Non-Fungible Tokens (NFTs) have taken the art world by storm and are now making waves in the world of investing. NFTs are unique, digital assets that are verified on a blockchain and are becoming increasingly popular as a way for artists, musicians, and other creatives to monetize their work. \
With the rise of NFTs, many people are now looking to invest in this new and exciting market. Whether you’re an experienced investor or just starting out, understanding the basics of NFT investing is crucial for making informed decisions. In this article, I will provide an overview of NFTs and delve into the key considerations for those looking to invest in this rapidly evolving market.
NFTs can represent a wide variety of digital assets, including but not limited to:
- Art: NFTs can be used to represent unique pieces of digital art, such as digital paintings, illustrations, and animations.
- Music: NFTs can be used to represent unique digital music files, such as MP3s or audio files, or to grant ownership rights to specific live performances.
- Collectibles: NFTs can represent digital collectibles, such as rare digital trading cards or virtual real estate.
- Photos: NFTs can represent exclusive rights to digital photographs, such as those taken by professional photographers.
- Videos: NFTs can represent exclusive rights to digital videos, such as short films, animations, and other forms of video content.
- Gaming items: NFTs can represent virtual assets in video games, such as unique skins, weapons, and in-game items.
- Personal avatars and profiles (PFPs): NFTs can be used to represent personal profiles, such as those used on social media platforms, and the unique digital assets associated with those profiles, such as avatars and background images.
- Domain names: NFTs can represent ownership rights to specific domain names, allowing for the creation of NFT-based websites.
Anything digital can be made into an NFT on the blockchain; however, the most common form of NFTs is digital art. Images, audio and video files can also be sold as NFTs. Once a digital asset has been made into an NFT, it will be unique on the blockchain and can be traded in exchange for money, just like physical art would be.
Tax-free NFT gains? Check out Portugal!
I find the NFT space to be extremely fascinating for many reasons, and I’ll be gathering my notes here. The one thing that I would start off with, is that after looking at NFTs for a while, the regular crypto space (Bitcoin, Ethereum, etc) starts to look downright boring and run of the mill. If you thought understanding the valuation of cryptos like Bitcoin and Ethereum was very hard, the NFT space is just wild in comparison.
Buying Blue Chip NFT Projects
One of the best strategies for getting exposure to NFTs as a beginner is to stick with the so-called “blue chip” NFT projects.
Buying Factionalized NFTs
While the prices for these projects are currently quite prohibitive (some popular ones have sold for more than $1 mln), you can invest in their fractionalized versions on the following sites:
- Fractional – the most popular fractionalization platform.
- NFTX – mint and trade NFT index tokens.
Apart from fractionalization, investors are increasingly forming Decentralized Autonomous Organizations (DAOs) to pool their funds and gain exposure to the priciest NFTs. Here are some examples:
- FlamingoDAO – minimum 330 ETH investment to join.
- Beets DAO
Social trading is becoming a big thing. The first ideas of social trading were introduced and popularized by platforms such as eToro, where you can follow traders you respect and who have gotten great results, and you can even choose to copy their trades.
But with NFTs, the social element has been taken to the next level. NFT traders basically live on Twitter and on Discord, where an essential part of their job is to engage in discussions and follow the moves of the best collectors in order to find the next alpha opportunity.
Now, while in Web 2 you could follow your favorite traders and even automatically copy their trades in certain cases, Web 3 opens the floodgates of possibilities for social trading.
You can now team up with a few buddies or even total strangers, and quickly set up a structure where you can invest together by pooling your funds, then voting for buying and selling decisions.
A tool that can be used for group investments is NFT Squad by Prysm. You can also read more about this new type of social trading here.
Basic Mistakes NFT Newbies Do
Not understanding gas fees
When you are interacting with the Ethereum blockchain and manipulating it, you will pay a gas fee for the transaction you are initiating. This means that if you transfer, mint or stake an NFT you will need to pay a corresponding fee. Some newbies can be caught unawares by fees charged to delist an NFT on OpenSea, so be aware of that too.
Gas fees also fluctuate throughout the day, and can get ridiculously high at times. Use a tool to estimate the current gas fees, and wait for a suitable time when gas is cheaper if your transaction is not time-sensitive. Always check what you will be paying before you confirm the transaction. You can also use MetaMask and similar tools to set the right gas price manually.
Typically, you’ll find that every hour gas fees spike as some new NFT project is launching. You can get a quick glance at what’s causing gas fees to spike at the moment on Ultrasound.money. Depending on your time zone, you might find that gas fees are lower late at night and in the early morning.
