The NFT is currently a $3 billion industry. and as Bloomberg writesthere is a small group that gets most of the profits.
Profit, you say?
So where are these NFT profits? which are NFTs, for that matter, and are the risks worth the potential reward?
What is NFT?
An NFT, or non-fungible token, is like a “proof of ownership” for a piece of digital art.
Literally, an NFT is a few lines of computer code that contain (among other things):
- Title of the artwork
- Artist’s name
- Name of the current owner
NFTs live (mostly) on the Ethereum blockchain, which is like the giant Google Doc the whole world uses.
So yes, essentially NFT is just a bunch of code in the cloud that says “Chris Butch owns Dissolution of freedom from Beeple.
Why Do people buy NFTs?
When I explain NFT in less than 30 seconds people – and confirm that yes, these it’s something that people pay thousands and sometimes millions of dollars for – I usually get this expression on my face:
This face is justified.
In my experience, people buy NFTs for the following reasons:
- For collecting art
- Support an indie artist
- Be part of a cool new trend
- To earn extra points sometimes included with NFT purchases, such as tickets or the chance to meet the artist.
- As an investment
Most likely, if you are reading this, you are primarily considering buying an NFT as an investment – a quick win for easy money.
But before discussing whether investing in NFTs will be profitable, let’s first go over the basics of how to buy NFTs. Because, to be honest, both of these topics are loaded like Wendy’s baked potatoes and could influence your decision to invest in NFTs in the first place.
How do you buy NFTs?
If you are considering investing in NFTs, you should be aware that buying NFTs is a clumsy, tedious, and costly process.
Sure, buying NFTs gets easier once you’ve done the initial ~20 minute setup of accounts, wallets, etc., but unfortunately, the gauntlet of fees will never go away. Here is the CliffsNotes version of the NFT buying process.
- Create a Coinbase account.
- Link your bank account.
- Create a “hot wallet” with MetaMask.
- Create an OpenSea account.
- Link your MetaMask wallet to your OpenSea account.
- Search OpenSea for the NFT you want to bet or buy.
- Return to Coinbase and buy enough Ethereum to cover the cost of NFTs in OpenSea, plus 10% contingency to cover fees.
- Send Ethereum to your MetaMask wallet.
- Buy NFT and pay transaction fees and gas.
- Store your NFT in an offline cold wallet if you wish.
I really wish buying NFTs was as easy as buying stocks on a modern brokerage app like JP Morgan Self-Directed Investing. This process includes:
- Create an account.
- Linking your bank account.
- Buying shares.
And zero commissions.
But if you’re not intimidated by the tedious buying process, let’s delve into the next important issue: disputes.
Why are NFTs causing controversy?
There has been some backlash against NFTs that potential investors should be aware of – much like you would probably want to know about a company’s dirty laundry before buying its shares.
The two biggest controversies surrounding NFTs are by far the following:
1. They are not as good for the environment.
When you buy an NFT, a computer bank somewhere (“crypto-mine”) must securely transfer your Ethereum and “mint” (also known as the process) the NFT.
Sounds simple enough, but the process is actually so complex that a single NFT transaction consumes more electricity than the average American household consumes in a week. And since cryptocurrency mines are largely based in coal-dependent nations like Iran and Kosovo, every NFT purchase will emit more CO2 than a 300-mile SUV ride.
Therefore, no one really considers NFTs to be socially responsible, ESG investments. At least until environmentally friendly proof-of-stake NFTs become more popular.
2. They’re not as good for artists either.
According to OpenSea’s guide, selling an NFT is as easy as uploading a .gif or .jpg and setting a price. There is no pre-screening process to ensure you are the original owner of the artwork.
As a result, the IRS is concerned that NFTs encourage fraud. People other than the original artist can create NFTs and sell works that do not belong to them. One artist discovered that someone had listed 87,000 unauthorized NFTs of his work. In another scam, an investor paid $336,000 for a fake Banksy NFT.
To avoid buying a fake, only buy from listings linked to the artist’s webpage or social media accounts and make sure they haven’t been hacked!
Are NFTs a good investment?
Well, let’s start by defining what is a “good” investment.
A good investment is one that delivers or is predicted to generate a good risk-adjusted return. This means that the expected return on investment is worth the risk.
Lottery may have a high potential profit, but your chances of winning are extremely small.
High return + even higher risk of losing money = low risk-adjusted return = bad investment. (Check out: Why You Should Never Play the Lottery).
