How to Invest in NFTs

Trading NFTs

The biggest NFT platform is OpenSea, and that’s where most of the trading happens. You can also get a quick overview of which NFT projects are the most popular at any point in time. As I mentioned earlier, make sure that you interact with original projects, as there are a lot of fakes and copycats. Look for the blue checkmark next to the project name to make sure it’s the original project you’re looking at.

Interest in NFTs ebbs and flows, you can check out this chart to see the daily volume on OpenSea to get an idea of where we’re at.

In general, when Ethereum and altcoins pump, you’ll see lower interest in NFTs, and vice versa. Gas prices also influence the volume in a big way. On some days (or even periods extending for several days) gas fees really spike, pushing down project floors as traders delay their operations on OpenSea. Especially on lower-priced NFTs, you will get killed with gas fees when trading, which will make it next to impossible to turn a profit. Therefore it’s very important to keep an eye on gas prices and find a good time to push your transactions to the blockchain:

• Ethereum Gas Price Chart and Price by Time of Day
• ETH Gas Watch
• ETH Gas Station
• Ultrasound.money – to check gas burns in the last 5 mins
• Dune Gas Prices Dashboard
• Check how much you’ve spent on gas and failed transactions

If you’re flipping then it is a better technique to buy at the floor and resell as the floor rises (provided you’ve done your research and are convinced it will do so) than going for a high rarity but well-priced item, as liquidity tends to be much less for the rarer and more expensive tokens. I suggest only buying the expensive rare items if you really love the artwork and wouldn’t mind holding it forever, or at the very least over a span of a couple of years.

Valuation of NFTs

Putting a value on a single NFT or a whole collection of NFTs can be very tricky from an accounting and legal perspective.

This mainly concerns individuals whose countries of residence levy wealth tax based on their overall net worth, and companies holding NFTs on their balance sheets.

What is an NFT’s value when it’s on a company balance sheet, or held in an individual’s collection, or even when it’s in the possession of a digital artist and ready for sale?

Interestingly, we’ve even had audit firms like KPMG purchase NFTs, and presumably, they will hold them on their balance sheet, probably leading the way in showing how to account for them in a corporate balance sheet.

Evaluating NFTs

A lot of the value accrued to NFTs is highly subjective, however, there are also important things to consider, such as an item’s rarity within its collection. Some other useful sites for evaluating NFTs:

• Rarity Tools – ranks project items by their rarity.
• Traitsniper – rarity ranks
• Golom – rarity ranks
• Moby – trait analyzer, whale watcher
• NonFungible.com – analyze, track and discover NFTs.
• ICY Tools – on-chain analytics and wallet watching
• NFT Stats – statistics on best-selling items, price over time, volume, etc.
• Dune analytics – check this example for The Surreals project.
• Nansen.ai – on-chain analytics
• Paperhands – view your best and worst trading decisions
• NFTBank – portfolio valuation, identify underpriced assets in the markets
• DegenData – free wallet and project analysis tool
• SuperSea – trait analyzer, profile value calculation and more
• Whatsminting – tells you what are the hot ongoing mints at the moment

Keep in mind that the real drivers of value for NFTs of the PFPs type (personal profile pics) are the following:

• flex power
• rarity
• community membership

One of the best ways to judge whether an NFT project will do well or not is to check the Discord channel and see what kinds of conversations are taking place there. You want to ask questions like:

• Are the developers public? While many are anonymous, I maintain my idea that real names or companies behind projects are better. I don’t really understand this obsession with being anonymous.
• Where are the NFTs themselves stored?

When we talk about rarity, we need to make sure we’re all looking at the same rarity classification. Different tools might be using different settings. You can think the trait normalization is something like this. For an NFT that has 2 1/1 traits, if the trait normalization is OFF, these traits would get the same score. Traits that have the same % will have the same score. If the trait normalization is ON, these traits will get a different score. It will depend on more things and other traits, besides the %. On Rarity.tools, most of the projects have it set as ON.

