Getting Started in NFT Investing

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Contributor, Benzinga
July 29, 2023

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The crypto boom put blockchain technology in the spotlight. Blockchain facilitates transactions without a central authority, making transactions on a blockchain network impossible to alter. You can exchange crypto and non-fungible tokens (NFTs) on a blockchain. Many platforms let you buy and sell NFTs, but it’s helpful to know the background on these assets before getting started.

What is an NFT?

An NFT is a digital asset that gets exchanged on a blockchain — a one-of-a-kind unit of currency called a token. NFTs can take many forms, including as digital art, video and audio files, tickets and other forms. NFTs can substantially rise in value, similar to cryptocurrencies. For example, the Bored Ape Yacht Club (BAYC) is currently the most successful NFT ever minted. This NFT launched at $189 in April 2021, and some investors have sold for over $100,000. For some investors, this price movement translated into a 50,000%+ return on investment (ROI) in less than a year.

How Do NFTs Work?

NFTs use blockchain technology to facilitate transactions and verify ownership. Ownership verification makes it easier to conduct transactions and eliminates the middleman. This structure saves you from third-party fees, which could quickly add up for expensive assets. 

Why is an NFT Valuable?

NFT assets derive value from public opinion. Investments only command price points that people are willing to pay. Some investors treat NFTs like collector’s items with significant upside potential. Other NFTs carry more utility by providing access to exclusive files, virtual groups and other perks. Regardless of their level of use, they are only as valuable as the level of interest they inspire in potential buyers.   

5 Steps for How to Buy NFTs

NFTs are a new way to invest in the blockchain. Some of these assets have skyrocketed in price and developed large followings. Others have followed pump and dump trends. If you want exposure to NFTs, use these steps to buy your first asset.

Step 1: Open an Account at an NFT Marketplace

NFT marketplaces facilitate transactions between buyers and sellers. You can explore several marketplaces and compare their benefits. You should also check the reviews and browse around to make sure you are not getting scammed. Once you decide on the right marketplace for your needs, you can create an account. 

Step 2: Create a Digital Wallet

NFT marketplaces let you connect your digital wallet to their platforms. This digital wallet enables you to trade crypto and NFT assets. However, most NFT marketplaces do not have the functionality to let you create a digital wallet. In that case, you can sign up for another solution, such as Coinbase Wallet or MetaMask. These companies guide you through the steps to creating a crypto wallet. 

Check for each digital wallet provider’s security features. Digital wallets are more vulnerable than cold storage, which is equivalent to putting your crypto on a hard drive, but some issuers provide insurance and extra protections.

Step 3: Purchase Cryptocurrency

NFT marketplaces do not conduct transactions with fiat currencies. You will need to fund your digital wallet with approved cryptocurrencies before buying NFTs. Most marketplaces use Ether as their preferred cryptocurrency but some let you use additional cryptocurrencies. If a marketplace only accepts Ether, you would have to convert your Bitcoin into Ether before buying an NFT. 

Once you create a digital wallet on another platform, you can link it to an NFT marketplace. You can use the appropriate funds in your digital wallet to purchase NFTs. Most NFT marketplaces use Ether for transactions with little variation. 

Step 5: Buy or Bid on NFTs

Now that you have a linked digital wallet, you can start buying and bidding on NFTs. You can use your selected marketplace’s categories and filtering options to find NFTs that match your criteria. The NFT marketplace you select usually includes a walkthrough that instructs you on how to make a purchase. 

Advantages of Investing in NFTs

NFTs are a new asset that has already demonstrated high potential. Investing in NFTs provides investors with several advantages:

  • Significant appreciation potential that can comfortably outpace index funds 
  • Early adoption of Web3 
  • Inspiration to mint your own NFTs

Disadvantages of Investing in NFTs

Every investment has weaknesses, and NFTs are no exception. You should consider these disadvantages before buying NFTs:

  • High risk for a potential payoff
  • Hard to assess the fair value of an NFT other than listening to public opinion
  • Scams and frauds

Are NFTs the Right Investment for You?

NFTs are risky assets that can provide returns in a short amount of time. NFT investors need to have high risk tolerances and be willing to explore new opportunities. Each investor should assess their risk tolerance and portfolio allocations before buying NFTs. Researching NFTs before investing will help you make the best decisions that align with your financial goals.

Invest in NFTs to Diversify Your Portfolio

Blockchain technology offers revolutionary capabilities, including the infrastructure for NFT marketplaces. Some investors seeking higher gains may consider NFTs as an additional asset for portfolio diversification. You can start your NFT investing small and expand your position if you believe NFTs are right for your portfolio.

Frequently Asked Questions

Q

Are NFTs a good investment?

A

NFTs are a high-risk, high-reward investment that can make sense for some investors’ portfolios.

Q

Can you buy NFTs with U.S. dollars?

A

You cannot buy NFTs with U.S. dollars. You have to convert fiat currency into a cryptocurrency that the NFT marketplace accepts.

Q

How much money do you need to invest in NFTs?

A

NFT price points vary, but you don’t need a lot of money to get started. Some NFTs sell for under $50.

About Marc Guberti

Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.