptocurrency Ethereum. To buy an NFT, investors must buy crypto and link their crypto wallets to the marketplace. After purchasing the item outright or winning an auction-style sale, the investor receives information to access the NFT in their crypto wallet. Either the buyer or seller will pay gas, or transaction fees, on top of the sale prices.

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