“Beauty is in the eye of the beholder.”
That’s a sentiment you may have muttered to yourself a time or two, whether discussing a friend’s new painting hobby or trying to make sense of a sculpture in a hotel lobby.
Art, and its value, is something that has always pushed boundaries.
We’re living in an exciting time when those boundaries are being stretched further than ever — into the digital realm.
NFTs have helped legitimize digital art, giving it a hosting and sales platform as well as creating a system for assigning value. In fact, the “rules” around what make an NFT valuable might actually be more clear than anything we’ve seen yet in the art world!
In the words of an art specialist at Christie’s, Noah Davis: “As a mechanism, NFTs make it possible to assign value to digital art, which opens the door to a sea of possibility for a medium that is unbridled by physical limitations.”
Here’s what you need to know about investing in NFTs, understanding their value, and making the most of it to help grow your wealth.
The Basics of How the NFT World Works
For those just getting into the NFT investing game to capitalize on all the value that’s swirling around in the space, let’s begin with a quick rundown of the basics.
Defining Non-Fungible Token (NFT)
NFTs are non-fungible tokens. Non-fungible means irreplaceable. In the case of NFTs, this means that each token is different and can’t be exchanged with another. This is different from something like an ounce of pure gold, which can be swapped with another ounce of pure gold without impacting its value or characteristics. It’s this factor of non-fungibility that makes it possible to use NFTs to assign ownership to, and buy and sell, digital properties.
What are those digital properties? Currently, most NFTs consist of digital artwork. That means when we think of NFTs, most of us think of digital images like photos, illustrations, and sometimes even gifs. In fact, one of the most well-known NFTs at the time of this writing is the $70 million-dollar digital collage Beeple’s Everydays: The First 5000 Days.
However, anything that’s unique and is able to be represented by a digital token can be bought and sold as an NFT. Videos, audio, memes, video game avatars and “skins,” and even real estate are all things we’re currently seeing NFTs created around.
How NFTs are Created, Bought, and Sold
NFTs exist thanks to blockchain technology.
Blockchains are decentralized, transparent databases that record transactions. With blockchains, the chain of custody of an NFT is always visible. Self-executing smart contracts, which also live on blockchains, enforce the details of NFT sales. Together, these features make the process of peer-to-peer NFT trading possible without any oversight from a centralized agency or institution.
Right now, most NFTs exist on the Ethereum blockchain, which is also home to lots of other technologies — applications, payment systems, a cryptocurrency (Ether or ETH), and so on.
When an NFT is minted, or published to a blockchain so that it can be purchased, a unique digital “signature” is programmed into the token. This is when it becomes non-fungible.
Usually when an NFT is ready to be sold, or re-sold, the seller will host it using an NFT marketplace. OpenSea is a popular example. These platforms are where most will go to purchase an NFT — a process we’ll walk you through later in this article.
NFT marketplaces usually host lots of NFTs with different content and from different sources. This creates an environment where it’s easier to find the value of an NFT through comparison. However, once in a while, an especially high-value NFT like the Beeple collage will be sold via auction house instead of on a marketplace.
Factors that Impact How NFT Value is Determined
Now for the question many beginning NFT investors find themselves asking: where does the value of NFTs come from?
While there aren’t any hard-and-fast guidelines in place, there are several factors that NFT investors can look at to determine if they’re willing to pay what an NFT seller is asking — or to set the price of their own NFT when they’re ready to cash in.
The value of a painting by Claude Monet and the value of even a similar impressionist painting by a modern-day street artist will be different — that’s just the way the art world works. And it’s no different when it comes to NFTs.
The first factor that impacts the value of an NFT is the reputation of the artist behind it. NFTs designed or minted by well-known or especially popular up-and-coming artists will be assigned more value than those created by less recognized artists.
Last Price Paid
In another similarity to the physical art ecosystem, the value of an NFT is very often impacted by the price it was last sold for. Sellers know the market will bear this price, so as long as the content or artist hasn’t developed a negative connotation for any reason, they’ll be able to start with this number when determining the value of their NFT.
Just like past sales prices impact NFT value, so do past owners. After all, who wouldn’t want to own a painting that previously hung in the home of Jay-Z and Beyonce?
The interesting thing about NFTs is that it can be difficult to track their ownership history, as blockchain addresses are anonymous by nature (though some marketplaces may make the identity of the person associated with a blockchain address public).
Capitalizing on the history of an NFT is easiest if the previous owner mentioned their ownership in a public forum, or if their purchase was publicized by a media outlet.
Scarcity creates demand that outweighs supply. And that is a recipe for selling an asset at a competitive price.
What makes an NFT scarce? First of all, uniqueness. Some NFT collections consist of hundreds or thousands of similar NFTs with just minor differences. Take the inBetweeners collection for example. NFTs in this collection aren’t super unique, which could downgrade their scarcity.
However, inBetweeners have something else that makes them rare — they’re associated with Justin Bieber. Association with a renowned artist or celebrity increases the scarcity, and therefore the desirability, of an NFT.
Scarcity increases the intrinsic value of any asset, making its owner feel like they have something that’s truly special. This feeling is one for which sellers can charge top dollar in the NFT art space.
We’ve often seen the value of an item increase as it increases in popularity.