If you’re minting a hotly anticipated project, you might want to set the gas price much higher than normal, because it’s first-come, first-served, and if the transaction doesn’t go through by the time all the NFTs in the project get minted, you’ll not only be left empty-handed but out of pocket, as the transaction will fail but still cost you gas fees.
Not understanding how Ethereum transactions are processed
Transactions from one wallet are processed sequentially. If a transaction gets stuck in a pending state, posterior transactions sent from your wallet will have to wait until the stuck one is processed before getting processed.
You can start multiple transactions but the entire Ethereum blockchain is processed sequentially so there is only one active transaction at any given time. Transactions from your wallet are processed in the order of Nonce.
If you submit a transaction with Nonce 10, then another with Nonce 11, the one with Nonce 10 must process before the one with Nonce 11.
- Speed Up: Resubmit Nonce 10 with the same transaction at a higher gas price
- Cancel: Submit a 0 ETH transfer at Nonce 10 at a higher gas price
- Replace: Submit a totally different transaction at Nonce 10 at a higher gas price.
Speed Up transactions are virtually identical to Cancel transactions – with one critical difference. Specifically:
- On Ethereum, a Speed Up transaction is an attempt to overwrite a currently pending transaction with a new transaction.
- Just like Cancels, Speed Ups are a convention and not a standard.
Whereas a Cancel transaction is an attempt to overwrite a pending transaction with a zero value replacement, a Speed Up is an attempt to accelerate a pending transaction.
In other words, you still want the transaction to happen; you just want it to happen faster. Therefore, a typical Speed Up transaction will have:
- An identical nonce,
- From the same Wallet address,
- At least a 10% higher gas fee, and
- The identical value, plus
- Gets signed-and-successfully-submitted before the original transaction is confirmed.
You might notice that step 4 is the only difference between a Cancel and a Speed Up. They both work on the identical principle: since miners are incentivized to prioritize transactions with more gas, the identical nonce Speed Up transaction should be confirmed before the original transaction – even though it entered the mempool later.
Speed Ups are easily done via the MetaMask UI. When a transaction is taking long, you’ll see a Speed Up button that you can click.
On Ethereum, a Cancel transaction is an attempt to overwrite a currently pending transaction with a new transaction.
Typically, a Cancel transaction will have:
- An identical nonce,
- From the same Wallet address,
- At least a 10% higher gas fee, but
- Zero value, and
- Gets signed-and-successfully-submitted before the original transaction is confirmed.
The core of the idea is that, since miners are incentivized to prioritize transactions with more gas, the cancel transaction should be confirmed before the original transaction – even though it entered the mempool later.
Despite the options, the new transaction still needs to be mined to take affect. You can end up in a situation where you submit a cancel, but your original still makes it to the chain first.
Replacing a transaction uses the same principles we already discussed. We can submit a transaction with the same identical nonce as a previous transaction we submitted (and is still in pending state) while changing the value or even the destination address. Again, we increase the gas fee as an attempt to have this transaction mined before the original transaction is confirmed.
Failing to understand security basics
Make sure you save the seed words of your wallet somewhere safe, and preferably use a cold wallet for the items that you want to hold long-term. For example, you can combine a Metamask wallet for regular trading and buying with a Ledger wallet for cold storage.
Here’s how you can move your wallet from MetaMask to Ledger. Or just watch this video.
Be very careful when signing transactions on Metamask and read what permissions you’re granting. Also, note the gas fees associated with the transaction (see the previous point).
Falling for scams
There are lots of NFT-related scams within Discord channels, especially through DMs, and also on Twitter. If you’re offered something that sounds too good to be true, it probably is a scam. Triple-check everything, especially if you’re signing any transactions with your wallet. Never share your seed words with anyone. NFTs and Web3 in general are new niches and thus are akin to the wild west, as this site quite clearly portrays.
Unfortunately on non-curated marketplaces like OpenSea, there are a lot of scammers. One of the easy ways these scammers trick buyers is by putting up fake collections. Know the number of items in the collection you want to buy from. Most fake accounts will only have 50 to a few hundred NFT’s in them at most. So if the project you’re interested in buying has 10k items, it’s easy to spot the fake collections.
Beware of the price change scam. When new hot projects come out there is currently a scam whereby people list at the floor then change quickly to a higher price. The idea is that other people will click buy then approve the transaction without double-checking. Always double-check your checkout price on MetaMask before hitting confirm.
