Web3

Buying and Selling NFTs

In: Web3, NFTs

Once you've become acclimated to the space, buying and selling NFTs can be done really quickly and easily. But there's a pretty significant learning curve as to how to do it properly and securely.

This primer is meant to get you acclimated. I'll cover how to buy and sell NFTs, why people are interested in buying and selling NFTs, and even some of the dark side to this nascent space.

Note: Most of the content below is assuming we're dealing with the Ethereum blockchain. NFTs can (and do!) exist on other blockchains as well, but I'm using Ethereum in most of these examples.

And if you aren't familiar with how crypto Wallets work, start here.

What are NFTs?

NFT is short for Non-Fungible Token.

A token that is "non-fungible" means that it is unique and cannot be substituted or replaced with another identical token. By definition, there is no identical token to an NFT.

You're likely thinking of NFTs as a .jpg or digital asset. That's the form they often take, but a Non-Fungible Token is a token. Tokens are really just a bundle of code with defined characteristics.

For a deeper dive, check out this article:

NFTs vs. Tokens vs. Coins
As you wade into the Web3 waters, you’ll get used to seeing tons of acronyms and other lingo related to digital assets. I’d bet by now you’ve come across the acronym NFT, and probably have a solid grasp of what they are. But just in case... What is an NFT?

How do you buy NFTs?

Like all assets, there are two ways to purchase an NFT:

  1. Through the primary market (directly from the creator)
  2. Through the secondary market (from another owner)

Purchasing through the primary market is done through a process called minting. When someone creates an NFT for sale, they create all the assets they are selling (all the metadata associated with the NFT, including the image) and they connect it to a smart contract:

A "smart contract" is simply a program that runs on the blockchain. It's a collection of code (its functions) and data (its state) that resides at a specific address on the blockchain.

When you mint an NFT (either from the creator's website or the contract directly on Etherscan) you are telling the smart contract to execute its program, which initiates a transaction between your digital wallet address and the digital address of the contract.

You send the creator some amount of currency, the creator sends the next available asset (NFT) to you, and you pay a fee ("gas") to the network validators for executing the transaction.

This process begins by connecting your digital wallet to the website. From there, you can execute the smart contract directly via the website.

If all available NFTs have already been minted, the smart contract will not run. The creator's wallet of NFTs is empty, so you'll have to purchase the NFT from another holder and their wallet. This is facilitated by secondary market platforms, predominantly OpenSea.

So to mint a project, you'll need to know 1.) when it's available to mint and 2.) what website to mint from (or the address of the contract itself).

It sounds like a lot, but it's actually pretty straightforward assuming you have a digital wallet with cryptocurrency inside of it setup. More on that in a future article.

Why do people buy NFTs?

Why do people buy anything?

To purchase something, you are convinced that the value you'll receive from having that thing is worth more than the money you trade for it.

Sometimes it's a painful problem you need a solution to (my sink is leaking, I need to hire a plumber).

Sometimes it's just a story you tell yourself (I will have more respect and credibility if I buy this Supreme t-shirt).

Right now, NFTs are much more of a vitamin than a painkiller. They provide value, people enjoy them and they've legitimately changed a lot of peoples' lives – but I would argue that the vast majority of NFTs aren't solving any true problems yet.

What is valuable about NFTs?

So if NFTs aren't solving big problems, why are people paying hundreds, thousands, even millions of dollars for them?

There are three main types of value in NFTs:

  1. Utility
  2. Patronage
  3. Speculative investment

You may buy an NFT for one of the reasons above or even a mix of the three. I may happily be a patron of an artist, but have a sense in the back of my mind that this piece may appreciate in value.

Same with utility – of course we want utility, but even if something fails to deliver on that utility, at least I supported a creator I cared about. Or at least I'm able to recoup or even earn a return on my investment.

Utility

"Utility" is the word of the day in NFTs right now. And for pretty good reason – if we buy something and we aren't doing it to simply support the artist or for a hopeful financial return, what value does it provide?

An NFTs utility is the actual role it plays in your life, the access it creates, or the solution it provides.

I think this promise of utility is one of the slower developing pieces of the NFT space right now, but I also think it's one of the most important. Watching the developing ideas for the utility of NFTs is one of the main reasons I started this blog!

NFTs are best suited for providing access. That could be to information, community, experiences, or even products.

Most NFTs today are an entry ticket into a more exclusive space. That's a great builder – it provides a way to build relationships with others who clearly have similar interests.

Within those spaces, information is often passed around (often about other NFT projects).

But the more ambitious teams are going further now into experiences (online and offline members-only locations and events). It's even a new way to price a SaaS or membership product (pay annually or purchase our NFT for lifetime access).

We're only scratching the surface here on utility, and much of the writing on this blog will focus on diving deeper into specific use cases.

Patronage

Some people buy NFTs simply because they enjoy the art or want to support the creator. Patrons of the arts have existed for centuries and NFTs simply provide a new means of supporting the artists and work that you love.

As a general rule, I recommend only investing in NFTs that you do genuinely enjoy aesthetically or because of the artist that created them. There's a very real possibility that any given NFT has no secondary (resale) value, and if you're going to be stuck with a .jpg, it should at least be something you like (and could display)!

Speculative Investment

A lot of people are looking at NFTs as an investment. Because NFTs are by definition unique, it's logical that some NFTs would be more valuable than others – both objectively by being more "rare" (scarce) or subjectively by being more visually appealing to someone.

