NFTs, or Non Fungible Tokens in English, are a new breed of crypto assets that have seen significant success in 2021. According to CoinMarketCap, the NFT market would represent the equivalent of more than $12 billion by mid-2022 and just over 2 million NFTs are believed to have been sold at the time of writing. The Crypto NFT market, which represents less than 1% of the entire cryptocurrency market, remains a volatile market with significant opportunities for profit or loss.
Although NFTs are primarily aimed at the art market, their application extends far beyond the artistic domain. Now more and more institutions, individuals and companies are using NFTs as part of their business.
Decoding on how NFT Crypto works and the best techniques to invest in cryptocurrencies.
NFT Crypto: How Does It Work?
An NFT can be considered as a single cryptocurrency that cannot be split, unlike classic cryptocurrencies such as Bitcoin, Ethereum, etc. In this way, NFTs are irreplaceable, as they are not interchangeable.
NFTs are often associated with a song, a video, artwork or even books… We can therefore describe an NFT as a digital file that is linked to a document of authenticity guaranteed by the Blockchain. An NFT can therefore be seen as a digital property contract.
Technically, the first registered NFT was created… in 2014! Although the term NFT was not used at the time, the technology was used by artist Kevin McCoy in collaboration with entrepreneur Anil Dash in his work “Quantum”, which depicts an animated colored octagon. The NFT was sold in 2021 for nearly $1.5 million at Sotheby’s.
An NFT is created by means of “minting”. It is said to have been minted in French. Minting makes it possible to create a cryptographic token associated with the link of a digital file on the Blockchain. The cryptographic token may contain various information related to the author of the NFT, etc.
Crypto NFTs are thus created based on pre-existing Blockchains. The most popular is the Ethereum Blockchain, but others can also be used, such as Solana or Binance. Once the NFT is created or minted, it can be bought or sold on exchanges.
Where to buy NFT crypto?
The most popular marketplaces for buying NFTs are OpenSea, Rarible, SuperRare, Nifty Gateway, and Binance NFT.
While some specialize in certain types of Crypto NFTs like SuperRare in the digital art market, others are more general like OpenSea and Rarible.
It is thus possible to acquire NFTs on these trading platforms through their applications or their websites. To do this, you must first connect your crypto wallet (which is held with financial intermediaries such as Coinhouse) to the platform so that you can then cash out or checkout your NFT Crypto trades.
However, there are transaction fees that vary depending on the Blockchain on which the NFT is created, the cryptocurrency you pay for your NFT Crypto with, or the exchange platform you use. In some cases, the creator of a Crypto NFT may also decide to charge a fee for each resale, which is shared between the creator and the platform.
It is also possible to create your own NFTs directly on some popular NFT Crypto marketplaces.
Buying Crypto NFTs: With Which Cryptocurrency?
To date, the most popular Blockchain for creating and exchanging NFTs remains the Ethereum Blockchain. Most NFT Crypto payments are made in Ethereum (ETH).
However, transactions can also be made in, for example, Binance USD (Binance’s stablecoin), in BNB (Binance Coin, Binance’s crypto currency) or in SOL (Solana).
So, the purchase of an NFT on an exchange platform usually requires holding this cryptocurrency in its digital wallet.
Also, the fact that most NFT Crypto purchases are made in cryptocurrencies like Ethereum adds to the price volatility of this market.
Ethereum, which was worth just over $4,000 in December 2021, is worth $1,700 at the time of writing this article (June 2022): a 60% loss in 6 months!
It is therefore imperative for the NFT enthusiast to consider the variation in the price of the cryptocurrencies in which the Crypto NFTs are traded.
For example, the purchase of an NFT in December 2021 worth 0.5 ETH (approximately €2,000), and the value of which would have doubled to 1 ETH in June 2022 (€1,700), would increase the investment expressed in euros by even 15 % (-€300) despite the increase in the price of the NFT.
This exchange rate phenomenon is therefore important to consider when buying NFT Crypto. Indeed, an upward or downward movement of the cryptocurrency used for the purchase of NFTs can significantly magnify losses or gains expressed in fiat currency.
To significantly reduce the exchange rate risk, you can use stablecoins in your NFT Crypto purchases. For example, the Binance NFT platform allows you to buy NFTs with USD stablecoins.
What are the differences between NFT and cryptocurrency?
As we have explained, NFTs can be considered as special tokens. In a simplified way, we can assume that each NFT is a unique token that is not replaceable and that guarantees the authenticity and moral integrity of the work it is associated with. Conversely, cryptocurrencies, such as Ethereum or Bitcoin, are divisible into an infinite number of decimal places.
In other words, traditional cryptocurrencies are fungible (divisible), while an NFT is not.
The shareable nature of traditional crypto currencies theoretically allows an infinite number of users to hold these cryptos. In the case of NFTs, the uniqueness does not allow a large number of people to own the same token, which explains the fundamental property of NFTs: “scarcity”.
Finally, NFTs and cryptocurrencies differ in their usage.
NFTs are a means of guaranteeing the authenticity of a document, photo, work, etc. Therefore, NFTs are associated with a work or a more or less concrete object and have a visual and unique identity in many fields (artistic, literary or sometimes even scientific with NFTs of images taken by microscopes, etc.).
Finally, the two categories are distinguished by their democratization. NFTs represent only 1% of the total cryptocurrency market and require the prior use of cryptocurrencies to be created and traded.
Why Invest in Crypto NFTs?
Obviously, one of the main motivations for NFT Crypto investors remains the promise of potentially big profits through speculation.
However, the first major market correction in 2022 seems to allow for a restructuring of the market and limit the often excessive speculation to some extent.
To date, the two best-known NFT collections are the CryptoPunks and Bored Ape Yacht Club collections.
The Bored Ape Yacht Club collection contains 10,000 NFTs depicting monkeys. The average historical value of a Bored Ape NFT is estimated at 22.5 ETH for an estimated capitalization of over $900 million. On the other hand, the CryptoPunks collection, which consists of 10,000 units representing character profiles, had an average price of 45 ETH in mid-2022.
Despite this considerable speculation, many investors may be interested in NFTs for purely artistic reasons by acting as collectors.
In addition, a number of rare projects have recently been developed to, for example, link NFTs and works of art through a museum. This is the case with the Private Museum project, which offers a range of artworks by various artists in the form of NFT and accessible in the Metaverse. NFTs can also have a more disinterested dimension and have a purpose close to the traditional art market.
Investing in Crypto NFTs is not safe
However, NFTs are not without risks!
The main risk is that of partial or complete loss of your investments. The NFT market is indeed a highly volatile market with risks of large sudden variations in the price of NFTs and the price of the cryptocurrencies used to exchange them. In addition, the NFT market has experienced a significant slowdown since early 2022.
Another major risk is the presence of fakes or imitations. The risk of copyright theft remains high when creating NFTs, and many “creators” can impersonate famous artists. For NFTs backed by real works, there may be a decor relationship between the price of the real work and that of the NFT it represents.
Finally, Crypto NFTs can be linked to scams and price manipulation. Indeed, some instances of “wash trading” on NFT Crypto have been identified. In this situation, the creator of the NFT artificially inflates the price of the NFT by sequentially reselling its NFT between its own accounts, prompting other agents to buy the NFT at a price that is not its market price.
Image source: Freepik
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