Non-fungible tokens NFTs presumably weren’t widely known to investors until last year. NFTs suddenly became very popular at that time, mainly in the form of digital art.
In August 2021, sales reached a record-high level of close to $5 billion, according to statistics from industry data aggregator Crypto Slam. Before plummeting sharply this June along with the value of cryptocurrencies, frequently used to buy these tokens, sales continued in the billions.
Blockchain technology is used to authenticate NFTs, just like cryptocurrencies. NFTs, however, indicate ownership in a specific thing, like a digital picture, unlike, for instance, Bitcoin (BTC). NFTs can be purchased and sold similarly to how a sculpture might be auctioned, but unlike cryptocurrencies like Bitcoin, they cannot be swapped for goods and services.
The market for NFTs is still relatively young in terms of investment. All but the most speculative investors might want to stay away until the regulatory veil clears and additional applications for NFTs in the real world are created. For the time being, you might want to think of them as a fun thing to collect that, like a stamp collection, could one day be valuable.
Their ultimate value, according to Anthony Georgiades, general partner at technology venture capital firm Innovating Capital, “lies in their underlying utility and the fact that they reflect ownership.” Many future technological uses will affect both consumers and businesses in real-world ways.
When researching the ins and outs of NFTs, investors should bear the following things in mind:
How do NFTs function, and what are they?
Art and NFTs.
Investment risks with NFTs.
As use cases increase, investing cases can get better.
In conclusion, should you purchase NFTs?
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How do NFTs function, and what are they?
NFTs are media assets that are associated with a specific digital token and that can be monitored and confirmed on a blockchain, according to Jeff Davis, the creator of Cap3 Collective. This company will fund blockchain-based web projects and launch later this month.
Walker Holmes, vice president of the metaverse platform MetaTope, explains that NFTs are the mechanism that makes it possible to establish the verifiable ownership of digital property. We will see deeds, titles, tickets, identification cards, and much more represented by NFTs and confirmed on the blockchain as we continue to move toward a more digital society.
NFTs are created using smart contracts that assign ownership and permit transfers. Some platforms even enable fractional ownership, which is helpful because tokens cost tens of thousands of dollars each.
Art and NFTs :
Digital artwork is only one use for NFTs, but it is a common one that has led to the development of a more inclusive paradigm for the art market.
According to Sarah McDaniel, head of the art resources team at Morgan Stanley Wealth Management, the places where institutions, collectors, and artists go to acquire and sell art are art galleries and auction houses. By enabling more artists to sell directly to consumers, NFTs and their markets disrupt this process. Additionally, by using these tokens, artists may find it simpler to collect royalties from sales of their works.
The CEO of Modulus Global, Richard Gardner, who offers financial tools to brokerages and expert traders, argues that artists shouldn’t anticipate massive profits just because they release an NFT.
You can’t legitimately expect to monetize to the tune of six figures; he argues, “especially given the current economic context and downward direction of the NFT industry.” Instead, you need to bring your star power to the table.
Because cryptocurrencies are frequently used to buy and sell NFTs, the volatility there may transfer to non-fungible tokens. For instance, if you paid $3,500 for a piece of digital art in mid-March using one unit of the Ethereum network’s currency, Ether (ETH), the same piece of art on Monday would be worth less than $2,000, assuming no other changes save those in the exchange rate.
Of all, there are other motivations for purchasing art besides investment, so your worries about cryptocurrency volatility can be unfounded.
Pros and Cons of Investing in NFTs :
Benefits of Investing in NFTs
Investors may desire to purchase assets that have been tokenized into NFTs for various reasons. The following are some benefits of investing in NFTs:
NFTs are open to all investors. Everyone has access to making investments in tokenized assets. When assets are tokenized into an NFT, ownership may be transferred between individuals more effectively and efficiently from one place to another.
A blockchain is used to protect NFT ownership. The digital representation of ownership through blockchain technology can increase the security of an investor’s ownership of a given item. Additionally, blockchain technology can increase asset ownership transparency.
It’s a chance to gain more knowledge about blockchain technology. Investors can diversify their portfolios and increase their understanding of blockchain technology by investing a small amount in tokenized assets.
Drawbacks of Investing in NFTs :
Many investors have good reasons to be hesitant about buying tokenized assets. The following are a few drawbacks of NFT investing:
NFTs are not a class of assets. NFTs are frequently—and mistakenly—viewed as an asset class instead of a technology method of indicating ownership. The enthusiasm and general misunderstanding around NFTs might lead to inflated and unstable tokenized asset valuations.
The production of NFT requires a lot of energy. The Ethereum blockchain, which employs the energy-intensive operational protocol known as proof of work, now supports the majority of NFTs. The amount of electricity used by one NFT transaction is equivalent to that used by the typical home for around two days.
