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What is an NFT and how can I profit from one?

·Finance reporter
·6-min read
Musical artist Grimes and Tesla founder Elon Musk pose for a photo. (Source: AP)
Canadian Singer Grimes (seen here with ex-partner Elon Musk) recently sold some of her digital art for more than US$6 million. (Source: AP)

"NFT" (non-fungible token) has been on everyone's lips lately, and since the pandemic began, NFTs have exploded in popularity. 

People have been paying hundreds of thousands of dollars for an NFT. On 19 February this year, an animated GIF of Nyan Cat (a 2011 meme of a flying pop-tart cat) sold for more than US$500,000.

A few weeks later, Canadian musician Grimes sold some of her digital art for more than US$6 million.

And it's not just art that is tokenized and sold. Twitter founder Jack Dorsey has promoted an NFT of the first tweet, with bids hitting $2.5 million.

The rise of NFTs

NFTs are considered by many the new frontier of 'revenue generation', especially in the art and music industries.

"Non-fungible" means there is no equivalent for which the item can be exchanged. When it comes to NFTs, blockchain technology is used to establish the uniqueness and possession of a piece of digital art, which is then sold via a platform. 

Each sale of this art is recorded on the blockchain, creating a digital origin that cannot be changed.

NFTs became very popular in the early months of 2021 due to many high-profile sales, including an NBA Top Shot video clip of LeBron James that sold for US$208,000, and a piece by digital artist Beeple that sold for a whopping $69.3 million

Los Angeles Lakers' LeBron James during an NBA basketball game. (Source: AP)
A video clip of Los Angeles Lakers' LeBron James sold for US$208,000. (Source: AP)

There are a number of different ways you can purchase NFTs, from dedicated marketplaces to popular exchanges like CoinSpot and Binance.

Where do I buy an NFT?

OpenSea is the original peer-to-peer NFT marketplace and, by far, the largest and most trustworthy platform out there. 

According to analytics platform DappRadar, OpenSea had a total buying volume of over $6.5 billion in September. 

OpenSea offers NFTs for a whole range of things, from game items and collectibles, to artwork, music, GIFs and more.

How to pick an NFT that will increase in value

Dean Karakitsos, founder and CEO of Bitquery, talks us through NFTs and the process of acquiring one:

“NFT Marketplaces are a major breakthrough that allows everyone with no technical background to create or buy, mint and sell NFTs," Karakitsos said.

"By creating and minting an NFT on a marketplace, you won't need to know how to code a smart contract or need any technical knowledge at all. Back in the early days of NFTs, the only way to mint an NFT was by writing a smart contract. 

"Along with your Metamask wallet, you can try OpenSea, Nifty Gateway, Binance NFT and, soon, Coinbase NFT, to name a few”.

Why you need Ethereum to purchase an NFT

Karakitsos goes on to explain why you need Ethereum to buy an NFT:

“Assuming you have an account on OpenSea listing NFTs for sale, this will require some gas fees, which means you need some Ethereum in your Metamask wallet to cover the fees," he said.

"There are 3 ways that you can sell your NFT on OpenSea:

  1. Leave your NFT open for offers

  2. Set a price you think is appropriate 

  3. Start an auction and wait

“In order to acquire value, you can build a community around it, marketing your NFT, use influencers and any other method that you can use to acquire value. That’s how it all works”.

How does NFT increase in value?

Like every asset class, its value increases with the old law of supply and demand. 

As more companies, big brands and celebrities launch digital versions of their products, supply and demand for these crypto assets will increase their prices in the short (and long) term. 

How to know which NFT to buy

But how can you pick an NFT that's worthwhile and that will increase in value? 

There are several factors that drive an NFTs value, but it is rather difficult to determine the precise value of an NFT. This is because they're relatively new.

The three main factors you have to consider are rarity, utility and tangibility.

Rarity means how “hard to get” a specific NFT is. Some good examples of rarity would be a first-of-its-kind artwork from a famous creator such as the Mona Lisa or a limited-edition Beatles album.

NFTs are special because of their inherent value. This is where the owner of the NFT holds the blockchain as proof of ownership.

The utility of an NFT comes from its real application, in either physical or digital worlds. Put simply, utility illustrates how easily the NFT can be used and what you can do with it.

Tangibility means some NFTs are tied to real-world objects, which gives value in terms of tangibility backed by title perpetuation. An example of this could be a concert ticket. These NFTs with definite value are best suited for short-term trading in the marketplace. That is because these NFTs may have expiry dates.

Simultaneously, other collectibles like NFT-tethered, limited-edition NBA sneakers will accumulate value over time as the number of items in circulation decreases.

Woman sits at her computer. (Source: Getty)
Remember to always do your own research before venturing into the world of NFTs. (Source: Getty)

Five of the best NFTs to keep your eye on in 2021-22

  1. OpenSea: OpenSea is the largest marketplace, featuring lazy NFT minting. It has roughly 50 different business categories to invest in, making it the best NFT to buy. OpenSea’s major focus is on buying and selling digital art and game development.

  2. CryptoPunks: CryptoPunks was the first non-fungible token initiative built on the Ethereum blockchain, demonstrating its importance and proving it is the best NFT project to invest in. This NFT allows you to own a one-of-a-kind pixel avatar.

  3. Virtual Reality Land: Exactly as the name suggests, VRL is a real estate development that allows you to own digital land that you can access through blockchain links. In the future, virtual reality and augmented reality technologies may prove to be the queens of virtual land.

  4. Rarible – RARI COIN: The NFT market has a strong need for digital artwork. Rarible stands out from other virtual arts because of its unprofessional and immature photography content (excluding nudity).

  5. NBA Top Shot: The National Basketball Association (NBA) is responsible for bringing NFTs into the mainstream. NBA Top Shot has a collection of memorable game moments and footage, which are perhaps the best sports-related NFTs to buy. Prices seesaw, according to the rarity of the material.

Remember, as with all financial investments, it pays to do your research and invest wisely. 

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