In this guide, we will cover the basics of non-fungible tokens (NFTs) and why they are important in the cryptocurrency space. We will prominently feature Binance’s new NFT marketplace throughout as it is one of the best platforms to use when creating, buying, or selling crypto collectibles. Read on to discover why and how to properly invest in NFTs.
Non-fungible tokens (NFTs) are among the numerous use-cases for the novel blockchain technology that is barely a decade old. If you’ve been paying attention to technology-related news sources, you have probably come across multiple articles showcasing the sale of NFTs for millions of dollars at a time.
In March 2021, the digital artist Beeple sold a collection of his art called ‘EVERYDAYS: THE FIRST 5000 DAYS’ for a whopping $69 million. It was a body of work he had started back in 2007, creating and posting one digital image every day for 5,000 days to social media. The action comprised all these 5,000 images put together to form a single NFT.
Following Beeple’s March NFT sale, there have been multiple subsequent sales attracting millions of dollars, and it’s puzzling to a lot of people how a digital image that presumably can be copied by anyone online can demand so much value.
In this guide, we will consider what makes NFTs valuable. You will learn how to value an NFT before you start investing in this niche. Before you begin investing in this space, we will discuss how to value an NFT since these digital collectibles have distinct features that distinguish them from one another that makes them valuable. In addition, we will describe what these characteristics are, as well as how to create, acquire, and trade or sell these tokens in detail.
What is a non-fungible token (NFT)?
To understand NFTs better, it is worth considering the difference between fungible and non-fungible assets. Fungible assets lack uniqueness, and one commodity can be replaced by the next of the same kind. An example is money. Fungibility is a core tenet of sound money, meaning that one ten-dollar bill should have the same value as the next ten-dollar bill. This feature makes money more predictable and hence usable as a medium of exchange.
Non-fungible assets, on the other hand, are unique assets whose value is predicated upon their differences. Pictures, images, and other similar assets are often one of a kind, and they make excellent examples of non-fungible assets. As forms of money, these assets would be a terrible medium of exchange since they do not have a standardized value.
However, this feature does not make them any less valuable as their uniqueness constitutes their desirability. NFTs only transfer this feature onto the blockchain, where data can be immutably recorded and be easily verified for authenticity.
How do NFTs work?
NFTs exist on the blockchain, and since several blockchains support these unique assets, several frameworks dictate how to mint NFTs. Minting is the process of creating a brand new NFT by recording the data of a given asset onto a blockchain.
Ethereum is the most popular platform on which NFTs are minted today, and it provides two frameworks (also called standards) for minting: ERC-721 and ERC-1155. Binance Smart Chain (BSC) is another blockchain platform on which NFTs can be minted, and it too has two comparable standards to Ethereum’s code-named BEP-721 and BEP-1155.
Ethereum and the BSC platform work similarly, and so do the two standards that define how NFTs on their platforms are minted. BSC is a blockchain created by leading cryptocurrency exchange Binance that has the same features as Ethereum, including supporting smart contracts. The main difference between the two networks is cost. It’s much cheaper to transact on BSC than it is on Ethereum.
Technically, NFTs being tokens can be transferred from one individual to another on the blockchain, just like sending Bitcoin (BTC) from one individual to the next. They can be stored in a wallet or bought and sold on a digital marketplace such as Binance’s NFT Marketplace and OpenSea for Ethereum NFTs.
Reasons to invest in NFTs
The NFT niche is a growing market, and ever since Cryptokitties took NFTs mainstream – at least within the blockchain scene – the market has only grown bigger and more popular. There are several reasons to invest in these digital assets regardless of who you are or your investment goals.
Most investors have come into the NFT scene looking for the next best thing in terms of returns on investment (ROI), but there are reasons outside financial gains to invest, but even then, it never hurts to know that there is a chance to make a killing just holding one of these rare tokens.
Here is why you may want to invest in an NFT now:
- Utility: NFTs are unique tokens, and the fact that they are recorded immutably on the blockchain means that anyone can use an NFT to prove an asset’s authenticity, value, scarcity, and provenance.
- Financial investment: NFTs are currently trending because some of these nascent assets have seen unprecedented value gains, with some selling for millions of dollars only weeks after being created.
- Asset protection: most artists have struggled with intellectual and physical property for a long time, but now with NFTs, they have a tool that will enable them to not only protect their body of work but also receive fair compensation.