NFT collections all have some level of inherent scarcity. Some have collections in the tens of thousands of items, others have collections with less than 100 items. In the collections of thousands of items, some of the traits of an NFT (the hard-coded data as part of the object) are more rare than others. That means that even in a collection of 10,000 NFTs, there may only be 10 that have a particular trait.

People looking at NFTs as a financial investment are just considering supply and demand. Because there is inherent scarcity, if there is more demand for a project than there is units to supply that demand, price (value) goes up.

Let's look at CryptoPunks:

The CryptoPunks are 10,000 uniquely generated characters. No two are exactly alike, and each one of them can be officially owned by a single person on the Ethereum blockchain.

When CryptoPunks was released in 2017, they were free to claim for anyone with an Ethereum wallet. As of this writing, the lowest priced Punk today is 63.95 ETH ($177,604.50 USD).

This is an extreme, extreme example. As one of the first projects ever, CryptoPunks has a lot of demand from a wide range of buyers – those who love history, those who want to signal their status of wealth, and those who see it as a "safer" investment in the NFT space because it's so well-regarded.

It should go without saying, but buying on speculation that you'll receive a financial return is a risky thing to do. As NFTs become more popular, it becomes more and more like day-trading a stock – there are people spending every minute of every day trying to win that game.

Do you think you're going to beat them?

A growing trend for NFT projects is implementing a whitelist for the project mint. This is a list of people (by wallet address) who are pre-approved to mint an NFT before the general public. Think of it like a presale.

And as things become more competitive on the investment side, there is more and more pressure to get on a whitelist so that you can be sure to get an NFT at the mint price. There are likely to be more people who want a popular project than there are pieces, so if you're able to mint a project, it's likely you can quickly sell it on the secondary market at a profit.

Therefore, a lot of immediate profits go to those who are able to mint a project that is in high demand. And professional NFT traders are spending a lot of time and energy ensuring that they can get in at the mint of a popular project or identifying the more rare pieces that may be undervalued on the secondary market.

In my early 20s I built and sold a digital ticketing marketplace for secondary sales. During that time, I learned a whole lot about the game of buying and selling tickets.

There is rampant speculation. A HUGE number of primary ticket sales are done by brokers on pre-sale and then re-sold to the general public (who actually want to attend the event) at a premium on the secondary market.

Right now, speculative buying of NFTs is a lot like that. The traders spend their time understanding market demand for a project, finding ways to improve their odds of minting the project (like a whitelist), minting multiple NFTs, and then selling some or all of their NFTs on the secondary market over time.

Unfortunately, patrons who just want to join a project or join a community are often pushed out and forced to buy at a higher price (if they can afford to).

How do you sell NFTs?

If you are a buyer and NFT holder, selling your NFTs is as easy as creating an account on a secondary marketplace like OpenSea, Nifty Gateway, or LooksRare (assuming its an NFT on the Ethereum blockchain). Different blockchains have their own marketplaces (Solana has Magic Eden for example).

Those platforms make it easy to sign in using your wallet and list your NFTs for sale – and once someone purchases your NFT, the currency is deposited directly into your digital wallet and the NFT is sent to the buyer.

For creators who want to create and sell their own NFTs, we'll need a deeper dive in a future article. First and foremost you need to create the Collection itself, meaning all the digital assets and their associated Traits.

Here's a great step-by-step from a project called ExpansionPunks (disclosure: I own an xPunk):

Building a 10K NFT Avatar Project — Step-by-Step.
ExpansionPunks (www.ExpansionPunks.com) is a collection of 10,000 unique, procedurally-generated collectible Punks stored as ERC721 tokens…

Creating your Collection is even getting easier with tools like NFT-inator.

Once you have your Collection created, you can either create your own Smart Contract and minting website as shown above (requires some technical know-how) or you can sell directly through OpenSea.

OpenSea has more advanced tooling available as well.

What else may be going on?

Frankly, I think a huge part of buying NFTs is the dopamine hit from minting.

This probably technically falls under the Speculative Investment header, but minting an NFT feels a lot like doing a scratch-off or opening a fresh pack of Pokemon cards.

You just don't know what you'll get. What if it's incredibly rare and valuable?

When a project is minted, its metadata is not always immediately revealed. The creators often choose to wait until a certain time or until a project is fully minted before revealing the image and traits of the NFT you just purchased.

A big reason for this is that once the reveal happens, holders often rush to list their NFTs for resale on the secondary market. Most NFTs in a collection are not meaningfully more rare than most others in that collection.

So the people buying NFTs as an investment will often try to divest from their less valuable pieces at a low price and then begin listing their more rare items at a premium.

And then it's often off to chase the next high of a new mint and a new reveal.

This is just another reason that supporting a project from a place of patronage or utility is a healthier choice and safer reason for buying an NFT.

Conclusion

We are still in the early days of NFTs. While primary and secondary sales will continue to mature and become more competitive as investment marketplaces, we are at the beginning of what I believe will be a LOT of interesting experiments related to the true utility of NFTs.

Those experiments will be documented here from time to time, and I hope you choose to undertake some of your own!

Written by
Jay Clouse
I'm the lead Creator Scientist writing this newsletter. I also host Creative Elements, a narrative-interview podcast talking with today's top creators with more than one million downloads.

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