You might have to have Ether (ETH). Since most NFT sales take place on the Ethereum platform, possessing Ether (ETH), the cryptocurrency used by the blockchain, is frequently required to buy an NFT. Investors may have few options if they want to purchase NFTs using fiat currency like the dollar.
The Risk of investing in NFTs :
But for investors, those and other factors are relevant. According to Grant Powell, founder of Curios, an NFT-as-a-service platform, the first thing people interested in purchasing NFTs should understand is that this kind of investing is very speculative, which means it is dangerous.
According to Stephen Sikes, chief operating officer of investing platform Public.com, risks associated with NFT investing include copycat NFTs masquerading as well-known tokens or fraudulent sites that attempt to get prospective buyers to connect their wallets to steal cryptocurrency and NFTs.
To avoid fraud, Sikes advises searching for certified merchants on marketplaces.
Even trustworthy NFT marketplaces run the danger of being hacked. Unless you’re flipping the tokens rapidly, Omer Amsel, head of product management at digital asset security company Fireblocks, advises moving newly obtained NFTs into safe wallets.
Investors should educate themselves on where and how to purchase NFTs and the reputation and notoriety of the people behind them before investing in an NFT project, establishing ownership, and keeping their wallets safe. Checking whether the marketplaces are affiliated with any security protocols, researching NFT creators or sellers, being wary of solicitors requesting private information, checking prior transactions, or using particular technological solutions that can gauge the rarity of an NFT are some of the tools and procedures for making safe purchases.
Before you invest any money, Davis advises that you “spend a solid month just learning best practices and getting a lay of the land.”
The most crucial and complex component of investing in NFTs, according to Joshua Hong, founder of the blockchain-based web platform Synesis One, is evaluating the utility and community of a specific token.
The fact that the market worth of an NFT is typically established by the strong links and interactions between creators, supporters, fans, buyers, and sellers, according to Hong, is one reason why it’s so crucial to investigate who is behind an NFT project.
In other words, community matters while considering NFT investments :
When it comes to NFTs, “strong communities drive a lot of value,” according to Amsel. “Massive fan bases exist for high-profile projects like Doodles, Cool Cats, Apes, and Art Blocks. These are the initiatives that people are enthusiastic about, and it’s not just HODLers who are enthusiastic—large VC firms are as well, as institutional money continues to flood into the field.”
HODLers, or long-term crypto investors, want to acquire and keep their cryptocurrency for an extended period because they believe that cryptocurrency will eventually replace the present monetary system. Others employ a diversification strategy similar to their regular investing portfolio.
If you decide to invest, only do so with money you can afford to lose. Once you’ve decided on a method, stick with it.
According to Davis, some investors only make NFT investments with long-term utility and intend to hold them for years. In contrast, others purchase popular art projects today to sell them for a profit the next day.
Regulatory Risk :
Regulatory risk is one type of risk that demands its area. Despite having many similarities to stocks, NFTs have not yet been formally recognized as securities and could eventually be classified as commodities.
According to Arry Yu, chair of the Cascadia Blockchain Council of the Washington Technology Industry Association, “the market in the U.S. continues to try to guess what the regulation is by paying expensive lawyers to interpret the more than 80 (crypto) enforcement actions that have taken place by the Securities and Exchange Commission so far.”
Gardner advises staying away from the NFT industry since the regulatory landscape for digital assets is unstable.
In the next 12 to 24 months, upcoming rules “may very possibly transform how the industry functions,” the author asserts. As use cases increase, the investing case can strengthen.
Although most NFTs are currently associated with digital art, Hong asserts that these tokens’ value as financial assets that might grant passive income or the opportunity to participate in membership or a deed is where their future rests.
NFT platform co-founder Reeve Collins asserts that “NFTs are the future.” They will be a significant component of our digital life and have many applications.
Collins contends that, for the time being, early NFTs without much practical use should be regarded as collectors rather than investments. Instead, he advises making investments in businesses developing NFT technology.
He says, “this first NFT boom was all about speculation and gambling, buying an asset at a low price in the hopes of appreciation and selling it.” “Even though it’s a lot of fun and occasionally even addictive, it is not an investment, in my opinion. Instead of choosing an image with the intention of long-term wealth appreciation, one should merely invest in it for amusement at the moment.”
Conclusion: Should You Purchase NFTs?
No, and yes. Yes, if you’re looking for an enjoyable activity. Suppose you wish to do anything other than engage in speculative investing, then no, or at least not.
If the latter is your thing, you can think about designating a tiny section of your portfolio for NFT investment, like how you might consider penny stocks.
In the end, Amsel argues, “it’s crucial to acquire what you love and what gets you thrilled, similar to the guidance art consultants give their clients. “Find a group of creators you admire, and give them your support. If you stick with it over time and keep an eye out for new developments, you can end up with a precious collection of NFTs.”