NFT 101 for investors

NFTs have taken the crypto world by storm. But what are they? Should you get involved? And what are the risks?

The disruption NFTs are causing has raised some eyebrows in not only traditional finance, but in the traditional art market too. Since January we’ve heard muttering all the way from ‘tulips, tulips!’ to ‘how can I get involved?” 

Firstly, what is an NFT? It stands for non-fungible token. It can’t be divided or fractionalised. A way to explain an NFT is by comparing it to a share certificate. One share is a fungible asset, a fraction of something that you have part ownership of, and is deemed a security. In contrast, an NFT represents a whole, rather than a sum of the parts, and it sits as a smart contract on an immutable distributed ledger. Unlike a share, it can also represent something more ephemeral, such as a memory or an experience. It is not dissimilar to a one-of-a-kind trading card. 

One of the first use cases for NFTs has been art and collectibles. Partly this is because many cryptocurrency investors in the last years have built up large storage of value. It’s hard to trade out of crypto if you own a lot of it, because of things like tax and volatility, so art has been a natural use case to continue transferring excess capital into alternative assets (not dissimilar to how the traditional art market operates). In addition, art equals content for the next stage of Web 3.0 in the same way writing and information did for Web 2.0. There is a black hole where visual content is required to feed hungry participants in the next stage of the internet.

Why should a traditional stocks and shares investor be looking at NFTs?

Would it help if we told you the New York Stock Exchange (‘NYSE’) launched NFTs celebrating some of its notable IPOs to date? We were even quite surprised that a traditional institution such as NYSE was coming up to speed so quickly, as stock exchanges tend to be quite glacial when it comes to adopting new technology. 

But it’s not only NYSE! Experimentation with NFTs is happening everywhere among businesses and brands, from bands like Kings of Leon to institutional brands like McDonald’s and Taco Bell. From artists like Damien Hurst to art dealers like Sotheby’s. They are all exploring NFTs as a way to build a deeper relationship with some of their audience.

What is evolving is that NFTs are a major potential new social channel that gives brands and influencers a chance to investigate what having super-fans means for a business in the same way a sports team found a global audience when using the internet for the first time back in the dot.com days. So powerful is this idea that in 5 years’ time, at every AGM, investors will want to know not only what the overall business plan is, but what the company’s NFT strategy (that is, community building plan) is. 

Which cryptocurrencies represent the foundation of NFTs and what should I be investing in?

Most of you would have heard of Ethereum or ETH. It’s one of the better-known crypto currencies second to Bitcoin. In relation to NFTs, it has the best network effects for investors, developers, projects and creators. Ethereum is the rails on which NFTs run. Think of it like a huge immutable spreadsheet holding all the transactions that have ever taken place, recorded on it. There are also more platforms emerging by the day that operate outside of Ethereum, or ‘off chain’. However, Ethereum has been one of the foundations of NFTs. Other emerging similar foundational NFT cryptocurrencies which we are always keeping an eye on include Cardano (ADA), Flow (FLOW) and Polkadot (DOT). There are also NFT platform index funds emerging such as Index Finance (NFTP).

What’s our prediction for NFTs in the next 12 months?

We are about to see a lot of experiments around community engagement, what an NFT represents, the possibilities of what a smart contract can achieve and how decentralised communities can be grown and rewarded.

Many self-contained bubbles will come and go but almost anything has the ability to become an NFT – from property to people. In January you could have bought an NFT piece of art one day and then sold it for 100% profit the next. While the market has cooled somewhat, we are seeing insane auction price levels for some NFT artists (see Beeple and Pak). But over the next 12 months we also expect NFT traders to end up on the floor and having to dust themselves off. That’s not saying this is going away though. Just that if you do get involved, be prepared for a bumpy ride.

How can I get involved?

To set out, the very first thing you need is an account for buying a cryptocurrency such as the recently listed Coinbase account, and a wallet that you can use in your browser to access Web 3.0 such as a Metamask wallet. They are easy to set up. Once you are plugged in you can go and visit websites like Rarible or Opensea which are the art market equivalent to ebay and purchase and sell NFTs. You can even buy land in the Metaverse (a term to describe the collective shared digital space in which NFTs exist) from these sites. 

Our last piece of advice

If you do decide to get involved in NFT, then find your tribe. Because in the end that is what NFTs are all about. And that way, if you do lose any investment over short-term volatility, you will still have a collectible, token or piece of art that you value. If you love what you are collecting or involved with, whether it’s art, NBA Top Shots or the foundational technology, you are less likely to be obsessed over the volatility and be in it for the long term in the same way as, say, a stamp collector. 

We will talk more about the different NFT categories next time. Until then, good luck exploring and feel free to get in touch if you have any questions! The NFT community is always ready to help onboard anyone that is interested.

Melissa Gilmour is founder of NFT experience and curation agency Lily & Piper. Jamie Anson is founder of Nifty Orchard app and Ethereum London meetup organiser.

Lily & Piper is working with artists and architects to provide NFT experiences for the digital future. You can find out more at lilyandpiper.com.