Thoughts and practical advice for those starting out
What are NFTs anyway?
In a nutshell, NFT stands for non-fungible token. What does that mean exactly? Let me explain in a simple way. Currency is fungible; your dollars or bitcoins are equal to my dollars or bitcoins. They hold the exact same value. Non-fungible means the opposite. Each item is unique. Non-fungible tokens means every token is different from one another.
Examples of NFTs, and those that are the most well-known, include digital art or collectibles, such as those found in marketplaces like OpenSea, Rarible, SuperRare or Foundation. But NFTs actually have a much wider variety of use cases, such as domain names, music and game characters to name a few.
If you want to learn more, I suggest you check this article out from the Ethereum website as it’s the most comprehensive and clear resource I found about NFTs.
The best way to learn about NFTs
If you’re interested in understanding NFTs, the best thing you can do is to mint, buy, or sell one. Why? Because being actively involved in the NFT space will not only get you hooked, it will teach you lessons that you won’t learn from simply consuming content.
I myself learned more about NFTs through 5 days of actively playing with them than in the many preceding weeks where I was just checking Twitter and listening to podcasts trying to understand the market. Your errors (and be assured that you’ll make them) can be quite painful, so you need to learn fast if you want to avoid losing your money.
Before you get involved, you need to figure out what purchasing and selling NFTs is like. Be aware that you will have to spend gas — the cost to use the network — for every action you take on Ethereum, including a one-time gas fee on OpenSea if you want to sell your NFT (more here). When I bought my first NFT I thought, “OK I’ll just transfer the amount it costs.” But I had to add extra funds to my wallet several times to pay for gas and put it on sale. (Read this if you want to learn more about gas, how it works and strategies to reduce it.)
Flipping NFTs: big risk, big reward
Before deciding whether you want to get into NFTs or not, it is essential to know what game you’re playing and who is on the other side of the trade you’re getting into.
The main reason why NFTs have become such a hot market in 2021 is because many people are chasing money. The kind of returns that you can make in the NFT market are ridiculous. Take a look at @tandavas talking about how he turned 0.3 ETH (around $1,000) into 80 ETH (around $280,000) in 72 hours.
Or see how @TheShamdoo reflects on getting $30,000 for holding an NFT that was free to mint (i.e. only gas had to be paid to claim it).
There is practically no other place where you can make these types of returns in such a short amount of time. Of course people are coming to NFTs for the money! Except it’s hard to get lucky, and the downside is that you may never recover what you spend.
Some of you may think, how are people spending 1 ETH (and sometimes a lot more) on NFTs? If you think about it, it’s not such a crazy amount for someone who just received 80 ETH in one of their sales. They may use a tiny fraction of the proceeds to keep buying other NFTs. The price an NFT costs is also perceived by many as a reasonable price to pay for the possibility — however small — of making a huge profit in the coming days or weeks.
In any case, it would be misleading to think that everyone is getting rich trading NFTs. Most likely, a small percentage of people are becoming incredibly wealthy, while many others are experiencing some gains mixed with losses that can end up being huge.
To get a good sense of the NFT market we should avoid survivorship bias. It’s too easy to spot the winners because we hear about them every day on Twitter. For perspective, a good account to follow is @nftsalesbot because it shows you the big losses some people experience trading NFTs. Consider the tweet below which highlights the trade of someone who lost 97% in 8 days.
Why do trades like this happen? Many get in when they see prices shooting up in a buying frenzy and get FOMO, thinking the price is going to the moon. But maybe after a while price stops rising, the floor goes down, or demand drops. And then, the original buyer might sell to get rid of what now they think is a worthless item, trying to get whatever amount back from it.
Meanwhile, early holders saw massive profits and dumped, which caused the holder above to panic sell. Peak greed often marks the top and peak fear the bottom, so be aware of your own emotions and the market sentiment. You’ll generally be better off not chasing price moves, though sometimes it makes sense to take profits if something has skyrocketed.
