NFTs have been in the news a lot lately, and many of our Addition Financial members have been asking us about how to invest in cryptocurrency, blockchain technology and NFTs.
It can be exciting and profitable to invest in new technology, but it’s essential to understand where you’re putting your money and what the risks are before you start. If you want to invest in NFT stocks, you’ll need some information and guidance to protect yourself. Here’s what you need to know.
How is Buying an NFT Different from Buying Cryptocurrency?
NFTs and cryptocurrency are often discussed in the same breath and they have a lot in common. However, they are not the same thing and there are some key differences between buying an NFT (or NFT stocks) and buying cryptocurrency.
The first key difference is that cryptocurrencies such as Bitcoin and Ethereum are fungible. That means that if you have one Bitcoin and you trade it for another, both coins are worth the same amount before and after the trade – barring any market fluctuations, of course. Their fungibility means that you can swap one for another without changing the amount you have.
An NFT is a non-fungible token. When something is non-fungible, it is unique. Let’s use Beatles songs as an example. If you owned the rights to Hey Jude, one of the Beatles’ most popular songs, you could not trade it for the rights to Piggies, a significantly less popular song, and expect the latter to have the same value as the former.
Another way to look at it is that NFTs are unique and cryptocurrencies are not. While the value of both is determined by demand, NFTs’ value is determined individually while each type of cryptocurrency has value collectively based on its popularity.
Can You Invest in NFT Stocks?
NFTs and NFT stocks are two different things. An NFT is a single token that represents a digital asset. An NFT stock is an investment in something related to NFTs, such as an NFT marketplace.
Investing in NFTs is risky because they are relatively new and we don’t know (and can’t know) what will happen with them in the future. An NFT’s value is entirely dependent on what people are willing to pay for it. Spending a small amount for a digital asset isn’t that risky because you can probably afford to lose what you spend. Spending a large amount on an expensive NFT s inherently riskier and should be approached with caution.
NFT stocks are risky in the same way that investing in any new technology is risky. You’re taking a gamble that the technology will have staying power – that people will adopt it and that its uses will become commonplace.
As is the case with any stock, you can mitigate your risk by spreading it around. You can buy some NFT stock as part of your portfolio and balance it with less risky investments such as blue chip stocks or ETFs. We’ll get more into the details of that later.
How Do You Start Investing in NFT Stocks?
If you decide you want to invest in NFT stocks, you’ll need to do some research first. Here again, we want to be sure to differentiate between buying NFT stocks and buying NFTs. To buy NFTs, you’ll need the following things:
- Access to an NFT market
- A crypto wallet
- Crypto that’s compatible with the exchange you choose
NFTs are not an investment in the traditional sense. In fact, buying an NFT should be approached more like buying something you like because you like it, not because you are counting on getting a return on an investment.
NFT stocks are stocks that can be purchased through any investment account, including your 401(k) or IRA or even an investing app. As you would with any stock, you’ll want to do some research about the stock and how it has performed, as well as the company’s plans and goals for the future.
One of the benefits of buying through an investment app is that it’s easy to find information about any NFT stock you’re thinking about buying. The other alternative is to work with a certified financial professional to plan out an investment strategy that includes NFT stocks.
How Much Money Do You Need to Invest in NFT Stocks?
There is no fixed amount that you need to invest in NFT stocks to take advantage of the growing interest in companies that are creating or using NFT technology. You can buy as little or as much as you like.
It’s always a good idea to balance your portfolio to manage your risk and ensure that you don’t have too large a percentage of your assets in any one investment. Since NFTs are new technology, we would recommend balancing them with stocks with a long history of growth. For example, you might invest in Fortune 100 companies such as Apple, Walmart or Berkshire Hathaway to provide some stability in your portfolio.
NFT Stocks to Consider Buying
NFT stocks can be a smart investment provided that you know which stocks to buy and how to manage your investments. Here are some stocks with good performance histories and bright futures for you to consider.
- Coinbase is one of the world’s largest cryptocurrency exchanges. The company launched a new NFT marketplace that is in Beta testing as of May, 2022. Given Coinbase’s huge market advantage, investing in the company is a good way to catch the NFT wave without taking too much risk.
- eBay opened its huge online marketplace to NFTs in 2021. While it remains to be seen how the new venture will affect eBay’s stock prices, it’s likely that the company’s already-huge customer base will grow as a result of its expansion into NFTs.
- Cloudflare is a company that delivers content safely and securely via the cloud. They are now capable of supporting NFT transfers and the stock has performed well and continues to grow in popularity.
- Funko is a company that’s known for creating collectible figures, and with the launch of Digital Pop, it has now entered the world of NFT art. The company’s stock grew by 40% in the third quarter of 2021 and 48% in the fourth quarter.
- Defiance Digital Revolution ETF. For investors who prefer to spread their risk across multiple NFT stocks, one of the available options is investing in an exchange-traded fund (ETF) that specializes in NFT stocks.
These are just a few examples. We anticipate that more companies will be moving into the NFT space, so keep an eye on the news to find new NFT stock investment opportunities.
Tips for Researching NFT Stocks and Managing Your Portfolio
Before you start buying NFT stocks to add to your portfolio, here are some tips to help you minimize your risk and maximize your earnings.
- Review the company’s financial statements. Two reports to focus on are Form 10-K, which is an annual report, and Form 10-Q, which provides quarterly updates on the company’s financial status between annual reports.
- Focus on what investors have earned. Even if you’re not a financial expert, you can get a clearer picture of what to expect if you invest in a company by looking at its revenue, net income, earnings per share, and return on equity. The last number will tell you how much profit the company has generated for each dollar of investments.
- Do qualitative research. This step can be a little tricky because NFTs are such a new thing, but it’s important to look beyond the numbers to get to know a company before you buy its stock. Pay attention to how news resources talk about the company, as well as getting to know its goals and missions.
- Compare the company to its competitors. While a company’s status vis-a-vis its competitors can’t tell you everything, it is important to see where the company stands and how it measures up to other NFT companies and stocks.
- Balance your portfolio. Even if you’re really excited about an NFT stock, it’s not a good idea to put too many of your eggs into one basket with any stock. As a rule, you should make sure that no single stock represents more than 10% of your portfolio. That way, if an individual stock takes a nosedive, you won’t lose more than you can afford to lose.
- Review your asset allocation regularly. Finally, make it a habit to review your portfolio regularly to ensure that your risk is properly allocated. Even if you’re careful not to invest more than 10% of your assets in any one stock, your allocation can change as prices rise or fall. We suggest looking at your overall balance once a month to ensure that you’re not taking too much risk.
These pointers can help you invest in NFTs wisely and manage your risk going forward to minimize the chances that you’ll lose more than you can afford to lose.
Buying NFT stocks can be an effective way to get involved in exciting new technology that has the potential to change the world. The key is making sure to research any stock you buy and make asset allocation an ongoing process to protect yourself.
Do you need help with NFT investment and portfolio management? The MEMBERS Financial Services Program is here to help. Click here to learn more and book an appointment.