A Complete Guide to NFTs

It might be impossible to ever guarantee a return on any investment in the art world. NFTs are certainly no exception. Most of it seems destined to be worthless while some of it is destined to be worth a fortune.

However, if you pick something you know and love there’s a chance you’re not alone and that others may value it as well. Maybe you could impress some of them or sell your NFT at a profit. You might never buy into obscure pixel art because you know nothing about it, but you just might get into digital comic books or sports collectibles – because you understand them.

The History of NFTs

The first NFTs were developed in the early 2010s using the Bitcoin  blockchain. Colored Coins were specific Bitcoins that could be identified as unique through Bitcoin. They weren’t without flaws but, it sparked more interest and development in non-financial uses of the blockchain.

In 2014, another offshoot of this blockchain created Counterparty which hosted several collectible trading cards, including Spells of Genesis and later, meme trading cards called Rare Pepes. The Rare Pepes later moved onto the Ethereum blockchain. While all of these projects stored value as early NFTs, they remain relatively unknown and less popular than subsequent  projects.

Larva Labs and Cryptopunks

Larva Labs emerged as one of the most important innovators in the NFT space in 2017. John Watkinson and Matt Hill developed 10,000 unique pixelated avatars with unique combinations of features, called Cryptopunks. These features conferred rarity amongst its holders. These NFTs skyrocketed in value within a few years – if you want to buy a common Cryptopunk it will cost you more than $150 000.

This inspired countless popular projects also featuring 10 000 unique avatars with different traits – notably the Bored Ape Yacht Club, as well as several derivatives. Their most recent project, Meebits, created 20 000 unique 3-D avatars which are also highly coveted. Their other innovations in the space include the first on-chain generative art pieces.

Opinion:
Larva Labs’ projects, they are likely to be worth it buying into early. They hold historical value for creating the first on-chain avatars, the first on-chain generative art and the first on-chain avatars functional across decentralized video games.

Use-Cases of NFTs

Generative Art and Collectibles

This is one of the most popular use cases for NFTs. Artists like Beeple sell unique digital pieces to buyers online. Think of the NFT as a storage of value. It’s not silly, after all, people invest money into art for the same reason. Ethereum might still be volatile but the individual NFT will remain stable, and if it is a quality piece – its value may also appreciate.

Many blockchains also allow for generative art to be coded within the blockchain. Each time a user “buys” a piece of art, a random string of numbers and letters is generated. This runs through computer coding, generating tones, sounds, interactive art, 3-D planets, and just about anything else. ArtBlocks is the leading platform for purchasing these pieces, though other artists sell NFTs directly from their websites, like DEAFBEEF.

Other collectibles are a lot more common but allow for use across different games on platforms like Decentraland. While some of these NFTs will be highly coveted, many in-game items may not end up with high returns on your investment. However, virtual parcels of land in these games are highly valuable and continue to appreciate in valuation. For example, owners will be able to “lease” land out to developers and other gamers.

Investment opinion: While there is the potential for ridiculously high returns, many collectors choose to hold NFTs for sentimental value. Usually, you can search for an artist’s previous work to get a sense of the value of their projects. As for in-game collectible items, virtual land remains a highly valuable commodity.

Fantasy Sports and Trading Cards

One of the NFT projects with the highest market cap is NBA TopShot. Here, sports fans can buy short reels of basketball highlights. Other innovations in this space will allow users to use their highlights in games and fantasy sports.

Investment opinion: With the immense growth and popularization of these projects, it is becoming more of a vehicle for fandom than a tool for the average investor. If you are looking for a 10 – 100X return, this might not be the best place to invest. If you are a big NBA, soccer, or baseball fan, it might be worthwhile.

Fandom and Perks

Other NFTs bring value as a ticket into a particular “fandom” or community with several other perks. Gary Vaynerchuk released VeeFriends, NFTs that give users value through access to exclusive conferences, events, and even early access to other new NFT projects.

Throughout ownership, these NFTs bring a lot of value to the owner and are thus highly coveted. Snagging one off of a secondary marketplace will cost you more than $20 000.

Basketball player LaMelo Ball released his own NFTs, with four different rarity classes. Ownership of an NFT confers you with gifts, entry into raffles, and other benefits which depend on Ball’s in-game performance. Many other avatar-based projects like Bored Ape Yacht Club also come with perks including access to a unique community, free NFTs gifted to owners, as well as exclusive games.

Investment opinion: It’s hard to tell which NFTs will increase in value and which won’t. This can depend on the presence of a strong dev team, a large community, and a quality product. Staying on top of the latest NFT releases might help you find something that turns out to be worth a fortune. The marketplace moves quickly so you may need to be ready to act on impulse. (Ordinarily not the best approach to spending money but popular and anticipated NFTs tend to sell out immediately)

Opportunities to Earn Dividends

Other NFTs will confer their owners with dividends related to the project’s overall profits. For example, the NFT platform and developer MasterBrews sold art that also functioned as tokens. Each art piece is assigned a token value, and the owner will be able to claim a proportion of the profits generated by the company at the end of each month.

