NFTs: A Comprehensive Guide to Buying and Understanding Non-Fungible Tokens

The NFT frenzy is in full swing and new projects are springing up left and right. Art, music, gaming items, fundraising for nonprofits, access to Discord channels and events — a wide range of goods and services is already being offered via NFTs. Many prominent celebrities are wooing new audiences by utilizing NFTs.

It’s not only native crypto companies that are interested in NFTs. Established firms and organizations like Visa, Alfa Romeo, the NBA, and Burger King have also announced NFT projects and marketing campaigns.

However, NFTs have attracted the most attention thanks to the breathtaking increases in prices some have experienced during recent months. NFTs are currently going through a similar phase as the crypto market did during the ICO boom in 2017, with some NFT projects experiencing a 20-fold price increase within a short period of time, and the prices of newly launched, hyped NFT projects are going through the roof from day one. This NFT gold rush craze is attracting a multitude of investors and entrepreneurs who, with the prospect of making a quick buck, are investing in all sorts of NFT projects. This, in turn, drives up prices as well as the number of newly launched projects.

Unfortunately, and as has to be expected in such a Wild West environment, there are many underperforming or even fraudulent projects, which deprive investors of their capital. Therefore, it’s wise to use caution when investing in NFTs. Investors typically need to conduct a thorough due diligence before investing in any NFT project in order to minimize the risk of falling for scams and pump-and-dump schemes.

How to Value NFTs

NFTs are a rather diverse investment vehicle with a variety of possible use cases, some of which may not even be known to the buyer at the time of purchase. This is especially relevant for community-driven projects, which are being constantly developed by their current NFT owners, thereby expanding the use cases of the underlying NFTs. Thus, correctly valuing NFTs is no simple undertaking. Following, three main value drivers for NFTs are discussed in more detail.

Scarcity within a project has two aspects. Taking the CryptoPunk NFTs as an example again, we see that there is a limited number of CryptoPunks in the 2017 series and there will never be more than 10,000 CryptoPunks. The same is true for many other projects, which are also limited. Second, each CryptoPunk has a unique appearance, but all the CryptoPunks have been created from the same set of attributes, with some attributes being rarer than others. Thus, not all CryptoPunks have the same value.

Many other NFT projects have followed this idea and have created characters from a given set of attributes. When valuing such an NFT, it is not only important how many NFTs have been created by the project in total but also how valuable the individual attributes of the NFT at hand are.

As many celebrities have publicly announced their purchases of a Bored Ape NFT, the access to this Discord channel could be of great value to some. Further, as the prices for Bored Apes have risen to over $100,000 USD, the Discord channel is guaranteed to only include persons with a net worth north of that, again making it interesting for some people to gain access to this circle.

Other use cases can include access to services and goods, entitlements to cash flows and airdrops, participation in games and communities, and many more. As mentioned above, many NFT projects are being developed further and some of these projects will introduce new use cases along the way. Thus, when valuing NFTs, their current and potential future use cases have to be taken into consideration.

With NFTs, desirability is often connected to the history of the individual NFT projects. Owning one of the first NFTs ever created on Ethereum seems to be of great value for many investors. Another factor that currently massively drives desirability for NFTs is the belief in future price surges. At the same time, this is an NFT’s main crux: While an NFT’s historical characteristics are immutable, desirability due to expected future price increases can vanish at any moment — especially, when it becomes obvious that these future prices most likely won’t be realized.

NFT projects whose valuations are mainly driven by the expected future price increases will collapse as soon as the NFT market starts to cool down. Thus, in the current market environment, investors often need to carefully investigate an NFT’s value propositions and evaluate if the current price levels are justified.

How to Buy NFTs

NFTs are a diverse asset class. There are many ways to purchase and trade NFTs. Most NFTs are sold on specialized NFT marketplaces. Others are traded on blockchain gaming marketplaces or within the metaverse. The easiest way to buy an NFT is on a large NFT marketplace such as OpenSea on Ethereum, Solanaart on Solana, Binance NFT (Binance account required), Craft Network (on Icon), or AirNFTs (BNB Chain, Fantom, and Polygon).

Note: Unlike with cryptocurrencies, NFT projects usually have a dedicated marketplace where most of their NFTs are traded. Also, if you’re interested in a specific NFT project, research which blockchain the project has been deployed on and set up a wallet for the respective blockchain if necessary.

Note: Should the NFT not be displayed in your wallet, try adding it manually via the smart contract address.

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