NEVER interact with NFTs that appear in your wallet if you don’t know where they came from. They are airdrop scams, if you interact with them to sell them it’s a hack to get into your wallet. Either leave them alone completely or hide them.
If you ever buy NFTs in a bundle, open up the bundle and actually make sure all the NFTs in the bundle are legit. Some scammers will place 1 real NFT in a bundle of fake ones or ones from other collections.
Not keeping all costs in mind
You will need to pay taxes on your NFT-related profits, and that will eat a big chunk of your profits. Make sure you have enough cash left over from your NFT adventures in order to pay tax. You can calculate your NFT taxes using a tool like Cointracker or Cointracking.
When you buy an item on OS or other marketplaces, you will pay a gas fee. If the item you’re buying is cheap, you might even end up paying more in gas fees than the item itself is valued. You might have to pay gas fees again when you sell, depending on how you decide to conduct the sale. If you’re thinking of flipping that item, this fact alone can make it impossible for you to turn a profit.
OpenSea itself charges it’s own fee for selling, and you will also typically pay a royalty fee back to the project, which can range between 2.5 and 10%.
There are gas fees when the item is sold and who pays the fees, depending on the transaction.
- Buyers pay the gas fees when purchasing fixed-price items.
- Sellers pay the gas when accepting offers.
When making offers or accepting offers on OpenSea, you will need to transact in WETH (Wrapped ETH). You can easily wrap or unwrap from ETH, but there is a small fee for doing so.
Always shorten the time frame when putting items up for sale so you don’t pay cancellation fees. The default is 6 months, but you can change this to 24hrs, 3 days or 1 week.
Use the same principle when making an offer, or you could end up buying a useless NFT 3 months from now because you forgot to cancel your bid.
When the gas price is super low go through all your collections and activate the sales option for each collection, so you don’t have to do it when gas is high.
Going in with great expectations
Despite a number of high ticket NFT sales taking place, according to Nonfungible.com, 58.55% of NFTs traded were sold for $1000 USD or less. Yes, there are people who made millions in a few months while playing around with NFTs, but these are by far the exception not the rule, and even they will admit that they got lucky. Go into NFTs to learn, first and foremost, and secondly, for the art. Profit should be third place. If you keep that order in mind, you won’t be disappointed and you’ll reduce your chances of making any stupid FOMO-based decisions.
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.
0xcc2a..f0b3 FLIPPED PUNK #3173
🏆 Status: Rapid & Good Flip
🛍 Bought: 95 ETH @ $4,288
💰 Sold: 106.99 ETH @ $4,326
🤝 HODL: 2 days
Ξ PROFIT: 11.99 ETH
💲 PROFIT: $55,479 (📈 +14%)https://t.co/RDwRfKpaWd
— Flip McBot (@nftsalesbot) October 31, 2021
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?
9/ While many say there has been total correlation between the NFT classes, we are beginning to see individualized performances ever since BAYC took over NYC.NFT: active marketing, partnerships, and roadmap goals (such as an airdrop) pic.twitter.com/Foc62mIXeA
— MetaStreet (@metastreetxyz) December 2, 2021
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.
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
- community membership
1/ Bought my first NFT 2 months ago today without knowing a single soul in the space. What a fucking ride it’s been…
While I’ve been absurdly lucky financially I’ve been even luckier with something else — the community
— triumph (@triumph36_) October 7, 2021
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:
- fully centralized NFTs (like NBA Top Shot), where no information is in a public blockchain;
- “pointers”, NFTs where the certificate of provenance is on a public blockchain, but the artwork itself is elsewhere;
- 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.
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:
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.
The Definitive Timeline of Early NFTs on Ethereum V2
Thread 🧵 pic.twitter.com/fTca5bLyCP
— Leonidas.og (@LeonidasNFT) December 13, 2021
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:
Not understanding the significance of the NFT movement has been a million dollar opportunity cost for me.
I studied the last 250 years of art history to grasp the consequence of this moment.
Here's the knowledge you need to identify the next million $ NFT 👇🧵
— 0xJosh.nft (@justwavyj) September 26, 2021
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
- 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.
I believe that successful #generativeArt collectors will be the ones who understand the history of computer art 🤓 Here are some good reads / coffee table conversation starters to get you started. A thread 🧵 pic.twitter.com/3JERjopSoB
— Raphaël de Courville (he/him) 𓅬 (@sableRaph) August 17, 2021
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:
- 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.
What do you think of the NFT space? Are you invested in any projects? Let me know in the comments section below.
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