Investment value: At this point, it isn’t clear how valuable these projects will become. The best advice is to purchase these dividend NFTs only if you like their team, their roadmap, and their product. And you can purchase some of them in Metamask, and you can’t on Coinbase. Even Christie’s auction house has gotten into the game.

Play-to-Earn

The recent success of the NFT game Axie Infinity shows the potential of a play-to-earn ecosystem. Briefly, a player acquires multiple Axies which are creatures that they can battle with  or breed. Several built-in ways allow players to earn money as they play the game. Players living in the Philippines can make a good monthly income by playing the game. It is now by far, the largest source of profit among Defi applications.

Investment opinion: If you have the time to dedicate to this game, you can make a side revenue by participating in the in-game economic ecosystem. Some rarer items will of course be worth a lot more on secondary marketplaces. However, if you’re not a gamer and don’t have lots of time, it might not be the right investment for you.

Investment Opportunities

Minting During an Initial Launch

For any great project, the best way to get a good return on your investment is to “mint” an NFT during the launch. It is like minting a coin or a dollar – it is made and assigned to you on the blockchain once you pay the fee.

If you are using an Ethereum-based project, you will also need to pay for gas – to help your transaction go through. Popular projects on websites like ArtBlocks often have higher prices for gas, meaning an extra $400 to $600 on top of the fee you pay to buy the NFT. Make sure you’re aware that you need to load up enough Ethereum to pay for this gas. Note that the gas fee is non-refundable, even if you can’t successfully mint the NFT. NFT markets like OpenSea, Rarible, Mintable, and Nifty Gateway provide you the opportunity to bid or buy NFTs if you missed the initial sale.

There are a few things to watch out for with new NFTs. A high-quality project should have most of the following:

1. A website with a roadmap for future development, beyond just an avatar
2. Founders that are active on social media (usually they’re pseudonymous)
3. The project has some original aspects to it
4. A large, active community on Discord with people involved in the project regularly posting updates and answering questions

Secondary Marketplaces

If you missed out on the initial launch for an NFT, you may need to buy it from a secondary marketplace. With some projects, you can even buy up certain NFTs for lower than the minting price. Some people are very impatient and will want to liquidate some of their new asset class immediately on secondary markets like OpenSea.

Tokens

Investing in the tokens that power NFT collections might be the most straightforward way to invest in them. Buying the Rarible (RARI) token, for example, gives you a say in the future development of the website. The token is also used to reward active users on the platform. Other blockchains also issue tokens that help maintain and run their NFT projects include WAX, Enjin, and Flow. Their value will reflect the performance of NFTs and products on their respective platforms.

Users can also invest in tokens that provide membership in a decentralized autonomous organization (DAO). These DAOs then vote and buy up different NFTs. The value of these NFTs then drives the value of the DAO’s token. Membership grants a user voting and governance rights within the organization. A well-organized DAO like Flamingo may require a high buy-in but also comes with high rewards.

Finally, the best option for retail users who don’t want to break the bank involves buying up fractions of an NFT. Rather than paying $50M for a cryptopunk, you could instead buy a small share in it. The value of each share will depend on the total value of the NFT asset.

Key Takeaways

This article just skims the surface of the weird and wonderful world of NFTs. These are provably unique crypto assets that can have an immense variety of different functionalities. Briefly, we’ve outlined the investment opportunities and use cases provided by NFTs.

The first NFTs, Rare Pepes, and Cryptopunks will likely continue to appreciate in value. Any new NFTs that are developed with a unique use case may  also be worth buying as the price will appreciate if they gain popularity. If you can afford to get your hands on these, they might be the most solid nft investments.

Other use cases include:

• Generative art (3-D planets, art pieces, music) and in-game collectibles
  • These pieces are beautiful and also make great investments
  • Since they are scarce and held for sentimental value, their pricing often appreciate
  • In game-collectibles can be used across different video games but don’t appreciate as well
• Fantasy sports and virtual trading cards
  • Difficult to generate a very high return on investment unless you are an early adopter
• Fandom and perks
  • Often, owning these NFTs will provide more value than the cost of minting
  • Good resale value
• NFTs that also act as dividend tokens
  • Unclear how well these investments will pan out
• Play-to-Earn games allow you to earn some side income
  • Not the investment for you if you aren’t interested in exploring the game and its economic ecosystem

Beyond that, investing in fractionalized NFTs lets you own a small share of a very valuable token. Remember, the other most important rule of investing in NFTs is to make sure the project, its roadmap, and its developers are legitimate. Oh, and that you actually like the NFTs.