Interested in getting into NFT investing?
You and plenty of other people, it would seem!
If you’re just about ready to add NFTs to your investment portfolio but want to make sure you don’t make any avoidable mistakes as you dive in, This top-to-bottom guide will walk you through:
- What NFTs are and how they work
- The benefits and downsides of adding NFTs to your portfolio
- The point of getting involved with NFT investing
- How to tell if NFT investing is right for you
- Where to start when it comes to NFT investing
- The best tool for managing a portfolio full of modern digital assets, including NFTs
What Are Non-Fungible Tokens (NFTs)?
Non-fungible tokens, aka “NFTs,” are unique digital elements that represent digital properties.
Let’s break that down just a bit further.
Since fungible means interchangeable, non-fungible things are not able to be interchanged.
Gold for example is fungible. Two pieces of gold that are the same weight have the same value and can be interchanged with each other without consequence. Using this example, you can see how plenty of other items, such as cash and cryptocurrencies, are also fungible. One U.S. dollar will always be exchangeable with another U.S. dollar, and so on.
On the other hand are NFTs, which are completely singular and unique tokens that cannot be interchanged for one another.
Why is this fact so important?
Because NFTs make it possible to assign ownership to and sell digital elements.
These elements can include digital art, videos and GIFs, audio, avatars and “skins” (think video game characters), and really any kind of digital property that can be represented by a digital token.
As of this writing, the most popular type of NFT is digital artwork. One that’s really made waves recently is Beeple’s Everydays: The First 5000 Days. The collage sold for almost $70 million in 2021.
To get even more familiar with NFTs, check out the brief history of NFTs that we put together here. They started earlier than you might think!
How Do NFTs Work?
As mentioned, every NFT that’s created (called “minting” in NFT terms) is represented by a digital token that has been programmed with a unique signature.
Today, these tokens are most often built on Ethereum, a decentralized blockchain network. The Ethereum blockchain, and all blockchains for that matter, is a peer-to-peer database that records transactions, making it clear who owns a digital asset — no need for traditional oversight from government agencies or financial institutions.
In addition to the majority of NFTs in existence as of this writing, Ethereum also hosts other technologies, such as applications, payment systems, a cryptocurrency (Ether or ETH), and beyond.
NFTs are most often bought and sold via marketplaces that help assign their value and provide a payment and hosting platform. We’ll show you how to choose and use one of these very marketplace platforms later in this article.
However, some of the most pricey NFTs are represented by large, traditional auction houses. In fact, the Beeple piece we talked about earlier was sold by Christie's.
NFTs vs. Cryptocurrency
It wouldn’t be wrong to think of NFTs as a spinoff, of sorts, of cryptocurrency.
After all, NFTs wouldn’t exist if it wasn’t for blockchain technology, which was originally created as a way to host cryptocurrency transactions.
But that’s where the similarities between the two digital asset classes end.
Cryptocurrency is, by nature, fungible. And since it’s a currency, its value is specifically economic. Crypto can be exchanged as payment for goods and services.
But NFTs are of course non-fungible. Plus, their value — like the value of any piece of art — depends on collectability, desirability, and other factors that aren’t necessarily set by the open market. NFTs also can’t necessarily be used as a payment source.
What’s the Point of Investing in NFTs?
Investing in NFTs isn’t all that different from investing in any kind of asset such as stocks, commodities, and beyond. It just feels different because it’s a new type of asset, it can be complex to understand the inner workings of, and it’s often pretty volatile.
For most, an NFT investment is speculative. The hope is that its value will appreciate in the future and the asset will be able to be sold for a profit.
However, an interesting twist when it comes to NFTs is that they’re also seen as collectibles, like art or wine or baseball cards. So while generating return is probably the main goal for most, there is also some value in the collectibility and enjoyment for many.
Is NFT Investing a Good or Bad Idea?
There are upsides and, of course, downsides to adding NFTs to your investment portfolio.
In this section, we’ll explore the most common factors on both sides so you can get the full picture when determining what’s best for you.
Benefits of NFT Investing
Let’s talk about the main reasons why modern investors choose to pursue NFTs.
Diversifying Your Portfolio
One of the leading benefits of getting into NFTs is that they offer a creative avenue by which to diversify your portfolio.