- Blockchain support: NFTs are one of the more successful blockchain use cases, but even then, the general crypto scene is still growing, and the more users interact with the technology, the better it will get. Investing in NFTs by buying, selling, or minting new tokens may be a great way of increasing liquidity thereby contributing toward a more vibrant crypto community.
How to determine the value of an NFT
NFTs have proven to be extremely profitable from an investment perspective and with a growing list of functionalities, more and more people are now looking to acquire some of these assets. However, determining an NFT’s value is challenging since most prospective investors do not understand the niche and the asset is still growing as an investment.
For example, there is a big chance that an NFT acquired now may have either more or less utility in the future which could mean that it is either under or overvalued at its current valuation.
It’s also hard to underrate the role that FOMO (fear of missing out) plays in the valuation of these NFTs. It makes it clear that NFTs are subject to the market forces of supply and demand.
Here are three ways an independent appraiser or investor evaluates an NFT to assess its value:
- Rarity: digital collectibles are not that much differentiated from their physical counterparts such as paintings and sports memorabilia. The rarer they are, the more valuable they become. The value of an NFT is also influenced by its provenance. For example, an NFT created by a famous digital artist or owned by a popular individual may be valued at a premium compared to one without an interesting history.
- Utility: most NFTs are minted for fun in the crypto space but there are some that have been created with more utility than just esthetics. Some NFTs, for example, give rights to virtual land on the Decentraland blockchain while others can be used as in-game merchandise for games such as Gods Unchained, etc. Some DeFi (Decentralised Finance) platforms even allow NFT owners to borrow loans by using their collectibles as security deposits.
- Liquidity: this is a less significant factor but nonetheless it can affect the value of an NFT. The liquidity of a digital collectible refers to the ease of minting, buying, and selling the asset. There are some obscure blockchain networks on which you can mint an NFT but due to the diverse nature of the blockchain landscape, most networks are not yet interoperable. NFTs created on such small networks may be hard to share, buy or sell due to the unavailability of supporting services such as a marketplace to list the asset, a popular wallet to store it or even finding utility for the NFT.
How to start investing in NFTs
NFTs may be a novel phenomenon that is only booming into the tech and blockchain scene. Several investors are just learning about it as it develops and there’s no reason that should be you as well.
Every person has to start somewhere and if you are looking to take advantage of the highly impactful niche, here are some of the steps to take to cross over from complete newbie to proficient in non-fungible tokens.
- Get educated: accumulating knowledge about a particular asset class is the best way to understand the what, how, why, where, and when to invest depending on your investment goals. NFTs are no different and given their novelty, it is crucial to take the time to study and understand how to create an NFT, buy and sell it for a profit or even use it in any other way possible.
- Choose Your NFT Marketplace: marketplaces are physical or virtual places where goods and services are traded. NFT marketplaces are virtual platforms that offer trading for non-fungible tokens with some offering the feature to create the NFTs in the first place. Popular NFT marketplaces include Binance’s NFT Marketplace, OpenSea, Nifty Gateway, Rarible, among others. Marketplaces offer different features and choosing one that works for you depends on individual needs such as whether you want to create the NFTs or just trade them. The blockchain on which you want to create your NFTs may also determine which marketplace you opt to use. For instance, the Binance NFT marketplace is ideal to mint and trade NFTs within the Binance ecosystem.
- Choose your crypto wallet: cryptocurrency wallets are indispensable tools when interacting on the blockchain and you need one if you want to invest in NFTs. There are several wallets to choose from, all offering varying features. We encourage you to explore and try out the various wallets but the most popular choice for Ethereum and BSC-related NFTs is Metamask and Trust Wallet, respectively.
- Acquire crypto: the last step is to get some cryptocurrency which will be mandatory when creating or buying some NFTs. To create a non-fungible token on the Ethereum blockchain, you will need Ether (ETH) coins. The same goes for BSC NFTs where you will require Binance Coins (BNB). Most platforms that support NFT minting will require the creator to use the blockchain’s native cryptocurrencies to pay for fees to mint the NFT.
How to Buy & Sell NFTs on the Binance NFT Marketplace
The process involved in buying and selling an NFT is often simple and straightforward but this may depend largely on the platform on which you choose to make your trades.
For simplicity, we are going to use the Binance NFT marketplace. Binance’s platform is intuitive to use, and it easily plugs into the existing Binance ecosystem. It saves users the hustle of opening and maintaining numerous accounts for all their cryptocurrency-related needs.
