As NFTs have become the latest plaything of the rich and famous, regular investors have sat on the sidelines wondering whether $587,000 for the Nyan Cat GIF makes any sense whatsoever. (Tip: to the ultra-wealthy, that figure is just a rounding error). Naysayers have also pointed to the massive energy cost of blockchain applications.
But don’t give up so quickly. NFTs are so new that some stunning mispricings slip through. A collection of 25 GIFs by restaurant Taco Bell sold for just $1.60 each last week. One later got re-listed for almost $20,000 only three days later. Meanwhile, one avid sports collector who bought NBA digital trading cards turned an initial $175,000 investment to $20 million.
As for its environmental impact? I’ve sworn off buying Bitcoin (CCC:BTC-USD) myself, but Ethereum (CCC:ETH-USD) – the building blocks of NFTs – will soon switch to a less energy-intensive proof-of-stake function now that its sibling coins Cardano (CCC:ADA-USD) and Polkadot (CCC:DOT1-USD) have proven they work at scale.
So, what’s the secret to making money on NFTs? Much like buying fine art or real estate, making money in NFTs involves 1) having expert knowledge in a particular area and 2) having the conviction to jump in.
As for taking profits: the moment you find yourself asking, “is it worth that much?” sell immediately. Because when you’re an expert in a domain, trusting your gut will help you avoid losses if markets slow down. Ready to jump in?
NFTs: Small Investors, Massive Potential
Though the average NFT trades at more than $2,000, a small number of ultra-high-priced trades skews that figure upward. In actuality, most NFTs are available in the $10 to $500 range. One artist named Grumpii, for instance, makes adorable images of “Everything grumpy.” In other words, buyers can get GIFs of cute dinosaurs doing their best to show everyone they’re in a bad mood. (If you like it, it could be yours for less than $450.) And like most art, people buy these pieces to support their favorite artists. I highly recommend you do the same if you have anyone you’d like to help.
A small number of pieces, however, can go on to make millions.
And that’s where investors should focus their efforts: on unique pieces that seem wildly underpriced.
One good example came to auction last week: an album cover by the band Kings of Leon and YellowHeart. Careful readers would have seen that the original piece also included “A) 4 front row tickets to one Kings of Leon headline show per tour, any tour location in the world B) VIP treatment, meet and greet with the band, 4 sets of complete tour merchandise, 8hr SUV limousine, on-site concierge, private backstage hospitality” and several other top-tier perks.
The price of this original $61,000 work of art? Today, it’s worth almost $800,000 at auction.
For music lovers, Kings of Leon is a rather obvious instance. The band is exceptionally well-known among the indie music scene, and its initial listing on a Friday might have caught fans off guard. But there are plenty of NFTs that start life as an undervalued asset – LeBron James trading cards, Taco Bell GIFs, and the like.
What Makes a Great NFT?
There are three key factors to finding a winning NFT.
Rare. It’s no use buying a digital art piece if the artist plans to distribute infinite copies elsewhere. Instead, focus on artists and organizations like the NBA that have mastered the art of creating limited quantities of collectibles.
High quality. Some collectibles are worth more than others. The web URL “sex.crypto” is worth several thousand times more than the less-engaging “blockchainjobs.eth” URL. The same holds for digital art.
Undervalued. NFT mispricings happen often. But keen talent scouts can also spot works by artists or sports players who will eventually become superstars.
Many NFTs (like any collectible) are not worth much, so it takes discipline to keep saying “no” until an NFT comes along that ticks all three boxes.
Stick to What You Know
People love venturing outside their area of expertise. My suggestion for NFT investors?
Don’t.
Instead, have the discipline to play in areas you know well.
If you have an eye for art, it should feel quite intuitive why a transfixing GIF of Vincent Van Gogh is worth $20,000 while a lovely pixelated Sunset Skyline of Columbus City still only fetches $120. If you’re a gamer, there’s a good chance you’ll know which plot of land in Decentraland, a crypto-based version of Second Life, is going up in price. And if you’re a sports fan, you’ll identify the next NBA superstar before everyone else does. As I wrote before, Steve Nash and Kobe Bryant both had awful rookie years to start their remarkable careers.
Can you tell which one art buyers will buy for more?
A word of warning: beware of buying high-priced assets with limited appeal. The URL “google.eth” sold for 53ETH (around $100,000 in today’s dollars), but only one buyer in the world could have interest in that URL. Instead, why not bid on “facebook.eth” for a fraction of that price. Or better yet, find a URL with a far broader potential appeal.
The Best NFTs Today
In the fast-moving world of NFTs, it’s impossible to keep a tally of today’s best deals. NFTs are unique, and great buys tend to get snapped up quickly. The 25 Taco Bell GIFs (priced at $1.60) sold out within half an hour.
Instead, investors should keep a watchful eye on Opensea.io, Rarible.com, or other top-tier NFT marketplaces. Keep scanning them for items that make you think, “Hey, why’s that so cheap?” and be ready to invest big when these gems come around.
Do that long enough, and I’ll see you on the other side of that millionaire bridge before you know it.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
