Last Updated on June 9, 2023
NFTs are the cool new kids on the crypto block, reflecting digital ownership of a wide range of distinct intangible objects. Despite the fact that they’ve been around since 2014, 2021 was the first year that this revolutionary technology became widely accepted. In 2021, total NFT sales will reach $25 billion, up from $94.9 million the previous year. They’ve caught the attention of celebrities and major corporations ranging from American Express to Gucci, and have erupted throughout the music, art, sports, and other industries.
Investing in an NFT is “riskier” than investing in crypto because it’s essentially a leveraged wager on bitcoin. It’s basically gambling, but most people don’t see the difference and buy them because they’re entertaining.
With the current crypto market fall, it appears that NFTs were nothing more than a speculative bubble. While this is true to some extent, it does not negate the technology’s utility. In fact, as NFTs evolve from a high-stakes investment product to a vehicle for establishing identity, ownership, and even community, their importance will grow.
What is an NFT?
NFTs can represent real-world items and have even facilitated home sales. However, they’re mainly used for virtual assets like photos, videos, and music.
Most NFTs reside on Ethereum’s blockchain, a digital ledger. Ethereum currently uses energy-intensive proof-of-work but plans to transition to less energy-consuming proof-of-stake. Other blockchains like Solana, Polygon, and Flow also host NFTs.
Non-fungible tokens (NFTs) leverage blockchain technology to digitally signify ownership, making them more similar to a car title than the car itself. Just as you wouldn’t buy a car solely for its paper title, it’s unwise to purchase an asset merely because it’s been tokenized into an NFT. However, investing in tokenized assets isn’t entirely off the table. If an asset appeals to you and you have the necessary funds, consider purchasing it. If it’s tokenized, you might enjoy the added benefits that come with NFTs. Nevertheless, be mindful of the risks involved in NFT investing.
Find out all you need to know about NFTs in our blog titled “What you are to know about NFTs“
Pros of investing in NFTs
There are numerous reasons why investors might wish to purchase assets that have been tokenized into NFTs. The following are some of the benefits of investing in NFTs:
Anyone can invest in NFTs: Everyone has the ability to invest in tokenized assets. Asset ownership that has been tokenized into an NFT can be transferred more easily and efficiently between persons all over the world.
NFT ownership is secured by a blockchain: The use of blockchain technology to digitally signify ownership can increase the security of an investor’s asset ownership. Blockchain technology can also make asset ownership more transparent.
Opportunity to learn more about blockchain technology: By devoting a small sum to tokenized assets, investors can gain a better understanding of blockchain while diversifying their portfolios.
Cons of investing in NFTs
Many investors have legitimate concerns about investing in tokenized assets. The following are some of the drawbacks of NFT investing:
NFTs are not an asset class: NFTs are frequently misunderstood as an asset class rather than a technological means of indicating ownership. The general misunderstanding and enthusiasm around NFTs might produce inflated and volatility tokenized asset valuations.
NFT generation is highly energy-intensive: The Ethereum blockchain, which uses an energy-intensive operational system called proof of work, now supports the majority of NFTs. A single NFT transaction consumes enough energy to power a typical home for nearly a day and a half.
May need to own Ether (ETH): Because most NFT sales take place on the Ethereum platform, having the blockchain’s native currency Ether (ETH) is frequently required.
So is investing in an NFT worth it?
The popularity of NFTs has surged. You might be thinking if you should invest in NFTs after several investors gained millions.
NFTs, according to Vignesh Sundaresan, the auction buyer of the $69 million artwork, are a legitimate store of value that signify a shift in how the world views art and valuable assets. Sundaresan told CNBC that NFTs will become a new commodity class that connects buyers and sellers all over the world. However, the NFT he bought is probably just a digital image with a unique asset address that anyone may copy. Many individuals are dubious of NTFs as a result of this. After all, people used to believe that Beanie Babies and tulips should command exorbitant prices. Those fads vanished. Only time will tell whether NFTs are worth more than a Da Vinci or a pet rock.
Experts argue that NFTs aren’t quite ready for primetime investing, and that there are certain aspects of crypto that you should be thoroughly familiar with before purchasing one.
Understanding the Risks and Challenges of Investing in NFTs
For starters, purchasing an NFT is a difficult process. To get started, you’ll need an Ethereum-compatible crypto wallet and enough ether, as well as the ability to connect your wallet to an NFT marketplace. Crypto hacks and frauds, which have become increasingly popular and sophisticated, are likewise vulnerable to NFTs. A Google search for “NFT frauds” reveals just how easy it is to get into trouble.
Then there’s the issue of worth and utility. NFTs are not like stocks or bonds, where the intrinsic value of the investment is usually known. A successful NFT is similar to a strong brand in that other people place a lot of value on it, so it’s only worth what someone else is willing to pay for it.
For most investors, NFTs present significant risk, making them a poor investment unless for pure artistic interest. Experts typically recommend allocating less than 5% of one’s portfolio to cryptocurrencies over NFTs.
It is not a good idea to invest in an asset just because it has been tokenized into an NFT. Because NFTs are not investments in and of themselves, make sure you understand the value of the underlying asset before purchasing the NFT.
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