What are NFTs? A guide for investors
Most investors may not have heard of non-replaceable codes until last year. That's when NFTs exploded on the scene, mostly in the form of digital art.
Sales hit a monthly record near $5 billion in August 2021, according to figures from industry data aggregator CryptoSlam. Sales continued in billions before falling sharply in June along with the value of cryptocurrencies, which are often used to buy these symbols.
Like cryptocurrencies, NFTs have been certified using blockchain technology. But unlike, for example, Bitcoin (BTC), proprietary NFTs represent something specific, like a digital panel. While NFTs can be purchased and sold like auctioning the statue, they cannot be replaced with goods and services in the same way as cryptocurrencies such as Bitcoin.
When it comes to investing, the NFTs market is far from mature. Any investors except the most speculative may want to stay away until regulatory fog dissipates and more realistic uses of NFTs are developed. In the meantime, you might want to consider it a fun thing to collect, like a stamp set, you might end up worthy of something one day.
"Its real value lies in its fundamental usefulness and the fact that it represents ownership," says Anthony Georgiades, general partner of technology venture capital firm Innovating Capital. "There are many future applications useful for technology that will have practical implications for businesses and consumers."
Here are some factors that investors should consider as they explore the specificities and generalities of NFTs:
- What are NFTs and how do they work?
- NFTs and art.
- NFTs risk as investments.
- organizational risks.
- Investment status may improve with widespread use cases.
- Bottom line: Should you buy NFTs?
What are NFTs and how do they work?
NFTs are media files associated with a specific digital code that can be tracked and verified on the blockchain, explains Jeff Davis, founder of Cap3 Collective, an organization launched later this month that will fund blockchain-based web projects.
"Basically, NFTs is the mechanism that facilitates verifiable ownership of digital ownership," says Walker Holmes, vice president of metaverse MetaTope. "As we continue to evolve into a more digital world, we will see bonds, addresses, tickets, ID cards and more represented by NFTs and blockchain verification."
NFTs are created through smart contracts that define ownership and allow transfers and are purchased and sold on online marketplaces, with some platforms allowing partial ownership - useful because tokens can cost tens of thousands of dollars each.
NFTs and Art
Digital artwork is just one use case for NFTs, but it was popular, creating a more democratic model for selling art.
"Art exhibitions and auction houses were market makers in the art world - where museums, collectors, and artists go to buy and sell art," says Sarah McDaniel, head of the art resource team at Morgan Stanley Wealth Management. "NFTs and their markets disrupt this process by allowing more artists to go directly to the market and sell directly to buyers."
These codes can also make it easier for artists to earn royalties every time their art is sold.
But artists shouldn't expect huge profits just because they've launched NFT, says Richard Gardner, CEO of Modulus Global, which provides financial software for brokerage and professional traders.
"Especially given the current economic climate and the downward trend of the NFT market, you can't seriously expect a six-figure income unless you bring your star power to the table," he says.
Since NFTs are often bought and sold in cryptocurrencies, fluctuations there may bleed into non-replaceable codes. For example, if you bought a piece of digital art using one unit of Ether (ETH), Ethereum network currency, in mid-March at the exchange rate, the same art on Monday would be less than $2,000, assuming no other changes than those in the exchange rate.
Of course, there are other reasons to buy art than for investment purposes, so worrying about cryptocurrency fluctuations may be debated for you.
NFTs risk as investments
But for investors, these and other impacts are realized.
The first thing people who want to buy NFTs should know is that this type of investment is highly speculative, which means it's risky, according to Grant Powell, founder of Curios, an NFT-as-a-service platform.
Risks include investing in counterfeit NFTs that pretend to be common codes or fraudulent sites that try to entice potential buyers to plug in their wallets to steal cryptocurrencies and NFTs, says Stephen Sykes, chief operating officer at the investment platform Public.com.
"Look for verified vendors in the markets to avoid scams," Sykes says.
There is a risk that even reputable NFT markets can be hacked. Omar Amsell, product management manager with Fireblocks digital asset security platform, recommends moving purchased NFTs to safe wallets unless you flip codes quickly.
Investors should educate themselves on how and where to buy NFTs, the track record and star power of their creators before the NFT project, how to check ownership, and how to keep the portfolio safe. Tools and steps to make safe purchases include checking whether markets are in partnership with any security protocols, searching for NFT creators or vendors, being wary of lawyers requesting private information, checking past transactions, or using specific technology solutions that can assess NFT's scarcity.
"Spend a good month learning best practices and getting a plot of land before you spend a penny," Davis says.
Joshua Hong, the founder of blockchain-based web app Synesis One, says the most important aspect of investing in NFTs is also the most challenging: analyzing the tool and society behind a specific code.
Hong says that one of the reasons why looking for who is behind the NFT project is that the market value of NFT is usually determined by close relationships and interactions between creators, supporters, fans, buyers, and sellers.
In other words, society is important when considering investing in NFTs.
Amsel says: "Strong communities drive a lot of value when it comes to NFTs." "Excellent projects such as Doodles, Cool Cats, Apes, and Art Blocks have huge follow-ups. These are the kinds of projects that excite people, and not only HODLers are enthusiasts, but also large venture capital funds as we continue to see the flow of institutional funds into space. "
Long-term crypto investors who "retain dear life", or HODLers, believe that cryptocurrencies will eventually replace the current cash system and plan to buy and retain it indefinitely. Others pursue a diversification strategy similar to the one they use with their traditional investment portfolio.
If you decide to invest, just spend what you can afford to lose, choose an approach that fits your investment style and stick to it.
"Only some people invest in NFTs with long-term facilities and plan to keep them for years, while others buy a hot art project today and will look to turn tomorrow for a quick profit," Davis says.
Organizational risks
There is one type of risk worth its own department: regulatory risks. While NFTs have a lot in common with stocks, they are not officially declared as securities and may end up being considered commodities.
Says Arry Yu, President of the Cascadia Blockchain Council of the Washington Technology Industry Association.
Gardner warns against entering the NFT market right now because the regulatory environment for digital assets is in flux.
"The coming rules can change well how the industry works over the next 12 to 24 months," he says.
Investment status may improve with widespread use cases
While most NFTs today are linked to digital art, the future of these kinds of symbols lies in their usefulness as financial assets that can provide negative income or the right to participate in membership or instrument, Hong says.
"NFTs are the future," says Reeve Collins, co-founder of NFT BLOCKv. "There will be many applications for them, and they will be an integral part of our digital life."
But for now, Collins argues that early NFTs without real benefit should be seen as acquisitions rather than investments. Instead, he recommends investing in companies that build NFT technology.
"This first surge in NFT was about speculation and gambling, buying low assets, hoping to appreciate them and sell them," he says. "While this is very interesting, sometimes addictive, in my opinion, it does not invest. The picture to invest in at the moment should only be chosen for entertainment against the long-term goal of asset appreciation. "
Bottom line: Should you buy NFTs?
Yes and no yes, if you want a pleasant collectible hobby. No - or at least not yet - if you want to do anything but invest highly speculative.
If you're in the latter, you might be thinking of allocating a small portion of your portfolio to investing in NFT in a similar way you might think of a penny stock.
"In the end, like the tips that technical advisers give to their clients, it's important to buy what you love and what makes you excited," Ansell says. "Find a community of creators that you believe in and support. Keep on track over time, keep your ear on the floor, and you may find yourself with a very valuable NFT set as a result. "