Crypto Currency Investing Chapter 8 Summary: NFTs

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Can a JPEG really be worth hundreds of thousands of dollars?

In the world of NFTs, yes it can.

A non-fungible token (NFT for short) is a digital asset that represents art and collectibles, such as a song, image, sports card, or even an in-game object.

When an item is fungible, it means that it is interchangeable with the same item of the same value. For example, one bitcoin will always be equal to another bitcoin.

A non-fungible item, therefore, means it is one-of-a-kind. Normally, you can’t do a straight swap of one NFT to another.

NFTs run on the blockchain, most commonly on the Ethereum blockchain, and when you buy one it is comparable to buying a piece of art in the non-digital world.

The authenticity and ownership of this digital art is verified with a digital signature.

The beauty of NFTs is that the artist is connected directly with the buyer. This removes the need for middle-men, such as art galleries, who often take a big cut of the profits from the artist.

Additionally, thanks to the blockchain, passing off a fake as real is essentially impossible.

The value of an NFT can be calculated by assessing four things:

Utility: Can it be used for anything, such as an entry ticket or in a game?

Ownership history: Much like a Picasso is worth a lot just because Picasso made it, or if someone famous owned it previously.

Future value: This considers valuation changes and future cash flow. Scarcity and speculation play a big part.

Liquidity premium: How easy is it to sell or trade? If the NFT is on the Ethereum network, then anyone holding Ether has the ability to trade it.

There is one last factor also, and that is the buyer's perception. If something has personal value then he or she may be willing to pay a premium for something another person may deem as useless.

One way to profit is to create NFTs and sell them on the marketplace. You can sell them for a fixed amount or based on royalties for every time it is bought and sold.

Another way is through gaming. If you can create valuable digital assets while playing games such as Axie Infinity, then other gamers may buy them off you.

NFTs can be highly manipulated. It is best to stay away from trading them unless you are a genuine collector. However, if you already have some, then you could look into renting them out. This is popular in card trading games and these transactions are governed by smart contracts.

You could also “stake” them, which essentially means you lock them up and earn interest on them, much like investing fiat currency in a fixed-term bond.

And finally, you can use the “picks and shovels” strategy by investing in platforms that facilitate the sale of NFTs, such as Solana and Polkadot.

Anyone can create an NFT and get a digital certificate for it. This brings about many risks, such as copyright issues. Just because someone has been assigned a digital signature doesn’t mean they were the original creator of the work.

However, if you want to trade NFTs anyway, first you will need an Ethereum compatible wallet. Metamask is one suggestion.

Once you have that, there are a number of marketplaces you can check out:

Open Sea.io: Host a collection of rare items

Rarible: A democratic platform that uses Rari tokens for fees

Foundation: A premium platform where artists can only post their art after receiving an invitation from a collector.

NFT-Specific Marketplaces: Some NFTs trade on their own platforms like NBA TopShot.

Read the next chapter here.

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