Diversifying just means branching out and adding new types of assets to your portfolio. So if you’re heavily into stocks, adding some commodities and digital assets (hello, NFTs!) is peak diversification.
The idea behind portfolio diversification is to invest in assets with little correlation. This makes it so that even when some big swing happens — such as a stock market downturn — it doesn’t totally obliterate your returns and permanently impact your capital.
It’s even been shown that portfolios where healthy diversification has been achieved are at less risk, experience lower losses, and generate higher returns.
There are plenty more details when it comes to portfolio diversification. Learn more from our article: A Modern Guide to Portfolio Diversification.
The Joy of Collecting
NFTs are unique and often represent artistic endeavors, so of course there’s an inherent collectibility factor!
Collecting NFTs can be just as satisfying as collecting physical paintings or antiques. This is even more true now that collector networks and selling platforms are popping up as NFTs gain in popularity.
And naturally, some of the joy of collecting also comes from the fact that these valuables can be traded and sold to other collectors, so you can free up capital to go after your next NFT purchase.
Supporting Artists
Like collecting art? Then you probably also like supporting the artists who make it!
Purchasing NFTs from artists is a surefire way to make sure they receive most if not all of your investment. This unique sales approach gives artists, especially smaller ones, a creative way to support themselves and possibly even break into the industry.
Drawbacks of NFT Investing
To make sure you have all the information you need to decide whether or not NFTs are a good investment, it’s time to chat about some of the downsides of entering the NFT world.
High Volatility
Remember that crazy-expensive Beeple NFT we’ve mentioned a few times now?
Well the person who purchased that (Vignesh Sundaresan, aka MetaKovan) actually said that investing in NFTs is “even crazier than investing in crypto” and warned that there is plenty of risk involved for those hoping to make a buck off their NFT investments.
Why? Because they’re a volatile asset.
As new NFTs flood the market, the value of those already on the market fluctuate up and down rapidly. And, right now, there isn’t really a singular voice deciding the value of each new NFT.
In the physical art world, pricing depends on things like the size of the work, its sales and exhibition history, and of course the reputation of the artist. Galleries and auction houses are trusted resources when it comes to using this information to set art prices.
As of now, there isn’t a trusted, repeatable system in place like this for NFTs. Mostly, value is based on demand — and that’s a fickle mistress.
Lack of Liquidity
Unlike gold, which you can offload pretty much any time at a good price to a willing buyer, you’re not guaranteed to earn back what you paid — or even find a buyer when it comes to your NFT.
Because of their volatility, when you go to sell an NFT you very well might not get back the amount you paid for it. This may cause you to hold out for a higher bidder, making it a less liquid asset.
This is probably why we see many NFT investors treating their unique tokens as collectibles and practicing more of a buy-and-hold strategy. We can’t say we think that’s a bad move right now!
Negative Environmental Impact
There’s one last common characteristic that many mention as a downside when it comes to NFT investing — the environmental impact.
In 2022, Ethereum aims to move to a more environmentally-friendly proof of stake model that uses less energy. However, the current proof-of-work model still expends an extremely large amount of energy.
How to Get Started with NFT Investing
If it seems like investing in NFTs is a good route for you, the great news is that it’s actually not all that difficult to get started when you have the steps laid out in front of you.
Allow us to walk you through each of those steps now.
1. Research NFT Options
First and foremost, a reminder that investing doesn’t have to be a drag. you get to choose an NFT that you’re actually interested in!
Of course, we do recommend that you don’t just pick one totally out of the blue. Spend a little time making sure the NFT you’re interested in has some upside. Search Twitter to see which NFTs are trending, and use a platform like Rarity.tools or NFTcatcher.io to stay up to date on the latest releases in the NFT space. How many NFTs are being sold and for how much will give you an idea of the scarcity, and therefore the collectibility and upside, of the NFTs in a collection.
You also want to make sure the team behind your fave NFTs are consistently helping drive up the value of the asset. See if the NFT has a Discord or any other social media networks associated with it, so you can see what the builders as well as their community have to say about the asset.
2. Select Your NFT Marketplace
Sometimes the NFT you want will determine the marketplace you use to make your investment. Other times, your NFT investment will be determined by what's available in your favorite marketplace.
So let’s talk about marketplaces in depth, as they’ll be an important element of your investing process.
Marketplaces are where NFTs get minted, boght, sold, and stored. Marketplaces are somewhat like Amazon in that they offer a single platform for multiple sellers.
