How to earn passive income from NFTs: 'You can set royalties'

F.J. Jimenez | Moment | Getty Images
Key Points
  • NFT trading volume spiked 704% in the third quarter of 2021.
  • Artists who mint NFTs can set a royalty rate and earn passive income each time the piece sells.
  • Buyers can make a profit selling an NFT once, or buy special "utility NFTs" that offer an opportunity to make passive income.

Non-fungible tokens can seem like they're all the rage. Since grabbing hold of the internet's attention in the last few years, investors and generally curious people alike have been trying to figure out what exactly they are, and how they can make bank with them. Even celebrities are getting in on the trend.

NFTs are one-of-a-kind digital assets like videos, photos, or illustrations, that use blockchain technology. The latter is a public, digital database that tracks the whole history of an asset. In the case of NFTs, the blockchain lets anyone see exactly where they came from (a given artist, say), ensures their uniqueness, and exposes their purchase and ownership history.

The internet is filled with stories of artists who've sold their NFTs for thousands, tens of thousands, or even millions of dollars. And the market continues to grow: NFT trading volume spiked 704% in the third quarter of 2021, according to a report by analytics platform DappRadar.

In addition to making money off the initial sales, some people can also pull in passive income from NFTs. Here's how.

Artists 'can set royalties' on NFTs

For creators who create or "mint" their own NFTs, there is a built-in opportunity to make passive income after the initial sale. "You can set royalties," says Franck Bossi, an NFT agent behind NFT WatchDog, "usually 2.5%; some big projects, 10% to 12%."

Every time someone resells your piece on the secondary market, you get this royalty.

NFTs are bought and sold using cryptocurrency, often ethereum. Rapper Latasha, who started selling NFTs of her videos in 2021, is now seeing her work get posted on the secondary market.

Her video "MAKDA VERSE" originally sold for 2.6862 ETH, worth $8,386 as of the writing of this article. It is now on the secondary market for 1,111 ETH, worth $3,468,453.

"[I'm] seeing myself become a millionaire through NFTs," she recently told Grow.

For collectors, it's 'the same as when you invest in the stock market'

If you're not a creator but are simply buying and selling NFTs, there are a few ways you can make money:

  1. Sell a purchased NFT for a profit. If the value of an NFT you bought goes up after you buy it, for example, you may be able to sell it for a profit. But as is the case with many collectibles like comic books and records, it's hard to say what assets will ultimately gain value: All markets can go down as well as up.
  2. Make passive income with a utility NFT. Utility NFTs are unusual and come in various forms. They can be a collection of similar pieces of NFT art, or an NFT game that builds on itself with more creations, for example. When a utility NFT is sold on the secondary market, royalties could get distributed to all of the NFT holders of that utility. They'd get those royalties in a special coin they would then exchange for cybercurrency, most likely ETH.

    You can find utility NFTs by looking for them specifically on platforms like OpenSea.
[Artists] can set royalties, usually 2.5%, some big projects 10% to 12%.
Franck Bossi
NFT WatchDog

When it comes to the potential for future gains, NFTs are a gamble. Buying NFTs is "the same as when you invest in the stock market," says Bossi: In other words, there are no guarantees. You can take an educated guess but you never quite know what will happen, making it important to research prospects before you buy.

Make sure to do some research on the artist or business creating an NFT. If it looks like they have a solid history of creating valuable work, a road map for continuing to create in the future, and if they have a social media following of engaged fans, they're more likely to be a legitimate entity and potentially a worthwhile investment.

Non-fungible tokens and cryptocurrency are a new and evolving market that can contain significant risks and volatility. Carefully consider your objectives, risk tolerance, and time horizon before making any investments. 

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