There are 3 types of NFT:

1. 1. fully centralized NFTs (like NBA Top Shot), where no information is in a public blockchain;
   2. “pointers”, NFTs where the certificate of provenance is on a public blockchain, but the artwork itself is elsewhere;
   3. fully on-chain NFTs

Most NFTs fall under the first two categories. Surprisingly few NFTs today attempt to use the blockchain itself as a medium and storage. The innovation of NFTs is not to have a database of certificates of provenance linked to an artwork stored elsewhere. The innovation is to have the token be the artwork itself. Fully on-chain NFTs are the closest you can get to holding a physical artwork. Autoglyphs were the first fully on-chain art. Created in 2019, they’re a completely self-contained mechanism for the creation and ownership of an artwork.

Storing NFTs

While MetaMask is a very convenient tool to get you started with NFTs, you should switch to using a hardware wallet (referred to as cold storage) when your portfolio grows to a meaningful financial value. This guide will get you started.

Accounting and Taxation for NFTs

If you’re buying NFTs through a company, you need to make sure that your accountants and auditors understand what you’re doing. The same applies if you’re an individual, but to a lesser extent. On an individual level, in the US some people have been using them to optimize their taxes by donating them.

Tax departments in many major countries will usually consider an NFT as a capital asset held for investment purposes. his means that sales or disposals of an NFT will usually generate a capital gain or loss for tax purposes. Capital gains are subject to Capital Gains Tax (CGT). If you are creating your own NFTs, consideration would need to be given as to whether the NFT is subject to capital treatment, or is instead a trading activity, which is taxed and accounted for differently.

The gain on the disposal of an NFT is typically the NFT’s value at disposal in EUR/USD less:

• The cost of purchase
• Transaction fees

The best software for crypto taxation is:

• Cointracker
• Zenledger
• Tokentax

History of NFTs

You can listen to this three-part podcast about the history of NFTs or have a look at the Twitter thread below.

Building in the NFT Space

I’d love to try my hand at creating a new NFT project, so if you are interested in that feel free to contact me with your ideas.

In the meantime, here is a quick guide to creating NFTs.

I also consider creating tools related to NFTs.

Are NFTs Art?

The majority of people that see NFTs for the first time are a bit perplexed at what they see, and even more so by the prices being paid for some of these pieces.

A valid question is whether these NFTs can be considered art. In my opinion, while a lot of the projects are trash or copies of famous projects, there is no doubt that the best projects are art.

I struggled myself to understand why these would be art pieces, especially because the “weird” artworks I was seeing within most projects conflicted with my idea of art. Upon further reading, however, I realised that my own ideas of art were very limited, and it drove me towards learning more about art and how to appreciate and understand it.

Here’s a Twitter thread of where NFTs fit in the history of art:

As for learning about art in general, I’ve started a course about European art history on Wondrium, which is a platform I use for educating myself on various topics like math, history, electronics etc. I basically use it instead of a Netflix subscription and you’ll usually find me following some course on most evenings after putting the kids to sleep.

I’ve learned that for every art piece or project, I need to consider the following points

• Subject
• Interpretation – how the subject is expressed
• Style – the means of interpretation (each artist has his own style)
• Context – contemporary political events, artist’s own life, historical period
• Emotion – our response to the art

Generative art is not something new, it’s been done for decades. What is new is its introduction into the blockchain. With previous generative art pieces, delivery of the piece was quite clunky as it came with a screen and some sort of computer attached to it. Now, you can take electronic delivery in seconds through an NFT.

Suggested Reading on Generative Art

Take a look at this Twitter thread, there are several great books that are a recommended read if you want to understand the history and technical aspects of generative art.

NFT Licenses

People who dislike NFTs frequently taunt NFT buyers by saying that they can just right-click and save the image of the NFT in question, whereas the NFT buyer would be potentially spending thousands of dollars for the purchase.

It’s a bit of a joke, of course, but it’s also a very valid point that needs to be addressed. What exactly are we buying when we buy an art-based NFT?

Many NFT buyers definitely fail to understand exactly what they are paying for.

Some might have purchased traditional art before, and while I believe that even in the retail market for traditional art not many know what rights they have, perhaps they are not so important as what you can do with traditional art is more limited when compared to NFTs and digital art in general.

