4 Steps to Take Before Buying Your First NFT – The Motley Fool

4-steps-to-take-before-buying-your-first-nft-–-the-motley-fool

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Read this before dipping your toes into the NFT waters.


Key points

  • NFTs are changing the way we own items online, but it’s good to be clear on why you want to buy one.
  • Research will help you decide which NFT platform you want to use, which NFT to buy, and what the costs will be.

At the start of 2021, most people hadn’t heard of the word non-fungible token (NFT) and fewer still had any idea of what it meant. By the end of the year, Collins Dictionary had declared NFT its word of the year, and the market was worth an estimated $40 billion.

If you’re considering buying your first NFT, there’s a lot to think about. Here are four important steps to take first.

1. Be clear on why you’re buying an NFT

NFTs are essentially digital certificates of ownership, and those certificates can apply to a broad range of things. These include art, music, videos, sports collectibles, gaming items, and much more. You need to be clear on what type of NFT you’ll buy, and why you’re buying it.

If you’re buying an NFT because everybody’s talking about them, you may need to dig a little deeper. Otherwise it’s a bit like buying a book because you want to own a book, with no care as to who wrote it or what’s inside it. Choosing an NFT should depend on your own personal interests, and there are big differences between NFT sectors.

For example, perhaps you’re a gamer and want to buy an NFT avatar. You’ll have very different needs from a big basketball fan who wants to own an NFT of a favorite sporting moment. And someone who’s an art collector considering branching into digital art will also have different requirements again.

2. Research, and then research some more

Every investment is different, but the fundamentals of investing are often the same. You need to understand what you’re buying — whether it’s a piece of art, shares in a company, cryptocurrency, or your first NFT.

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Here are some aspects of NFTs to get to grips with:

  • You’ll need to pay fees. When you make a transaction on a blockchain network, you have to pay a gas fee. These can vary depending on the network, crypto prices, and levels of network congestion. NFT platforms usually charge additional fees.
  • NFTs can be minted on different blockchains. Ethereum is the most common NFT blockchain. But it’s possible to create NFTs on a number of different smart contract cryptos. Most will be cheaper and more environmentally friendly than Ethereum (ETH).
  • Valuation can be complicated. It’s extremely difficult to assess the value of an NFT as it often comes down to perception and what’s hot at a particular point in time. This is a trend-driven market, like fashion or art. There’s no guarantee something that’s in the spotlight today will continue to be there tomorrow.
  • NFT fraud is a big problem. In theory, NFTs give digital artists a way to show a piece of work is authentic and sell someone a kind of digitally autographed copy. But in practice, artists complain their work has been made into NFTs without their permission. One platform boss said cracking down on unauthorized works was like playing a game of whack-a-mole.
  • The NFT industry consumes a lot of energy. If you’re an environmentally conscious investor, pay attention to the sustainability debate around NFTs. Depending on which blockchain is used to mint your NFT, there can be a significant carbon cost to consider.

3. Decide where you’ll buy your NFT

You’ll probably come across several NFT marketplaces during your research. These are platforms where you can create, buy, sell, and explore NFTs. First and foremost, look for a platform that trades the types of NFTs you want to buy.

Also consider what blockchain network is used — as we mentioned above, Ethereum is the most common but Solana (SOL) and Tezos (XTZ) are also getting in on the NFT game. This is important because it’s difficult to buy NFTs using traditional money such as U.S. dollars. Not only do you need to own cryptocurrency, you need to own the right cryptocurrency.

Given the prevalence of NFT fraud, look at what each platform does to ensure the NFT you buy is properly authenticated. You don’t want to buy your first NFT only to find it’s not legit and the original artist didn’t even know it had been made.

4. Create a wallet to pay for and store your NFT

Finally, you’ll need an NFT wallet. These are crypto wallets that also support NFTs. It’s easy to set up a wallet, and there’s plenty of useful information online to help if you get stuck. When you first create your account, you’ll be given a kind of master password in the form of something called a seed phrase. Keep it somewhere safe, as this will help you access your NFTs if you ever forget your password.

You’ll need a wallet that’s compatible with the trading platform and blockchain network you chose above. Another key feature to watch out for is security — two factor authentication is a must. If you become a frequent NFT shopper, you might consider a hardware wallet that keeps your NFTs offline. But to start, a software wallet connected to the internet will do the job.

Bottom line

We don’t know how the NFT sector will evolve, but these assets could change the way we own items online. However, there are a lot of issues to address, including the environmental cost and copyright infringements. Right now, the best way to approach NFTs is to pursue your existing interests. This will help you judge the quality and value of the items you buy.

Be aware that there’s a lot of speculation, hype, and outright scams in the NFT world. There are no guarantees that NFT prices will continue to rise, in fact, many may fall. That’s why it’s best to only spend money you can afford to lose. If prices fall, it won’t prove financially devastating. Most of all, take your time and enjoy learning about a new world of digital ownership.

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