With NFTs selling for millions of dollars and their prices skyrocketing one day and falling the next, it’s important to understand the basics of these non-fungible tokens and how to acquire one if you want to invest in the NFT market.
It’s true that NFTs fell 23% in less than 24 hours earlier this month, but they have shown a huge upside over the past year. And by gaining exposure to the web3 space, investors who are interested in these assets can further diversify their portfolio.
There are two ways to acquire an NFT: minting or buying.
Both ways allow investors to own a non-fungible token, but each requires different steps and has different benefits. By understanding these important distinctions, you can make wise investment decisions and make sure you get the most out of your NFTs.
NFT BASICS
An NFT is a digital asset that represents something, like a meme, tweet, video, or piece of art, and NFTs have many surprising uses. They are usually bought and sold with cryptocurrency and are similar to cryptocurrencies in that they employ similar blockchains, most commonly Ethereum.
While NFTs are generally built with the same kind of programming as a cryptocurrency, the similarities end there. Each NFT has a digital signature that prevents them from being exchanged (non-fungible) and allows each one to be completely unique.
NFTs have gained notoriety as a way to buy and sell digital artwork, and projects like the Bored Ape Yacht Club at one point reached a market cap of almost $2 billion. Other NFT artists like Beeple, who sold an NFT for $69 million, have raked in large sums of money by minting their own NFTs.
As we’ve seen with the recent drop in value, owning NFTs carries risks. It is a relatively new market that has seen a lot of volatility.
Humphrey Yang, personal finance expert behind HumphreyTalks, is among the experts who see NFTs as carrying greater risk than cryptocurrency, as it’s similar to a leveraged bet on crypto. “It’s essentially gambling,” Yang told NextAdvisor.
MINTING NFTs
Minting an NFT requires going through the process of converting a digital file into a crypto collectible, usually on the Ethereum blockchain. This NFT, once minted, is stored in a decentralized database or ledger.
After an NFT is created it is minted onto the blockchain. By minting an NFT, a file is turned into something that can be easily bought or sold through the blockchain. Once the NFT is minted, the creator has the option to decide the amount they want to be paid in royalties once the NFT is sold again. The standard payout is around 5-10% of the secondary sales price, but it can be changed.
Creating an NFT project and advertising it across social media platforms can be a way to make quick money, which can then be used to fund other business ventures, like starting a mobile mechanic business or investing in other assets.
There are a few important steps to minting an NFT. To mint one, you must have a crypto wallet that will allow you to pay to mint the NFT. There are many popular wallets including Metamask and Coinbase.
Once the wallet has been connected to an NFT marketplace like Axie Marketplace and OpenSea, the NFT can be created by uploading a digital file to use as the NFT. To mint it, you need a website link, the details of the project, and the specific blockchain the NFT is going to be minted on. After this is all finished, it’s time to pay the gas fees and mint the NFT.
After the NFT is minted, you can sell it on the marketplace, and the marketplace will calculate fees based on the cryptocurrency’s network. You can promote your project on social media platforms like Twitter and Discord after the minting process, but it’s up to you to do this.
BUYING NFTS
Although there is a lot of upside in minting NFTs, buying them is a much more common process. All you need to buy one is a marketplace and a wallet to pay for it.
While of course the market can fluctuate dramatically, as we’re seeing now, buying NFTs can have a lot of financial upside. If you are keen enough to get in early into some of the more successful projects, there is a huge amount of potential profit.
Although it can be hard to find these projects early, if you keep up to date with the industry and understand what makes a successful NFT launch it is possible to find these rarities.
Once you choose an NFT to purchase, you will need to use cryptocurrency to buy it. Since Ethereum is the default for NFT minting, you’ll need to purchase that cryptocurrency on an exchange like Coinbase or Crypto.com and then transfer it to whichever wallet you’re using to purchase the NFT from the marketplace.
Same as with minting an NFT, the wallet needs to be connected to the marketplace, and this can be easy if the Ethereum being used to buy the NFT is purchased from the same company as the wallet.
From there, depending on the sale type, you’ll need to either pay upfront or submit a bid if the sale is in an auction format.
STORING NFTS
Once you acquire an NFT through minting or buying, it will be stored in a wallet and you’ll be given a unique seed phrase to use as a key to access your NFT. There are two main options for storing NFTs: hot wallets and cold wallets.
A hot wallet is a web-based application that gives a third party the duty of protecting the keys to access the investor’s NFTs or other cryptocurrencies. These can be less secure as the holder is handing over the responsibility for their investments to a different company that may be vulnerable to hacks or other security problems. Although hot wallets are easier to access and view, take security into consideration as it is essential to any investment.
On the other hand, a cold wallet is a hardware-based wallet that allows investors to store their holdings in a physical device that is more secure. However, the problem with a cold wallet is that if the holder happens to lose their wallet there is no way to retrieve it as the NFT is stored in the device only and nowhere else.
It is important to do the proper research to choose which wallet is the best option for you.
WRAPPING UP
NFTs are a great way to gain exposure to the web3 space and build your investment portfolio. Both minting and buying NFTs is relatively simple. While there are pros and cons to each, if executed in the correct way they can yield huge profits for the investor.
Minting an NFT simply requires the file that is going to be minted and the cryptocurrency, usually Ethereum, that is necessary to pay for the gas fee. However, buying an NFT can be less risky if you get in early with a well established project. Each investor will have their own preferences.
All in all, it’s important to get some exposure to web3 as it will continue to be an important part of the financial system, and holding NFTs is a simple way to do this.
Just as with all investments, it’s important to weigh the risk and reward before investing and have the proper risk management. At the end of the day, it’s up to the investor to make their own decisions, whether they’re minting or buying an NFT.
