From 11 Cents to $11 750 000: How Does Investing in NFTs Work?
Given the most expensive NFT to date ($91.8 million), even the most sceptical readers (even if they didn't admit it to anyone) by now wondered at least once: how exactly does that work?
Is there some sort of pattern, a long con, a scheme to make the rich even richer, or could you just as easily have been the lucky person who got a CryptoPunk for free and for fun at the beginning of the journey and paid only an 11-cent transaction fee and made a handsome 10681818082% profit on your investment?
Let's see if we can shed some light on this mystery wrapped in an enigma.
How to make money with NFTs?
The cryptocurrency world is famous for its incredible stories. NFTs wouldn't be possible if it weren't for Bitcoin itself, the very first pioneer of the crypto world, the one that started it all.
Bitcoin is something straight out of a Hollywood movie: it started with a (still!) anonymous cybersecurity expert who
- took code written by the U.S. Navy,
- got some of the most amazingly intelligent people on the planet to volunteer for free because they were mesmerized by the sheer brilliance of the project,
- made billions out of nothing,
- created a foundation that enabled saving lives,
- made life massively easier for thousands of the biggest companies around the world
- and disappeared when the FBI invited him to talk about the new payment system that would take billions out of the banks' and governments’ pockets and give power back to the people.
It was a miracle, Prometheus stealing fire from the Gods and giving it to mortals. Nice bonus: Bitcoin's pioneers made similar profits, buying at tenths of a cent and selling at $50,000 per coin.
Based on this code and inspired by indisputable fact-backed achievements, hundreds of thousands of new coins were created. Most of them failed. A few proved that Bitcoin was no fluke.
One of them was the YFI token, which some lucky investors bought for $3 and sold two months later for $43,000. YFI surpassed Bitcoin not only in terms of peak price at the time, but also in terms of speed of growth: the mountaintop Bitcoin eventually reached with tons of strife, blood, and sweat in a decade, YFI swiftly and effortlessly leapt to in just two months.
NFTs were the next step in the evolution of cryptocurrency. Designed by Larva Labs as characters for a computer game, CryptoPunks, which were basically gamer avatars and didn't get any simpler than the designer had made them, with square pixels and infinitely primitive basic elements, became quite popular, to say the least, as the public got a taste for blockchain.
When someone relatively unknown decided to add blockchain to an image that a 10-year-old could create in Paint, a veritable firestorm began.
What made virtual art sell like that?
2010-2020: first, a few code-based virtual coins similar to an in-game currency or skins for CS:GO made headlines and earned early investors millions in ROI.
2020: a token that wasn't even a currency (what’s a project token anyway?) became an order of magnitude more successful. Incidentally, YFI's creators called it "completely valueless" and advised us to "stay away from it". Turned out it was the best investment, probably ever in the history of humankind. Imagine if you could turn $100 into $860,000 in just two months without having to do anything but buy?
2017: getting a CryptoPunk for free and paying just a few cents for a transaction to end up with millions turned out to be as easy as buying a cup of coffee. But what was behind that success?
Using science to understand NFT ROI
How do the mechanisms behind NFTs work and why do they work that way?
Crypto markets mean certain gracious predictability in the general sense, as professional traders will tell you. What goes up must come down. There’s hype, hysterical buying, then panic-selling, smart investors buy at the bottom, and the cycle begins again. There’s something so artful in the beautiful precision and (almost!) predictability of fundamental analysis on a large scale. But that doesn’t mean you can tell what’s coming.
The most experienced traders will tell you that predicting future events based on past results is impossible. Gamblers in casinos may believe that one-armed bandits "warm-up" to them after a while or "build-up" luck, but the sequential processes in crypto markets, like every new roll of the dice, are completely unrelated. There are some laws governing trading, but no one can predict the outcome. Analyzing how a particular NFT will pay off isn't possible.
All even the best can do is find the asset with the highest potential payoff and the lowest risk, give no more than 2% in a day, invest, close their eyes and hope for the best.
Use common sense to understand art
In this case, the chances are even slimmer. The world of NFTs is very closely related to the world of art. All NFTs are basically art, from simple CryptoPunks to insanely complicated paintings that artists work on for years. And it's hard to find the logic behind their popularity.
Why is a banana taped to the wall selling for $120,000 at Art Basel Miami Beach, and what makes a pine tree sawed into three pieces a masterpiece of art? You may have heard of a forgetful gallery owner leaving his glasses on the floor of a gallery and returning to retrieve them twenty minutes later, only to find a crowd of art connoisseurs heatedly debating the pros and cons of what was clearly a powerful new postmodern (cubism? Orwellian?! ) exhibition piece.
Analyzing the logic behind the artistic value of the NFT is as difficult as it gets.
Although for justice’s sake, there's a theory that the FOMO fad will fade with time, the banana fever will die down, and people will only focus on NFTs by established artists that are obviously a product of colossal effort and professionalism.
This makes perfect sense. Bitcoin's success is due to the Herculean amount of work put into it (as well as the market demand), and it would make sense that only the very complicated and effective products would remain competitive. That leaves one more aspect.
Using the supply and demand model to predict ROI
There are many speculations about Bitcoin’s success.
One of the reasons is undoubtedly the fact that this payment system, which allowed people to control their own money without trusting the government, emerged right after the global banking crisis that led many to believe that banks and governments couldn't be trusted.
