How to buy NFTs – Forbes Advisor UK
An artwork called ‘The Merge’ by artist Pak sold for $92 million (£75) million in 2021. While a sale of this magnitude is not unheard of in the art world, The Merge set a different kind of record. Why? Well, The Merge is not a physical painting or a sculpture, but a non-fungible token (NFT).
Others have also profited from the growing popularity of NFTs. “Clock” was created by Wikileaks founder Julian Assange (and Pak) as a digital counter for the days Assange spent in Belmarsh prison awaiting extradition to the United States. The NFT raised over £40 million at auction last year, with the funds going towards Assange’s legal fees.
And rock band Kings of Leon made musical history as the first band to release an album as an NFT, with ‘When You See Yourself’ debuting in 2021. Fans could buy the token for $50 (£41), with sales open for two weeks , after which the NFT became a tradable collector’s item.
While these eye-popping sums have attracted the attention of investors looking for a return on their money, navigating the available options can be difficult. To help with this, let’s take a closer look at what investors need to know about investing in NFTs.
Remember: investing in any cryptocurrency is speculative and all your capital is at risk. You may lose some or all of your money. Cryptocurrency trading in the UK is unregulated and you will not be entitled to compensation if something goes wrong.
What is an NFT?
An NFT is a unique digital resource that cannot be copied or replicated, each with a unique identification code and metadata.
An NFT is the opposite of a “fungible” asset that can be easily exchanged for an identical asset. Money is an example of a fungible asset. If a person lends someone £50, it doesn’t matter if they are repaid with a £50 note or two £20 notes and a £10 note as they are the same. Cryptocurrency is also a fungible resource as one Bitcoin can be exchanged for another Bitcoin.
Early examples of NFTs centered around digital art and collectibles, but now encompass a wide range of other assets. Some of the most popular NFTs are based on photography, trading cards, domain names, music and virtual word asset ownership.
As with other assets, NFTs can be bought and sold online, creating the opportunity for investors to make money if the NFT rises in value.
How is an NFT made?
NFTs are created through a process known as “minting” where a representation of the digital file is created and stored on a blockchain such as Ethereum or Solana. This produces a record of ownership, prevents file duplication and tracks when the asset is bought and sold.
Most users choose an NFT marketplace to create their NFTs, with the option of a centralized or decentralized marketplace as follows:
Centralized marketplaces
These are run by a single entity that controls the marketplace and users. Centralized marketplaces can be more user-friendly and offer a secure platform for transactions. However, they have the power to restrict access to certain NFTs and users and usually charge higher transaction fees.
Decentralized marketplaces
These run on blockchain technology, which means there is no central entity controlling the platform. This can give users more freedom and decentralized marketplaces often require lower transaction fees. However, transactions can be slower and the lack of regulation can lead to copyright infringement or fraudulent use of NFTs.
Users must also pay a “gas” or transaction fee paid to validators for their services to keep the blockchain running. This is usually paid upon “issuing” the NFT, along with the subsequent purchase or sale of the asset.
Gas charges vary by network and also fluctuate in real time depending on demand. Ethereum is the largest network for NFTs, but charges a relatively high gas fee, while Solana claims to charge lower gas fees. Flow and Cardano also offer NFT transactions.
How can investors buy NFTs?
NFTs can be purchased privately, from traditional auction houses or via online marketplaces.
An NFT marketplace is a digital platform for buying and selling NFTs. This allows users to store and display NFTs, as well as sell them to other users in exchange for money or cryptocurrency.
Each marketplace has its own features, in terms of available NFTs, fees for transactions and payment options. We’ve made our selection of the best NFT marketplaces, which include the platforms below:
Open sea: one of the largest marketplaces offering art, music, photography, trading cards and virtual worlds. The core currencies are Ethereum, Solana and USDC, but other cryptos are also offered, but investors cannot pay in fiat currencies such as sterling or US dollars.
Rare: another of the major marketplaces that allows users to trade art, collectibles, video game assets, and NFTs via Ethereum, Flow, and Tezos.
NBA Top Shots: allows users to purchase video clips and art of some of the great moments in basketball history. The site accepts credit and debit cards, as well as Bitcoin, Ethereum, Bitcoin Cash, DAI and USDC.
Binance: one of the largest cryptocurrency exchanges to enter the NFT market in 2021. Offers artwork, game items and collectibles. It accepts credit and debit cards, as well as a selection of 70 cryptos.
Nifty Gateway: known for hosting expensive and exclusive NFT sales from celebrities and top artists, including the aforementioned “The Merge”. It accepts credit and debit cards, as well as Ethereum.
SuperRare: an advanced NFT art market that accepts Ethereum as a form of payment.
Platforms can accept payments in fiat currencies (such as sterling) or cryptocurrency, but investors must also open a crypto wallet. The key to the NFT will be stored in the crypto wallet, which can be held either online or offline.
If the NFT is a work of art, investors can print physical copies of it or store the digital image, but the actual NFT owned is just the ID token. Investors do not own the rights to the image or the original image itself unless these ownership rights are specified in the contract.
How are NFTs valued?
As with most assets, the value of an NFT is determined by supply, and more importantly, demand.
The most unique NFTs can command fantastic prices. The second highest value on record was achieved by the artwork ‘Everydays: the First 5000 Days’ which was sold by Christie’s auction house for $69 (£57) million in 2021.
NFT was a collage of 5,000 works by Mike Winkelmann, the digital artist known as Beeple. Not a bad return given Winkelmann hadn’t sold a piece of his artwork for more than $100 (£82) until six months earlier.
And in the sporting sphere, an NFT of basketball legend LeBron James dunking the ball in an NBA Top Shot moment was bought for $388,000 (£318,000) in 2021.
However, not all NFTs have a high price tag. According to data from NFT tracking firm NonFungible, the average selling price of an NFT is currently $3,000 (£2,459) and some NFTs are valued at less than a dollar.
There has also been a marked decline in the NFT market over the past year as the “crypto winter” subsided. Research firm NonFungible reported an almost 80% drop in the global volume of NFTs traded between Q2 and Q3 of 2022. It also pointed to an 84% drop in NFT resale profits.
As a result, investors should conduct thorough research before deciding to buy an NFT and be prepared to lose some, or all, of their money if prices fall.
