By Darshan Kothari
With cryptocurrencies, blockchain technology has spawned an entirely new kind of investment. Non-fungible tokens, or NFTs, are another popular investment that gained popularity in the year 2021 thanks to blockchain. People are starting to embrace NFTs ever since they’ve been officially accepted and regulated in the financial sector. These tokens are becoming more and more valuable, and more people have begun to acquire them solely for trading on exchanges.
It can be challenging to invest in the right asset. This doesn’t end here, especially now that the globe has witnessed the negative repercussions of the pandemic. We live in a technologically evolved society where innovations like peer-to-peer lending platforms, mobile payment apps, and even blockchain-based databases are growing at an exponential rate. These are transforming the methods by which we accomplish financial transactions and carry out business. The NFT token is however one blockchain-based tokenized asset that is on focus today.
What are NFTs?
A digital asset called a non-fungible token (NFT) represents a real-world asset. They may be distinguished from other NFTs thanks to their distinctive identifying code, which also helps in avoiding plagiarism.
The most well-known illustration of NFTs is Bitcoin, which has empowered millions of people all over the world in embracing the global economy. As of today, there are more than 200 cryptocurrencies available for trading in more than 40 countries. The non-fungible trait of NFTs (Non-Fungible Tokens) makes them distinctive digital assets that can be utilized to symbolize other assets.
What makes NFTs valuable?
NFTs don’t have any inherent value. They have only as much value as what others are willing to pay for them, much like cryptocurrencies. In contrast to stock, an NFT’s value is not determined by predicted shareholder payouts, corporate growth, or yearly profit margins.
This does not necessarily imply that purchasing tokenized assets is a bad idea. If you find an asset you like and have the funds to acquire it, you may want to do so. If the asset’s ownership is tokenized, you can probably take advantage of the extra benefits that come with NFTs. But be sure to also comprehend the NFT investment pitfalls.
Pros of Buying NFTs
- Ownership – NFTs don’t have a designated owner because they are unique entities. They don’t adhere to conventional property ownership norms. This indicates that they are interchangeable while retaining their originality. Furthermore, NFTs attain the utmost level of transparency because blockchain technology is used in both their creation and their transaction. This transparency stops dishonest and corrupt activities.
- Immutability – If NFTs’ legitimacy is verified on the blockchain, they cannot be altered or substituted in any way. Authenticity acquires a real, external value in addition to its intrinsic value.
- Marketplace Efficiency – NFTs have the ability to increase market efficiency, which is one of their most obvious advantages. Processes can be streamlined, intermediaries can be eliminated, supply chains can be improved, and trading security can be strengthened by converting physical assets to digital ones. NFTs are simple to authenticate, and once their legitimacy has been verified on the blockchain, they cannot be altered. Furthermore, NFTs have given artists access to a brand-new market where they may sell directly to collectors and earn royalties upon every subsequent sale.
- Powered by Smart Contracts – The core of blockchain technology, smart contracts, enable automatic executions in response to specific situations. An investor’s digital ownership of a specific asset is more secure when a transaction is made via blockchain technology. In addition, blockchain ensures transparency throughout.
- An Investment Portfolio – NFTs are distinct from conventional assets like equities and bonds. As previously said, NFTs have special characteristics and provide perks. However, the risk profile of the NFT is quite different from that of other asset classes. Therefore, by including NFTs in an investment portfolio, one can boost its effectiveness and obtain a better risk/return balance.
Cons of Buying NFTs
- NFTs are Volatile – The NFTs are still in an initial stage of development. They are largely viewed as some kind of asset rather than a strategy of technical display of ownership. They are not fully understood since the market is still new, and their prospective buying and selling sector is similarly small. They are therefore more difficult to trade. Furthermore, inaccuracy, in general, might cause an NFT’s value to deflate or inflate. As a result, they are seen as volatile and illiquid.
- Energy Consuming – The Ethereum network now supports non-fungible tokens widely and operates on the energy-intensive “proof of work” mechanism. The amount of electricity used by one NFT transaction is equivalent to what a typical home would use in a day and a half. The impact this does on the environment has been the subject of an ongoing dispute.
- Possibility of Fraud – Although a blockchain’s integrity cannot be disputed, scams and fraudsters could still exist in the system. In fact, recently, a number of artists have claimed that they were unaware that their work was being sold as NFTs on online marketplaces. The goal of utilizing NFTs to promote the sale of art is flagrantly violated by this. The value proposition of the NFT is that it uses a special token to authenticate actual works of art, ensuring that whoever possesses the token also owns the genuine piece of artwork.
Therefore, it is extremely problematic to create an electronic copy of the original work, tie it to a token, and sell it on online marketplaces. Once it is for sale, there is no longer any link to the original work, and thus the token is associated with a fraudulent version.
- Ethereum (ETH) is a Must – Since the majority of NFT sales take place on the Ethereum network, you often require Ether (ETH), the cryptocurrency used by the blockchain, to purchase the digital artwork. If investors wish to buy digital assets using fiat currency like the US dollar, they might not have many alternatives.
The demand for NFTs is enormous and constantly expanding. However, even though it could appear like they have a lot of potentials, you should tread cautiously when investing in new, ambiguous markets since they are unstable and reliant on speculation. In short, NFTs have both benefits and drawbacks, but it’s probably not a good idea to invest in just about any asset even though it has been tokenized. Whether or not a blockchain specifies who owns an asset, the investing fundamentals remain the same. Finding high-quality assets which you would want to buy and taking measures to do so is your best course of action as an investor.
Also read: How to recognise crypto scams and DeFi scams