In some ways, the timing was perfect. People were defrauded on a grand scale. No one was really punished. Nothing was changing. And then there was Bitcoin.
Bitcoin was a door out of the Matrix, a way to throw off the yoke of oppressive governments, as Satoshi Nakamoto put it, to gain the ultimately most important thing in life: complete freedom. Now, with cryptocurrencies, not only could you stay under the radar, but also make money trading them. The sky was the limit. As long as you knew how it all worked.
Will NFTs be in demand? Does the world need them?
If you contemplate NFTs as the great equalizer, the final piece in the crypto puzzle designed by the great genius (geniuses?) Satoshi Nakamoto is falling into place in truly spectacular fashion.
Bitcoin has given people the power to do what they want with their money without getting robbed blind with commissions of up to 20%, without having their accounts seized or frozen, and without being denied access to funds in the first place, as billions of people are. What would your life look like if you were unbankable? Thanks to cryptocurrency, you'll never have to ask yourself that question.
Tokens like YFI, ASICs, and trading platforms gave people the ability to make mastodon profits easily. There's just one problem. Let’s say you’re fed up with the banking cartel and want to join the Just Cause and become a part of the beautiful and inevitable crypto revolution. The problem is that you need capital - to buy an ASIC, to trade cryptocurrencies, or to farm and stake.
What if you, like billions of people on the planet, don’t have any? You thought cryptocurrencies were about empowering ALL people? The ultimate democracy? It turns out that when you trade crypto, the most you make with $100 is $2. And then another $2. And another $2. As long as you don’t lose. And ASICs cost thousands. Why, if you invest only $100,000, you get a decent 10% per year staking... Oh, wait.
So it looks like crypto is a way to make the rich even richer after all.
Here is a solution.
Along come works of art that have no justifiable value, cost nothing to produce, and whose price can’t be controlled or predicted. There is no way to know what they’ll sell for in a few years. And this gives the system a degree of randomness that is so mathematically brilliant that it takes your breath away if you think about it for a few minutes.
Anyone can get free NFTs and pay a few cents for a commission. There is no way to control the process, predict the outcome, or manipulate the rules. As we found out, pretty much all you can do is get free NFTs and hope for the best. And that gives everyone in the world an equal chance of winning. It's a perfect democracy, after all. You can get rich investing in NFTs whether you are an oil tycoon or someone living in a village in Africa with just enough money for a 50-euro cell phone.
It actually is a system that provides fair opportunities. It's just that we have had to wait for NFTs to be introduced so that the system is finally complete and Satoshi's vision can finally shine in all its glory.
And now the real magic begins.
Platforms that allow using NFTs
If you're anything like us, you look forward to using NFTs with the same anticipation as Ludlum's fans waiting for the first Bourne film. We probably should have gone with a kid-Christmas metaphor, but you know what we mean. If you can’t wait to get your hands on NFTs, the good news is: you can, right now.
The magic of cryptocurrencies means that there are no barriers to entry when it comes to NFTs. You can get them for free by playing games, receive them as prizes or gifts from friends, or buy them. All you need is crypto in your wallet. Anyone can set up a wallet in less than 10 minutes without knowing anything about cryptocurrencies and doing any paperwork. You can buy your first NFT on one of the following platforms, faster than a Dodo pizza can be baked, you just need to know how.
Lovely Coinbase is famous for valuing your privacy above all else (not). If you don't want your privacy anyway or don’t know what it is, you’re welcome to follow the detailed instructions on this page to join forces with one of the most well-known resources for crypto enthusiasts out there. Some exchanges will invest heavily in security and compensate their users after hacker attacks. Others won’t. Take usual precautions.
Stripe has been around since 2010, which is absolute donkey’s years for the crypto space. This is a hopeful prospect. That’s not only because of time in the business but also because of a heavy emphasis on the security of the NFT functionality it offers.
According to our sources, identity verification, fraud prevention, and (prepare yourself) lots more are called upon to guard your NFT activities. Joking aside, what’s going on here is the company refraining from telling anyone too much about its security practices, which is a good sign.
Bitpay is also one of the most established businesses out there, with its share of bad press, but that will inevitably happen after being in business for over a decade. We still recommend protecting yourself by using security practices like diversification. But what you’ll probably want to pay attention to is Bitpay’s “300M wallets/trillions in value”, “countless plugins, libraries, or APIs”, KYC and AML, which you can do but don’t have to if you don’t want to (nice touch), and protection against volatility. Bitpay is a formidable infrastructure worth at least a try.
With a few years of uptime (since 2018), ZenGo is clearly not as loomingly impressive as our next contestant, but it does have half a million users, all of whom must have one reason or another to keep using it. As well as interesting features like 3FA and a Visa crypto card, which are relatively new to this niche. Also worth mentioning is a system to help recover your money in case the company goes bankrupt. There’s a strong and not-anonymous team and a few cool friends and backers like Elron, Samsung NEXT, FJ Labs, BlockNation, Zilliqa and Tezos. Security like never before? Not sure we buy facial biometrics and industry-leading encryption (heard that before a couple of times), but you could do worse.
Binance NFT marketplace is available for anyone with coins like BUSD and ETH. Binance really needs no introduction: if you attend the Blockchain World Summit and throw an apple in a random direction (don’t do it), the 99.9% chance is, that you’ll hit a Binance user. This is the biggest player in the business, if you’re starting out you should probably start with Binance, and it’s worth paying attention to its Academy, too, while you’re there.