What exactly are NFTs and are they a good investment?

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23. Jan. 2022 ·
The word NFT comes up very often in the media and brings with it a real hype. But what exactly are NFTs and does buying NFTs make sense for me?
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The crypto market has been very popular for some time and is constantly bringing new technologies, including the novel technology of NFTs. We often hear in the media that several hundred thousand, if not millions, have been spent on a digital artwork again and young people become millionaires overnight. For laypeople, such success stories always sound a bit muddled and surreal because they are often not understood.

But this is exactly the problem we will clarify in this article, so that they are also fit enough to understand NFTs. And maybe write a success story yourself in the near future.

What are NFTs?

In short, NFT stands for “Non Fungible Token” and means a unique product that exists only once on a blockchain. In that sense, they are digital property of a product that can be bought with cryptocurrencies. But unlike traditional cryptocoins like Bitcoin or Ethereum, they cannot be exchanged 1 to 1 for another coin. Rather, they are valued based on demand and supply. For example, well-known collections such as “BAYC”, i.e. The Bored Ape Yacht Club, are much more relevant due to their marketing and popularity than small collections that do little marketing.

What are the types?

The range of existing NFTs is very wide and has grown steadily over the years. New exciting projects with unique and novel features are launched every day, creating more hype.
Probably the best known types of NFTs are the classic PFP projects, which stands for “Profile picture”. They were the start of the whole hype and have no real function other than to look good and serve as avatars for social media profiles.
Another popular type are music clips of an artist that are digitized and can be purchased once by fans. This way, fans not only have the opportunity to own a piece of the music, but also support the artist at the same time through the sales fees.
A third and very popular type of NFTs are playable artworks. This means that by owning the NFT, the buyer gets access to a game and at the same time can earn money by playing it.

How can I buy NFTs?

First of all, you have to choose a suitable blockchain (decentralized network on which the NFT resides) before buying it. Probably the most famous and largest blockchain is Ethereum by programmer Vitalik Butarin. Then, the currency (Ether) for the purchase will be purchased on one of the trading venues (Popular trading venues are Binance, FTX, & Coinbase) and sent to his “wallet”.

What is a Wallet?

A wallet is a digital wallet in which various coins are stored and used for purchase. The best-known wallet for the Ethereum blockchain is “MetaMask”, which can be easily integrated into Google Chrome. Once this is done, you send the purchased coins to MetaMask’s wallet address with one click. Now it’s time to buy your first NFT, but what do I need to pay attention to?

What do I have to pay attention to when buying an NFT?

Before you buy your first NFT, you should think about its functionality. Meanwhile, it is not so wise to buy pure PFP projects, because they are “outdated” and have no real function. It makes more sense to invest in NFT projects that have a purpose or benefit to the buyer. Examples of meaningful functionality are that you can use the NFT to play a game. Or that it can be used for “staking”. (In staking, crypto owners use their coins / NFTs to add new blocks to the associated blockchain, and get a reward in return).

How exactly you get this info varies from project to project, but usually such things are in the roadmap on their website or on the Discord server.

When the project is selected, it is time to check the offer on one of the marketplaces e.g. Opensea or Rarible and look for the rarity of the NFT. Rarity usually determines value and popularity.

For example, out of a collection of 5000 NFTs, the NFT with the number 500 is much rarer and more popular than one with the number 4500. To check this, websites like rarity.tools or raritysniper.com come into play.

Then you connect your wallet to the marketplace, search for the collection and buy the NFT. It is important to buy a NFT that you like and that is as rare as possible. After that, costs in the amount of the gas fees (processing fees on the blockchain) are added to the purchase, but after that the NFT is in the wallet.

Now, depending on the intention of the purchase, the NFT can be held for the future or sold at a later date. For the sale, the process is exactly the same, just

reversed. You connect your wallet to the marketplace, set the amount of the purchase price, and then display it on the marketplace.

Why are NFTs bought for such high amounts?

A simple screenshot or photograph is enough to have a digital image on the cell phone. But why are such high sums paid?

The NFT market can be compared to the art market. People pay horrendous sums for large paintings, even though they can simply be photographed. The same principle applies to NFTs, they can be photographed, but they only exist once on the blockchain and therefore have only one owner. The only difference is that you can’t touch an NFT or hang it on the wall.

Are NFTs a good investment?

There is no blanket answer to this question because, as described above, you have to look at the function and rarity. Nevertheless, many investors speculate on a price increase and a profitable investment. Out of fear of high inflation, more and more people are looking for an alternative money investment in NFTs.

Whether they are in the end a good or less good investment one must decide for oneself. Nevertheless, it must be said that NFTs are still quite young and thus in their infancy. It means that the possibilities with NFTs are far from exhausted. And if you find a good project early enough, you can achieve high returns.

 

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CEO & founder
Leonardo Lemos Rilk and his business partner Julian Witzel are the managing directors of VIERLESS GmbH, a web design agency that uses targeted branding to extract the maximum online potential from selected companies and brands. Quality, premium and uniqueness are the characteristics VIERLESS identifies with and now also establishes in the NFT sector.

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