The value of NFTs: collectors, speculators and utility
While it’s clear that a lot of people are coming to this market chasing hot money, this doesn’t mean that all actors in the space are speculators or that all NFTs are pump and dump scams.
First of all, there are real collectors who are interested in the art they’re purchasing. These people aren’t buying with the intention of selling the next day (or weeks, months, years). Buying expensive NFTs has in a way become a status game. By displaying a Cryptopunk — one of the first NFTs that launched, back in 2017— as your Twitter profile picture, you’re showing others that you own an NFT that only the wealthy, or early adopters, can afford. (Packy McCornick wrote a great analysis about NFTs as a status symbol here.)
A mistake people make is to think that all NFTs are necessarily digital collectibles or art. It’s only natural, because at this point not many NFTs have utility, other than status. NFT art and collectibles make for most headlines you see in the media (e.g. Somebody just paid $1.3 million for a picture of a rock).
Maybe this is why some people are saying NFTs are a worthless bubble or compare them to the tulip mania in the XVII century. I won’t enter this discussion, although I understand this side of the argument given that many are entering the space only to get rich quickly, and market manias do often revert and crash in a mass panic.
But leaving collectors and speculators aside, there are other NFTs which can provide some value and utility now, or perhaps in the future. Those are much more interesting for me because they are likely the ones that will shape the future of the NFT and crypto market.
An example of this are play-to-earn games such as Axie Infinity where players can earn money by playing (to learn more about Axie, check this short Coinbase blog post or Packy’s deep dive). If you can make money using NFTs, these could essentially be considered as an investment with some monetary value estimated from future payments one might receive. By the way, I am not really seeing major publications write about Axie or any other play-to-earn game; it seems that only the jpegs make the headlines.
However, play-to-earn isn’t the only way NFTs can provide value. If an NFT can be used for governance in a DAO (Decentralized Autonomous Organization) or as a way to get tokens that provide some utility (in a game or otherwise), this can also make the NFT valuable. (For more on this, read these articles about Loot and $AGLD).
Other types of utility from NFT projects include merch, comic books, charity donations, and regular airdrops to holders. And while there is innovation in the NFT space, many projects are just copying each other, promising similar deliverables. In my view, the projects which overdeliver and create unique benefits to holders are the ones more likely to succeed.
NFTs will gain even more utility when they become an integral part in the metaverse (for those who haven’t heard about the term, Matthew Ball’s essays are the best on the topic). The issue is that at this point we don’t know what the metaverse is going to look like exactly, or what it will entail. Therefore, it’s hard to know which roles NFTs will play and how much value and utility they will provide.
Many of the NFTs being launched these days mention they’ll be used in the metaverse, but in many of those instances it’s merely used as a buzz word to increase the excitement and hype of a given project, with nothing behind it to support those claims. Don’t be fooled by project roadmaps without knowing about the development team or confirming it is a reasonable metaverse project. Almost any NFT could potentially become an avatar in the metaverse, but that doesn’t mean that it will, that it’s valuable for that reason alone, or that avatars and games are the most relevant part of the metaverse.
The NFT space is in its infancy. There are likely other uses for NFTs that make them valuable but we haven’t figured them out yet. These will be unveiled as time passes by and may even be obvious in hindsight. But the future is still being built and we don’t really know how it will turn out. That’s why, as of now, I believe the majority of NFTs that currently exist will not have future utility beyond their collectible value.
Other issues to consider
So far we’ve seen what NFTs are and explored some parts of the market. Here I’d like to discuss some issues worth thinking about.
Incentives are massive for NFT producers. The market is so hungry, people will throw money at almost any NFT project, so creating them is quite lucrative. As @SOLBigBrain explains in the tweet below, teams launching NFTs are making a lot of money. So it’s not a surprise to see people making new NFTs only to grab some money. This is the reason why you see new launches every day.