There are many of these platforms out there, and we suggest you visit your top choices before choosing the one that feels right for you.
Some of the more popular NFT marketplace as of this writing include:
- OpenSea is a large NFT marketplace, which sells NFTs built on the Polygon blockchain
- Rarible enables users to create, buy, and sell NFTs on a variety of different blockchains
- Mintable supports purchase made in USD, reducing the barrier to entry for brand new NFT investors
3. Connect and Fund a Crypto Wallet
Now to use most of these NFT markets, you’re going to have to connect a digital wallet that holds the cryptocurrency you need to purchase an NFT. We’re talking about your crypto wallet.
Use a platform like Coinbase, MetaMask, or even PayPal and Robinhood to open a wallet and fill it with cryptocurrency like Bitcoin, Ethereum, or whatever specific coin your NFT marketplace requires. Some marketplaces will even have their own custom coin type, so make sure you're aware of that before loading up your wallet.
4. Purchase Your First NFT!
Well that’s kinda it, you’re all set up to make an NFT purchase out in the real world!
Depending on which marketplace you go with, your favorite NFT may be purchased in an auction or for a fixed price.
The next step from here leads us right into our final section of this guide to NFT investing — managing your NFT collection alongside the rest of your diverse portfolio.
How to Manage a Portfolio Full of Modern Digital Assets
Just like it is with any kind of investment, the key to success with NFTs is tracking not only their performance but analyzing their impact on the totality of your portfolio.
While this isn’t a new fact, it’s certainly one that’s getting harder to swallow as portfolios get more diverse by necessity.
So we built a tool to help you, and ourselves as DIY investors, manage a portfolio brimming with diverse investments.
Meet Kubera.
Kubera is the only personal balance sheet software that’s capable of providing a complete view of the debts and assets that make up your portfolio. Track your holdings in both traditional stock and crypto exchanges, antiques, real estate, domains, DeFi and crypto assets, bank and credit card accounts, vehicles, and pretty much anything else you can own. (Check out some of the global financial institutions we work with here.)
For those assets that have accounts attached to them (like your bank accounts and NFT marketplace profiles), all you have to do is add your account credentials to Kubera one time. From there on out, our dashboard will keep their information up to date in real time.
Don’t worry, it’s just as easy to track those types of investments without accounts (think antiques, cash, etc.)! For these, just use Kubera’s modern yet spreadsheet-like interface to enter their details and update their value every once in a while.
Got stocks or crypto accounts that aren’t updating automatically for whatever reason? Our tickers will take care of those. And thanks to some smart integrations with key valuation platforms (like Zillow and EstiBot), you can be sure the value of these key assets is always accurate.
With beautiful charts and our new granular recap screen, there is nothing stopping diverse investors like yourself from understanding individual asset as well as entire portfolio performance. Kubera ensures you have all the information you need to make fast, informed decision that are healthy for your wealth.
While that’s the gist of the most awesome features Kubera has to offer, we want to zoom in on one more capability that’s especially important for new NFT investors.
Kubera can automatically calculate the internal rate of return (IRR) — basically a more detailed version of ROI — for NFT assets, in your preferred currency!
Most NFTs today are purchased using cryptocurrency, which makes it hard to understand their value and return rate in the Fiat currency you use everyday. This also makes them hard to compare to your other assets and fully understand their impact on your portfolio. That’s why we made sure our IRR calculator is able to show results in the currency of your choosing.
To take advantage of this feature, just make sure the NFT’s details (price, current value, and cash flow) are all up to date. Kubera will add holding time to show you an accurate IRR for the duration that the asset has been tracked in Kubera.
In addition, Kubera even displays how some top indices and crptocurries are performing at the time, giving you a benchmark against which to measure your own asset performance.
To learn more about measuring IRR with Kubera, read our help center article on the topic.
The ins and outs of NFT investing can be a lot to learn as well as a lot to manage — if you don’t have the right steps and tech in place, that is.
But now that you know the steps, all that's left is to invest in the best tech for diverse investors. Sign up for your affordable Kubera subscription today.
Or, for those who work with a financial advisor or wealth manager — introduce them to Kubera! Our white-label solution will empower them to create the modern, easy-to-use platform they need to win over and successfully work with more modern investors like yourself.
