How To Invest in NFTs

Investing in NFTs for Beginners

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NFTs, short for non-fungible tokens, are unique digital assets that are created and secured by blockchain technology. NFTs digitally signify ownership, and while some of the most popular use cases include avatars and collectibles, NFTs can signify ownership of potentially anything.

You may be wondering how to buy NFTs and the risks of investing in them—or whether NFTs are right for you. Keep reading to learn more about investing in NFTs and other tips for getting started.

How To Invest in NFTs in 6 Steps

1. Choose the NFT that you want to buy

The first step toward owning an NFT is also the most fun part—shopping for the NFT that you want to buy. Every NFT is unique or part of a limited set. Navigate through the marketplace listings until you find the right NFT to start your collection. 

You can browse the major NFT marketplaces like OpenSea, Rarible, or Axie Marketplace to find out what is available. In most NFT marketplaces, you can only purchase NFTs with cryptocurrency, so you'll need to take note of the cryptocurrency that you need to purchase your NFT.

2. Create a compatible cryptocurrency wallet

If you don’t already have one, your next step is to establish a cryptocurrency wallet. These digital wallets hold the cryptocurrency that you need to purchase the NFT. Since not every digital wallet is compatible with every cryptocurrency, you need a digital wallet that is compatible with the cryptocurrency required to purchase your chosen NFT. 

Ethereum’s cryptocurrency Ether (ETH) is commonly used by some of the largest NFT marketplaces, so establishing an Ether-compatible wallet may be a good first step.

You can create a digital wallet for free via your phone or computer. Wallets with support for NFTs include those offered by MetaMask, Coinbase Wallet, and Ledger.

3. Fund your wallet with digital currency

Your next step is to fund your digital wallet by using fiat money, like U.S. dollars, to purchase the cryptocurrency that you need for the NFT. Although the major NFT marketplaces commonly use Ether, it’s possible that the specific NFT that you want is only available in another digital currency. The accepted currency for an NFT purchase is generally the cryptocurrency corresponding to the blockchain, such as Ethereum, that supports the NFT.

4. Connect your wallet to an NFT marketplace

With your digital wallet created and funded, you can connect your crypto wallet to the digital marketplace listing the NFT. Once connected, you should be able to view your wallet’s cryptocurrency balance that is available for purchasing one or more NFTs.

5. Buy an NFT

When you are ready, you can click the buy button to purchase an NFT. 

NFTs may have a fixed price or you may need to bid for it with the highest bidder purchasing the asset.

If you use ETH for the purchase, you also need to pay a “gas” fee for the Ethereum network to process the transaction. The amount of this fee varies based on network congestion on the Ethereum platform and can be as high as hundreds of dollars. Websites like NFT Gas Station can help you to estimate potential gas fees for NFT transactions.

6. Confirm the NFT transfer to your digital wallet

After you click the buy button, you are officially the owner of an NFT. Congratulations! Blockchain transactions are not cancellable or reversible, so the NFT is yours until you decide to trade or sell.

It may take some time for the transaction to finalize before you can view the NFT in your digital wallet. The transfer of the NFT to your wallet is not complete until it is confirmed and verified by the blockchain network that supports the NFT.

Once you see the NFT in your wallet, the transaction can be considered complete.

What You Need To Know Before You Invest in NFTs

Investing in NFTs is not a surefire way to get rich. While some NFT investors have experienced astronomical returns, there’s no guarantee that your specific digital asset will gain or keep its value. Any NFT could become effectively worthless.

Having some understanding of cryptocurrencies and computers is necessary to invest in NFTs. If you don’t manage your digital asset properly, then it’s possible to permanently lose access to an NFT.

Understand the Risks of Investing in NFTs

NFTs, as a new asset class, should be considered very risky. Part of the risk of investing in NFTs is the risk associated with investing in cryptocurrencies. While cryptocurrency has existed for more than 10 years, digital money is still a relatively new investment category with high price volatility. The value of cryptocurrency could drop with no notice, due to government action or unfavorable market conditions.

If your NFT is priced in Ether and the value of Ether falls by 50%, then the value of your NFT could also decrease by 50% or more. It’s possible to lose your entire investment in cryptocurrencies or NFTs.