S&P 500 index funds may have a modest expected return (~11% per annum), but the risk of losing money in the long run is extremely low.
Good return + extremely low risk = good risk-adjusted return = good investment. (Read: Why index funds cost less, reduce risk, and make you a better investor.)
Now let’s look at NFTs through the lens of risk-adjusted returns.
The potential profit from NFT flipping is high. Beeple crossroads It originally sold for $66,666 in October 2020. Four months later, a buyer sold it for a steep $6.6 million.
Risk However, the probability of losing money is extremely high. Almost astronomical.
99% of NFTs will go to $0, according to the Motley Fool, and it’s nearly impossible to spot the 1% that won’t. Even seasoned NFT flippers make a profit only 20.8% of the time. according to Chainalysis.
Now you might think that popular, blue-chip NFTs like Jack Dorsey’s first tweet or Snoop Dogg’s Traveling with Dogg collection at least retain their value. But no; offers on the secondary market are 1% or below the initial sale price of the NFT.
The problem with treating NFTs as an investment is that they are not interchangeable. There is only one of them each, so to make a profit on your investment, you need to find someone in the future who:
- Wants your specific NFT and
- Willing to pay more than you paid for it
Do these people exist? Well the secondary market fell 92% by May 2022, so things don’t look good. As a result of the number of sellers exceeding the number of buyers, most NFT resales end in losses. more than 50%.
According to Chainalysis“if you are not on the whitelist, it is much more difficult to make a profit after buying a newly minted NFT.”
How about whitelisting?
“Whitelisting” is a new fad among NFT investors. You may have seen that this is an easy way to get 10x, even 100x profits.
Here is whitelist 101:
- Get actively involved in the NFT project (join Discord, promote it, etc.).
- The creator notices your participation and adds you to their VIP “whitelist”.
- Whitelists get early access to new NFTs.
- Sell your exclusive new NFTs on the secondary market for profit.
In the end, whitelisted backers who flipped their NFTs made a profit 75.7% of the time—nearly four times more than non-whitelisted investors. according to Chainalysis.
But now that the secret is out, getting whitelisted can be a competitive and time-consuming process. Some creators really test their backers, requiring multiple daily social media posts to support the project, submission of custom illustrations, and more. It can take months of effort to get whitelisted, and in the end, the 25% chance you’ll still lose money just isn’t worth it.
Pros and cons of investing in NFTs
- unique assets. NFTs aren’t going anywhere, and being “first” brings its own form of pride.
- Support for artists. Over 90% of the NFT purchase price goes directly to the artist to support their livelihood.
- Adding art to your portfolio. Historically, works of art have been out of reach for most investors. NFTs are leveling the playing field.
- Whitelist your path to success. The chances of making a profit will more than triple if you get whitelisted and flip your NFT early access.
- Very high risk. Since supply greatly exceeds demand, and the secondary market does not change, the vast majority of NFTs will lose some or all of their value.
- A tedious and expensive buying process. The process of buying and holding is cumbersome, complex and associated with commissions.
- No passive income. Unlike stocks or even proof-of-stake cryptocurrencies, there is no out-of-the-box solution for earning passive income with NFTs.
- Replete with scams. Investors face a high risk of inadvertently purchasing a fraudulent NFT.
- Environmental issues. ESG investors may be put off by NFTs’ insatiable appetite for electricity and the resulting CO2 emissions.
Who Should Invest in NFTs?
I think the best candidate for an NFT “investor” is someone who how to make a profit, but would shrug if they didn’t.
My friends Bob and John fill their home with works of art that bring them joy. They have a few items that they hope will be appreciated, but if they don’t, oh well! They will just keep it.
I think what the right mindset for an NFT investor. Because statistically, your NFT investment is likely to lose more than half of its value after you buy it. So if you don’t mind those odds – and would be happy to just keep your NFT – the “investment” might make sense.
Who Should not Invest in NFTs?
Anyone who wants to make reliable investment returns should stay away from NFTs. The risk-adjusted return is too low.
I mean, of course; you can improve your chances through careful research and attempts to get whitelisted. But honestly, it’s better to make a 10-minute investment in index funds and spend the time saved on others. online income generating activities.
You don’t need NFTs to get rich. In fact, more than half of independently wealthy Americans have achieved this by putting their money into “boring” risk-adjusted investments and just leaving them idle.
If you want to start collecting digital art, check out my the complete guide to buying your first NFT. But if you want Earnverify: How the rich get rich (and how you can too!)