NFTs, or Non Fungible Tokens in English, are a new kind of crypto assets that have experienced significant success in 2021. According to CoinMarketCap, the NFT market would represent the equivalent of more than 12 billion mid-2022 dollars and just over 2 million NFTs are believed to have been sold at the time of writing. The Crypto NFT market, which represents less than 1% of the entire cryptocurrency market, remains a volatile market with significant opportunities for gain or loss.
Although NFTs are mainly centered around the art market, their application goes far beyond the artistic realm. Now, more and more institutions, individuals and companies are using NFTs as part of their business.
Decryption on how Crypto NFTs work and the best techniques for invest in cryptocurrency.
NFT Crypto: how does it work?
An NFT can be considered a single cryptocurrency that cannot be split, unlike classic cryptocurrencies like Bitcoin, Ethereum, etc. In this way, NFTs are irreplaceable, as they are not interchangeable.
NFTs are often associated with a song, a video, works of art or even books… We can therefore describe an NFT as a digital file associated with a document of authenticity guaranteed by the Blockchain. An NFT can therefore be seen as a digital property contract.
Technically, the first recorded NFT was created… in 2014! Although the term NFT was not used at the time, the technology was exploited by artist Kevin McCoy in collaboration with entrepreneur Anil Dash in his work “Quantum” representing an animated colored octagon. The NFT was sold in 2021 for almost $1.5 million at Sotheby’s.
An NFT is created through “minting”. It is said to be minted in French. Minting makes it possible to create a crypto-graphic token which is associated with the link of a digital file on the Blockchain. The crypto-graphic token can contain several information related to the author of the NFT, etc.
Crypto NFTs are thus created from already existing Blockchains. The most popular is the Ethereum Blockchain, but others can also be used, such as Solana or Binance for example. Once the NFT has been created or minted, it can be bought or sold on exchanges.
Where to buy NFT Crypto?
The most popular marketplaces for buying NFTs are OpenSea, Rarible, SuperRare, Nifty Gateway and Binance NFT.
While some specialize in certain types of Crypto NFTs like SuperRare in the digital art market, others are more general like OpenSea and Rarible.
It is thus possible to obtain NFTs on these trading platforms via their applications or their websites. To do this, you first need to connect your crypto wallet (held with financial intermediaries like Coinhouse) to the platform, so that you can then cash in or settle your NFT Crypto transactions.
However, there are transaction fees that vary depending on the Blockchain on which the NFT is created, the crypto currency with which you pay for your NFT Crypto or the exchange platform you use. In some cases, the creator of a Crypto NFT may also decide to apply fees to each resale which will be shared between the creator and the platform.
It is also possible to create your own NFTs directly on some popular NFT Crypto marketplaces.
Buy Crypto NFTs: with which cryptocurrency?
To date, the most popular Blockchain for creating and exchanging NFTs remains the Ethereum Blockchain. Most NFT Crypto payments are made in Ethereum (ETH).
However, transactions can also be made in Binance USD (stablecoin of Binance), in BNB (Binance Coin, the crypto-currency of Binance) or in SOL (Solana) for example.
Thus, the purchase of an NFT on an exchange platform most often requires the holding of these crypto currencies on its digital wallet.
Also, the fact that most NFT Crypto purchases are made in cryptocurrencies like Ethereum adds to the price volatility of this market.
Ethereum, which was worth just over €4,000 in December 2021, is worth €1,700 at the time of writing this article (June 2022): a loss of 60% in 6 months!
It is therefore imperative for the NFT enthusiast to consider the variation in the price of the cryptocurrencies in which the Crypto NFTs are traded.
For example, the purchase of an NFT in December 2021 worth 0.5 ETH (approximately €2,000), and whose value would have doubled to 1 ETH in June 2022 (€1,700), would have even saw its investment expressed in euros melt by 15% (-€300) despite the rise in the price of the NFT.
This exchange rate phenomenon is therefore important to take into consideration when buying NFT Crypto. Indeed, an upward or downward movement of the cryptocurrency used for the purchase of NFTs can significantly amplify the losses or gains expressed in fiat currency.
To significantly limit the exchange risk, you can use stablecoins in your NFT Crypto purchases. With the Binance NFT platform, for example, you can buy NFTs with USD stablecoins.
What are the differences between NFT and crypto currencies?
As we have explained, NFTs can be considered as special tokens. In a simplified way, we can consider that each NFT is a unique token which is not fungible and which guarantees the authenticity and moral integrity of the work to which it is linked. Conversely, cryptocurrencies, like Ethereum or Bitcoin, are divisible into an infinite number of decimals.
In other words, traditional cryptocurrencies are fungible (divisible), whereas an NFT is not.
The divisible nature of traditional crypto currencies theoretically allows an infinite number of users to hold these cryptos. In the case of NFTs, the uniqueness does not allow a large number of people to own the same token, which explains the fundamental property of NFTs: “scarcity”.
Finally, NFTs and cryptocurrencies differ in their use.
NFTs are a means of guaranteeing the authenticity of a document, photo, work, etc. Therefore, NFTs are associated with a more or less concrete work or object and have a visual and unique identity in many fields (artistic, literary or even sometimes scientific with NFTs of images taken from microscopes, etc.).
Finally, the two categories are differentiated by their democratization. NFTs represent only 1% of the overall cryptocurrency market and require the prior use of cryptocurrencies in order to be created and traded.
Why Invest in Crypto NFTs?
Clearly, one of the main motivations for NFT Crypto investors remains the promise of potentially large gains through speculation.
However, the first major market correction in 2022 seems to allow a restructuring of the market and to some extent limit the often excessive speculation.
To date, the two most famous NFT collections are the CryptoPunks and Bored Ape Yacht Club collections.
The collection Bored Ape Yacht Club includes 10,000 NFTs that depict monkeys. The average historical value of a Bored Ape NFT is estimated at 22.5 ETH for an estimated capitalization of over $900 million. On the other hand, the CryptoPunks collection, which is made up of 10,000 units representing character profiles, had an average price of 45 ETH in mid-2022.
Despite this significant speculation, many investors may be interested in NFTs for purely artistic reasons by acting as collectors.
In addition, a few rare projects aimed at linking NFTs and works of art via a museum have, for example, recently been developed. This is the case of the Private Museum project which offers an offer of works of art from various artists in the form of NFT and accessible in the Metaverse. NFTs can also have a more disinterested dimension and a purpose close to the traditional art market.
Investing in Crypto NFTs Is Not Safe
Nevertheless, NFTs are not without risks!
The main risk is that of the partial or total loss of your investments. Indeed, the NFT market is a very volatile market with risks of large sudden variations in the price of NFTs and the price of the cryptocurrencies used to exchange them. In addition, the NFT market has been experiencing a significant slowdown since the beginning of 2022.
Another significant risk is the presence of fakes or imitations. The risk of copyright theft remains high with the creation of NFTs and many “creators” can pose as famous artists. For NFTs backed by real works, there may be a decorrelation between the price of the real work and that of the NFT representing it.
Finally, Crypto NFTs may be linked to scams and price manipulation. Some cases of “wash trading” on NFT Crypto have indeed been identified. In this situation, the creator of the NFT artificially inflates the price of the NFT by successively reselling his NFT between his own accounts, which induces other agents to buy the NFT at a price that is not his market price.
Image source: Freepik
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