How to Buy NFTs
Step 1: Visit the Binance homepage and click on NFTs on the top navigation menu. This action will take you to the Binance NFT marketplace. Alternatively, you can visit the marketplace directly by inputting the Binance NFT Marketplace URL in the browser (https://www.binance.com/en/nft/market).
Step 2: Log in to your Binance account, then visit the marketplace to purchase an NFT or visit the Mystery Boxes section where you can buy a mystery box with an undefined NFT.
On the marketplace homepage scroll down to search for the NFT you are looking for using either the creators’ usernames or the items’ titles. On the left side, you can refine your search using the filters.
Step 3: Choose your favorite NFT to buy and click on it to read more details.
You can opt to buy now or bid on the NFT depending on the options offered by the seller.
If you opt to participate in bidding through the auction system, click on the [Place a Bid] button to place your bid.
On the Binance NFT Marketplace, you can use your balance from the Fiat & Spot wallet to pay for your NFT purchases. Three currencies are supported which are BNB, BUSD, and ETH. BUSD is the Binance stablecoin pegged to the US Dollar fiat currency.
After placing your bid, click [Place a Bid], and your bid will then be listed on top of the other bids until another bid is placed. If at the end of the auction period, your bid is the highest yet, you will be considered the buyer of the NFT and Binance will deduct the bid price from your account automatically.
The NFT will be deposited to your wallet where you can transfer it to any external wallet, hold it within your NFT collections or even sell it.
How to Sell NFTs
Now that you own an NFT from either minting it or buying it on a marketplace, you can flip it or list it for sale on the Binance NFT Marketplace. Here is how to do it:
Step 1: Navigate to the Binance NFT user center by clicking on the [User Center] button on the top navigation menu bar.
Step 2: Select the asset you wish to sell amongst three options – NFT Asset, Mystery Boxes, or Crypto Asset. Choose the first option for an NFT asset.
Under the NFT Asset tab, there are two tabs to choose from – ‘Collections’ and ‘On Sale’. The first one will show you all the NFT assets you hold in your wallet that are yet to be listed on the marketplace while the latter will show you all listed NFT assets.
Step 3: To list a new asset, click on [Collections] then choose from the assets listed the one you wish to sell by hovering the mouse cursor then clicking on the [List NFT] button that appears on the lower side of the thumbnail.
Step 4: Choose between the option to sell your asset through auction or to sell it at a predetermined price. Select [Highest Bid] for the former option and [Set Price] for the latter.
If selling the asset through auction, you will be required to provide the starting bid price and the date and time that the auction process will conclude. Likewise, if you are offering the asset for sale, you can specify the selling price and the time period the asset will be available for sale on the marketplace.
Step 5: Submit the NFT for listing. After providing all details about the listing, you need to read and understand the term and conditions of listing an NFT on the marketplace. Once you are content with the terms of service, proceed to click the [Submit] button and your asset will then be visible by prospective buyers on the marketplace.
NFTs are an exciting and interesting novel blockchain use case that is currently attracting a lot of attention due to the skyrocketing prices the assets are commanding. The process to buy and sell an NFT may seem complicated but as we have shown, it can be simple depending on the platform you use.
Binance NFT marketplace is a highly recommended NFT platform with several advantages, including allowing users to create the NFTs within their account and supporting Ethereum NFTs. Additionally, Binance is a large ecosystem, and NFTs created on the platform could have more utility within the ecosystem compared to minting them externally then transferring them to Binance.
Frequently Asked Questions on NFT Investing
What is an NFT?
The term NFT stands for non-fungible token and it refers to a record of details and ownership stored on the blockchain that represents a physical or digital asset.
What are NFTs used for?
Non-fungible tokens have a wide variety of uses including representing art such as images, music, and videos while also being used to represent in-game merchandise or rights to virtual real estate properties. It’s worth noting that NFT applications are on the rise as more of them are discovered by the blockchain community.
How do NFTS work?
NFTs are created and stored on the blockchain. The creator will typically describe their piece of art and include its ownership record then mint it to the blockchain by paying the minting fee. This record will be linked to the actual asset which means that the NFT will be used to prove ownership, descriptive details, and provenance of the asset represented.
How do you evaluate NFTs?
There are three ways to value an NFT: by gauging its rarity, utility, and liquidity. To determine if an asset is rare, you can find out how many copies of the particular NFT are available for purchase. Utility refers to the number of ways the asset can be used. The higher the utility, the higher the perceived value. Finally, liquidity is the measure of how easy it is to convert the asset into spendable cash. A highly liquid NFT is easy to sell in the marketplace because it is desirable and there is an easy platform to sell it.