The collectibles market exploded in 2020 as many sought out nostalgia or pursued new interests in the depths of the COVID-19 pandemic. At the same time, cryptocurrency was moving into the mainstream. Many companies attempted to ride the coattails of the two trends by producing digital collectibles using blockchain technology.
The result was a boom in NFTs, or non-fungible tokens, which allow digital products to become limited-quantity collectibles. If you want to learn more about what digital collectibles are, how to invest in them, and the top NFT collectibles you can buy, read on.
What are digital collectibles?
A digital collectible is a unique or limited-edition copy of a virtual item. Typically there's a visual element such as digital art, a video clip, or a digital trading card. Theoretically, it could be anything represented by 1s and 0s such as digital music recordings.
Digital collectibles use blockchain technology to create non-fungible tokens that allow for distribution and transfers in ownership. In other words, digital collectibles cannot be copied like regular data on a computer, but one owner can easily transfer ownership to another person. As a result, collectors can ensure their digital art remains rare and set the terms for conveying ownership or use.
How to invest in digital collectibles
Digital collectibles can be bought directly from the company creating them or on NFT marketplaces, where collectors can buy and sell them.
If you buy directly from the company producing the collectibles, such as NBA Top Shot or DraftKings (NYSE:DKNG) Marketplace, you may be able to pay for items with a credit card. They'll hold collectibles for you in a custodial wallet. If you want to sell them, you can do so through their marketplace.
The broader digital collectible market, however, requires you to use cryptocurrency for the transaction. You can find items on an NFT marketplace such as OpenSea, SuperRare, or Rarible. The cryptocurrency you need is usually determined by the marketplace, but most use the Ethereum blockchain, so you'll need Ether (ETH -0.56%).
You'll also need your own NFT wallet, such as Metamask, to make the transaction. Transfer the required cryptocurrency to your wallet, connect the wallet to the marketplace using a browser extension, and then select the NFT you'd like to purchase.
The market for digital collectibles is extremely volatile. The value of a collectible is only as much as someone is willing to pay for it. All collectibles, not just digital collectibles, can go from hot to not overnight.
So if you're buying a digital collectible purely based on the idea that it'll go up in value, you'd better be willing to hold onto it. The good news is that digital collectibles, unlike physical collectibles, do not require you to store and maintain them. There's no risk of damaging a digital collectible. As a result, the cost of ownership is practically zero.
Additionally, the cost of selling a digital collectible is usually much lower than selling physical collectibles. The only potential fee is the marketplace commission. Therefore, a poor investment isn't as bad in the digital world as it can be in the physical world of collectibles.
Top NFT collectibles
There are thousands of NFT collectible projects in the works, not to mention one-off creations from artists and celebrities. Here are some worth your attention:
CryptoPunks
CryptoPunks was created in 2017 by Larva Labs and features 10,000 unique pixelated portraits. The project is one of the earliest NFT collectibles. Portraits with rare features have fetched prices in the millions of dollars.
CryptoPunks are the closest thing you'll find to blue-chip art in the digital collectible world. As one of the earliest NFT projects of its kind, the tokens ought to be able to hold their value better than other collectibles. That said, they won't offer the value appreciation potential of newer projects.
It's worth paying attention to CryptoPunks recent sales to get a barometer for the overall NFT marketplace.
NBA Top Shot
The NBA launched Top Shot in 2020 in collaboration with Dapper Labs, the company behind the popular blockchain game CryptoKitties. The project releases collectible video highlights of players, somewhat like digital sports cards. In fact, customers can buy "packs" of collectibles just like they buy packs of cards in the physical world. They can also purchase individual cards on the market through its website.
NBA Top Shot is an early example of a digital analog of a physical collectible. Investors should watch how those collectibles perform relative to the physical sports card collectibles to get an idea of how these types of projects perform vs. traditional collectibles.
What's next for digital collectibles
Digital collectibles may have enduring value in our increasingly digital world. With the growth of augmented and virtual reality, digital collectibles may become more interactive or useful for users. Big tech companies are sinking billions of dollars into developing the metaverse and are trying to push it into the mainstream for both enterprises and consumers. As digital environments become more normal, digital collectibles could increase in value.
Remember that the market is extremely volatile, and not every new project is going to be a hit. Collectibles that were in style one day may go out of style the next, sending the value of the collection plummeting. Investors should be selective with their digital collectibles and only buy something they truly love.
Adam Levy has positions in Ethereum. The Motley Fool has positions in and recommends Ethereum. The Motley Fool has a disclosure policy.