So how does traditional art licensing work? As the precursor to digital art, we have to start from there in order to understand the various licenses being used by NFT projects.

The rights around artwork are much less straightforward than one would assume. In the United States, according to the Visual Artist Rights Act of 1990 (VARA), artists retain certain powers of attribution and disavowal long after the ownership of the actual tangible work of art is in the possession of a collector or institution.

VARA affords rights in addition to those afforded by copyright law. While disavowing an artwork through VARA can impact the monetary value of the piece, copyright is much more directly tied to ensuring the economic interest of the artist. Generally speaking, the more “original” a piece is, the stronger the copyright protections.

So what rights are granted to an artist when it comes to copyright? And how can they affect those in possession of a physical work of art?

Copyright gives artists who have created fixed, tangible works a bundle of rights in those works. The rights provide both artistic protection and ensure that artists can profit from what they’ve made. After an artist creates a piece, they have the right to make copies of their work, distribute those copies, perform or display the work publicly, or make works that derive from the original.

Not all of those rights transfer to the collector who goes on to purchase the piece. While many collectors assume that a work’s copyright is transferred when they purchase a painting or a sculpture, that is not the case. Copyright only transfers to the piece’s new owner if its artist evidences that it is his or her intent to transfer it.

What does this mean in practice? If you buy a Jeff Koons Balloon Dog, you then have the right to display your specific copy of Balloon Dog. But, unless you’ve received explicit permission from the artist, you do not have the legal right to take pictures of the piece, make postcards, and sell them.

With NFTs, we see various licenses in use. One of the most commonly used is the NFT License that was originally developed for use with the CryptoKitties project.

Not all projects are restrictive on purchasers of the tokens. Projects like the Bored Apes Yacht Club, CryptoPunks and Cool Cats gained a lot of fame due to their generous license terms, among other things.

Then we have projects like Nouns and Moonbirds, where the artwork is completely open-source.

You need to understand your NFT token’s license properly before you use it, even if you get into one of the projects with less restrictive licenses. For example, Yuga Labs grants commercial license to Bored Ape NFT owners to use the image(s) they own as they see fit, even to create or promote products. Arizona Iced Tea bought a bored ape and then proceeded to make use of the ape and BAYC graphics on their products, which provoked a takedown request from the BAYC team. Where Arizona Iced Tea went wrong is in the use of the Bored Ape Yacht Club and logo, which does not count as authorized use.

Since NFTs are a relatively new innovation, there are still many gray areas regarding licenses and copyrights. I expect to see more court cases and litigations that will help clear the many doubts that currently exist.

Further reading on NFT licensing

• NFT License
• NFT License Breakdown: Exploring Different Marketplaces and Associated License Issues
• NFTs and Intellectual Property: What IP Owners and NFT Creators Need to Know
• Protecting IP and Limiting Liability When Licensing IP for Digital Art and NFTs
• BAYC – The case for licensed commercial use rights
• NFTs, Minting and Copyright

The Future of NFTs

I am absolutely fascinated by the possibilities that NFTs are enabling, and beyond the current price bubble, I expect NFTs to play a significant role in the future of crypto, with lots of real-world applications up for grabs once the technology matures and regulations catch up.

Right now, it’s certainly a niche that is extremely high-risk to participate in as an investment. A report by Bloomberg has already shown that the JPEG market is highly illiquid. Only a quarter of the NFTs sold through the OpenSea marketplace during the period analysed have changed hands once or more. In addition, the top 3% traded NFTs account for 97% of the total NFT trading volumes.

One area that is already growing is borrowing and lending through NFT collateralised loans. These are the best sites for lending NFTs:

• NFTFi
• Drops – place your NFT as collateral and access a loan of up to 80% of the floor value of the NFT.

The way it works is that you can take your NFTs and use them as collateral for a crypto loan. You can also take the other position and accept someone’s NFTs as collateral in return for giving them a loan in crypto.

Further Reading

• Zeneca’s guide to Discord
• NFT Canon

What do you think of the NFT space? Are you invested in any projects? Let me know in the comments section below.