There are other problems in the NFT market to consider:
The first one is that most NFTs are priced in crypto, so it’s easy to lose track of their value in your country’s currency. This might lead to bad decisions on a trade due to the volatility of the asset the NFT is traded in.
At some point you no longer think in dollars or whatever fiat currency you use. Imagine paying 0.05 ETH for a given NFT. This might seem little but if ETH is valued north of $3,500 we’re talking about $175. Or take Solana, which went from trading at ~$25 to ~$210 in less than two months. NFTs selling for 3 SOL after such a price increase means it’s costing you over $600–yikes.
Converting into fiat might be a useful mechanism to avoid overspending. Otherwise you might lose sense of how much money you’re using.
Once more we have to consider gas fees. In the Ethereum network, gas fees can sometimes be quite high (this isn’t the case on Solana or Tezos). If a specific NFT is worth $200 but you’re spending $200 or more to get the transaction through, that NFT will have to double in value for you to break even on a sale. That’s significant enough to reconsider the purchase.
An interesting, yet troubling, aspect of NFTs that I recently came across is people saying that they’re being wash-traded. The tweet below explains what this means in a clear way:
This type of behavior in the market may be difficult to prove. But if true, this means that fake demand for NFTs is being created, artificially inflating prices.
One last consideration about NFTs is that if you’re in crypto and think Ethereum can 5x, 10x, or 20x in the coming decade, understand that you’re essentially paying a lot more for that $300 NFT (plus gas!) than its current price in dollars. If your thesis is correct, that amount could be worth $1.5k, $3k or $6k in the future. Unless you have very good reasons to think your NFT will be more valuable than the future value of ETH it’s costing you now, it’s probably not a great idea to buy it.
Resources to get started
If after reading all of this you still think it’s a worthwhile endeavor to buy NFTs, here are some of the best resources I’ve found recently that will help make this journey a bit less painful. This isn’t a comprehensive list, but it’s a good start.
Here are a couple of good threads on buying your first NFT — one by collector @punk6529:
Thread on Twitter
And another by VC @chriscantino:
Thread on Twitter
As I said, nothing will teach you more than minting, buying, or selling NFTs. Twitter isn’t enough; get into Discord channels of project launches and see what people are saying. You should be able to distinguish a good community from a weak one in less than 10 days. Just be really careful out there, because this is a world filled with scammers.
Closing thoughts and parting advice
Before finishing this essay, I want to share some of the things that I keep telling my closest friends and family about NFTs:
Don’t treat your NFTs as investments. Think of them as an expensive collecting hobby, as it’s unlikely you will make extraordinary profits from them. Do not use money you can’t afford to lose, because there’s no guarantee you’ll get anything back. If you buy and sell NFTs, it’s better to use that experience as a learning mechanism.
There are plenty of scammers on Discord channels. Everyone who DMs you is trying to trick you. Never share your seed phrase. Be extremely careful. You might want to disable messages from people who aren’t your friends.
There might be a good NFT that you can’t buy because it’s too expensive. This is where projects like PartyDAO or Fractional.art come in: they allow you to buy a fraction of an NFT. This could be a safer bet than buying a cheap NFT that no one has heard of. However, this could present additional problems such as coordination with other buyers or lack of market liquidity.
As I said earlier, know the game you’re playing. Is the NFT you’re interested in art or a digital collectible? If you wouldn’t spend $300 on a painting, collecting items or fancy merch, don’t spend $300 on NFTs. Does it have some utility in the form of a play-to-earn game, community ownership, governance, or something else? Figure it out, and be clear on why you want the NFT in the first place. If you treat it as a sunk cost and only purchase NFTs that you love, from projects that align with your interests, then you will always win.
Marc Bisbal Arias focuses on research, analysis, and investing.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
Disclaimer: this isn’t investment advice. This article has been written for informational and educational purposes only and it reflects my personal experience and current views, which are subject to change.
Please check out the NFT Red Flag Checklist for practical steps you can take to protect yourself while NFT hunting.