Pros and Cons of Investing in NFTs

  • Exposure to blockchain technology and cryptocurrency

  • Secure, semi-anonymous investments

  • High-risk investment with potential for large losses

  • Need to maintain a digital wallet

  • Expensive network fees

Pros Explained

  • Exposure to blockchain technology and cryptocurrency: Investing in NFTs provides direct exposure to and experience with a relatively new technology and asset class.
  • Secure, semi-anonymous investments: You can buy NFTs securely online and store them in an autonomous digital wallet of your choice.

Cons Explained

  • High-risk investment with potential for large losses: NFTs and cryptocurrencies are volatile, high-risk investments. You may lose your entire investment in an NFT.
  • Need to maintain a digital wallet: If you don’t have at least basic computer skills, you may struggle with the technical aspects of maintaining a digital wallet to buy, sell, and store NFTs.
  • Expensive network fees: In addition to the transaction value, you may be obligated to pay hundreds of dollars in Ethereum gas fees to procure an NFT.

How To Start Investing in NFTs

If you’re new to cryptocurrency and NFTs, then follow these steps to start investing in NFTs.

Create a Digital Asset Wallet

To hold NFTs, you need a standalone digital wallet, most likely one that accepts Ethereum. Your crypto wallet can either be software that you download or a hardware device that you physically keep. Software wallets are more convenient while hardware wallets can be more secure. 

Decide Which NFTs To Buy

You can choose the NFT that you want to buy by exploring NFT marketplaces online. You are likely to encounter a variety of images, short videos, and original artworks. Many NFTs come in collections or sets, with individual NFTs ranging in price from free to millions of dollars each. Pick an NFT that you think is fun and likely to gain value.

Complete Your First Transaction

Before you can buy an NFT, you need to connect your digital wallet to the marketplace where the NFT is listed. You may need to create an account with the NFT exchange before you can initiate the purchase.

Many NFT marketplaces function similarly to auction sites like eBay. It can take between a few minutes and several hours for an NFT transaction to complete, but most NFT transactions using the Ethereum platform require about five minutes.

What To Know After You Invest in NFTs

You may choose to frequently buy and sell NFTs to generate short-term profit, or perhaps you would rather buy, hold, and collect NFTs for the long term.

Your investment approach is for you to decide, but don’t just forget about your NFTs. Keep your digital wallet information somewhere that is safe but still easily accessible to you.

Since you’re spending cryptocurrency to purchase NFTS, both buying and selling may create a capital gain tax liability.

You’re solely responsible for tracking and recording your cryptocurrency and NFT capital gains, as well as reporting those gains annually on your tax return. NFT taxation is tricky because they can potentially be construed as collectibles, which are subject to a higher capital gains tax rate of 28%.

Should You Invest in NFTs?

NFTs are a unique and potentially profitable investment, but they’re not for everyone. If you’re not technically inclined or prefer stable, low-volatility investments, then NFTs may not be suitable for you.

You should consider investing in NFTs if you understand the risks, feel comfortable with maintaining a digital asset wallet, and can afford to potentially lose your entire investment.

Frequently Asked Questions (FAQs)

How can beginners invest in NFTs?

Beginners can invest in NFTs using any of the major NFT marketplaces and a software-based cryptocurrency wallet. After identifying the NFT that you want to buy, check which cryptocurrency the NFT is listed in and make sure that you have that cryptocurrency in your digital wallet. Most often, you need an Ethereum-compatible wallet that contains Ether to buy an NFT.

Do I need a lot of money to invest in NFTs?

High-priced NFTs can cost millions of dollars, but you don’t need to be a millionaire to own an NFT. Some NFTs are listed for free on marketplaces like OpenSea, though you are still obligated to pay transaction processing fees. Transaction fees on some blockchain platforms like Binance Smart Chain may be less than one dollar.

What is the best way to invest in NFTs?

There is no single best way to invest in NFTs. When deciding on an NFT investment strategy, consider the risks and costs in addition to the potential upside. Taking a balanced approach should help you to wisely choose the best NFT and NFT marketplace to fit your budget and investment goals.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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