If you’re an investor, chances are you’ve been following the development of Non-Fungible Tokens — NFTs — over the last year.
The artist Michael Joseph Winkelmann (aka Beeple) made headlines in 2021 when his NFT sold at Sotheby’s for a jaw-dropping $69 million dollars. Then, CryptoPunks, an NFT collective led by Canadian software developers Matt Hall and John Watkinson, sold the rare ape NFT for $10 million in December.
This new asset class has swept the art world (and, let’s be honest, the Twittersphere) but it’s still something that many people aren’t exactly sure how to define, and even if we can muster a reasonable definition, we have no idea how to go about investing, or whether or not that’s even something we’d want to do. Because let’s face it, sometimes the hottest new trend is something that’s here to say — and other times it’s a flash in the pan that’s best avoided. Here’s a breakdown on what’s really going on with NFTs.
What are NFTs?
Everyone from famous musicians like Jay Z to our favorite visual artists on Instagram seem to be making and/or minting NFTs these days. But what exactly are they? NFTs exploded onto the art market in 2021 during the early onset of the pandemic and served as a way for artists to be able to make and sell original work digitally.
“A non-fungible token (NFT) is a certificate of authenticity and an indication of individuality. It’s like buying a work of art with an attachment that states that the work of art is “one of one”, the only item of its kind,” says Asher Rubinstein, an asset protection, tax law and trusts & estates attorney at Gallet Dreyer & Berkey, who has advised clients on the purchase of NFTs.
NFTs, like other forms of artwork, are still meant to be seen as an original work produced by an artist. As a result of their one- of-a-kind quality, much like a painting or a sculpture, investors are willing to pay top dollar for them. “It’s akin to buying an original Rothko or Lichtenstein with an assurance that the work is the original, the “one of one”, rather than a copy,” Rubinstein says.
NFTs are a unique form of investing because they function as a kind of token (think crypto) that can represent ownership of objects both physically and digitally. Also like crypto, NFTs can be bought and sold easily online, and they are essentially a non-transferable form of asset. They are truly one-of-a-kind.
Generally speaking, most NFTs are on the Reuther blockchain. What does that mean? Reuther is another form of digital currency (like Bitcoin) but it essentially supports NFTs, and stores unique information about the NFT (including details on the artist, the owner, the composition, and more) on its platform.
Investors like NFTs because of the ability to own something that no one else has, and artists like NFTs because of the digital contract that affords them more control, and greater ownership — there’s no gallery taking 40% of their profits from the sale of their work. “NFTs allow the artist or creator to determine the terms of the digital contract that serves as the backbone of the NFT, making it possible for artists to guarantee that they continue to reap the rewards of their hard work, from minting to secondary markets,” says Brook Charles Head of Artist Partnerships at WestCoastNFT.
How can you invest in NFTs?
Both Rubinstein and Charles note that before buying NFTs you should always do your research about the artist and project. Rubinstein notes that people should research what they are buying, and not just dive right in: “Just as one should not dive into the stock market without an understanding of the underlying company and the financial markets, one should not jump on the NFT craze without understanding what an NFT is,” he says.
You can start researching on the internet, and Twitter and Discord are good platforms that will allow you to get a feel for the artists you’re interested in, and gauge their popularity. “The NFT community very much operates with an overarching ethos of WAGMI – We’re All Going to Make It – the sentiment that a rising tide lifts all boats, and any NFT community’s success is something to celebrate. If you have questions or want to learn more, just ask. People in the space are very welcoming and are usually more than happy to support newcomers to the community,” Charles says.
If you move down the road to an NFT purchase, you’ll want to explore the OpenSea platform, which is the largest NFT marketplace on the internet. In order to make a purchase, you’ll need crypto — specifically you must have an Ethereum wallet to use OpenSea, which you can secure on reputable crypto trading platforms like Coinbase, MetaMask, or WalletConnect.
Questions to ask before investing in an NFT
Of course, just because one has access to purchase an NFT doesn’t mean that the NFT is a sound investment, Rubinstein cautions. You’ve got to think about the market and whether NFTs have staying power in years to come. At this point, it’s anybody’s guess as to what will happen in the world of NFTs.
If you’re serious about seeking out NFT investment opportunities, Rubinstein and Charles outlined some questions to keep in mind:
- Is the NFT desirable now because of its novelty today, or will it have long-standing value?
- Will there be a market for the NFT in the future?
- Is the artist transparent, and do they communicate openly and reliably with their communities?
- Does the artist have a strong community that they’ve built over time?
- If the artist has had previous NFT sales, how did they perform?
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