Artnome studied this phenomenon as it applies to NFTs, specifically. By studying the SuperRare marketplace, they found that the number of NFT views by registered collectors correlated with the sales price of that NFT. Increased views — aka popularity — meant increased final sales price.
An asset is considered liquid if it can be sold when desired without taking a major loss in value. Liquidy is a priority for many people who see NFT art as an investment, rather than purely a long-term digital collectible. For these people in particular, high liquidity makes an NFT more valuable. They want to know they can make a profit from their NFT at any time.
Liquidity can be fickle, as it all depends on desirability and what a buyer is willing to pay — factors that change as the market changes, sometimes by the hour.
To get an idea of what you may be able to expect as far as NFT liquidity, look at its previous trading volume. Often, NFTs in the same category will have similar liquidity, so you can still diversify your NFT roster while maintaining liquidity.
Utility can be described as a set of add-ons that come with an NFT purchase. Utility might include access to events, membership in an exclusive community, free goods or services, and so on. These bonus “features” understandably have an impact on NFT value.
Perhaps the most famous example of NFT utility currently is the Bored Ape Yacht Club, a community made up of Bored Apes NFT owners. Right now, exclusive perks include access to a digital graffiti wall and membership in a private Discord server.
Connection to the Tangible World
Though NFTs exist digitally, those that are associated with real-world assets may be seen as more understandable among mainstream investors — increasing liquidity and therefore value.
How can NFTs from the digital world be connected with physical assets? By doing what they do best. NFTs define ownership and prevent fraud, and can be used to do just that for physical things like tickets, real estate holdings, land, precious metals, and beyond.
How to Buy Your First NFT
Now that you have all the facts on investing in NFTs that align with the value you’re seeking, allow us to provide you with a super quick walkthrough so you can make your first purchase!
Step 1: Choose Your NFT
First up, do some research to pick a specific NFT, NFT creator group, or category that hits several value factors. Here’s where to start:
- Use Twitter, Reddit, and other social media platforms that host NFT communities to check out where the hype is.
- Visit the NFT’s website or wherever the NFT creator hangs out to get an idea of NFT utility.
- Use platforms like Rarity.tools and NFTcatcher.io to get the deets on new NFT releases, including number of items in the collection, pricing, and more. This will help you determine scarcity.
Step 2: Create an NFT Marketplace Account
Your NFT of choice will likely require you to purchase it via a specific marketplace. Usually, to complete a transaction on one of these platforms, you’ll need to connect a crypto wallet and fund it with whatever cryptocurrency the marketplace accepts. Tools like Coinbase, MetaMask, and even PayPal now can help you open and fill a crypto wallet with Ether, Bitcoin, or whatever crypto coin you need.
Step 3: Make Your Purchase!
You’re ready to purchase your NFT, either via auction or fixed price — it all depends on the marketplace that’s hosting it. Once purchased, you’ll add the NFT details to your crypto wallet for safe storage.
For a more detailed walkthrough of the above process, read Investing in NFTs: How to Get Started.
How to Track NFT Value Alongside the Rest of Your Diverse Portfolio
Now that you’ve got your first NFT investment, it’s time to not only measure but to track its value over time — so you have all the insight you need to determine when it’s time to sell and when it’s time to double down to increase your return.
Introducing Kubera: the premier solution for finding and following the value of your entire diverse portfolio.
Kubera is modern personal balance sheet software with several unique features that makes it especially fitting for diverse investors.
The first thing that sets Kubera apart is its capability to track every single asset in your portfolio, side by side. We’re talking stock and crypto holdings, precious metals, bank accounts, real estate, digital assets, antiques, domain names, vehicles, and of course NFTs. View every asset’s details, value, and return at a glance using Kubera’s easy-to-digest layout.
View some of the global financial institutions we work with here.
That’s right, we said you can even view the return on your assets within Kubera — automatically and in your Fiat currency of choice. It’s yet another feature that makes Kubera stand out. Here’s how it works.
Let’s use a piece of NFT art as an example. You just make sure the NFT’s details like purchase price and present value are all up to date. Kubera will automatically add in its holding time to show you the IRR — internal rate of return is a subset of ROI that accounts for time. And like we mentioned, Kubera thoughtfully displays IRR in your chosen Fiat currency.
Why does that matter? Because this makes it possible to understand the value of assets purchased in non-conventional formats — like NFTs purchased using crypto — in your native currency. When you can view all of your assets on a level playing field, you can make more accurate comparisons and predictions to increase the growth and health of your portfolio.
See Kubera’s IRR calculation feature in action here.
Another interesting and helpful feature is all of Kubera’s visual insights. In addition to our beautiful charts, we also have a recap screen that crunches all of the data across your Kubera account to enable you a complete view of asset and portfolio performance.
And we’re not just talking about a vague, yearly measurement. You can get granular with Kubera — even viewing asset change on a daily basis.
This level of detail empowers modern investors to make the quick decisions that are required to build wealth in the fast-paced NFT market.
You’re already managing a life, as well as a diverse portfolio that’s helping you get you where you want to go in that life. Don’t give yourself yet another full-time job just managing your NFT investments.
Let Kubera measure and track NFT value for you — automatically.
Sign up to see for yourself today. And don’t worry, if you work with a financial advisor or wealth manager you can still make the most of all the unique capabilities Kubera offers. Simply introduce Kubera’s white-label solution to give them a platform where they can more easily engage with tech-savvy clientele, just like yourself.