Tips for Thought

The Advantages and Disadvantages of Investing in NFTs

The digital realm has provided countless opportunities for budding investors and entrepreneurs. One of the hottest online investments that have taken the internet by storm are NFTs or non-fungible tokens. Here’s what you need to know about NFTs and whether they’re worth the hype.

What is an NFT?

An NFT or non-fungible token is an investment. The term “non-fungible” refers to the fact that such a token is not interchangeable with a similar item. Unlike cryptocurrencies like bitcoin, which moves as a peer-to-peer item like electronic cash, each NFT is unique, which adds more value.

What are the features of an NFT?

NFTs differ from other digital investments due to some of their features, which include the following:

1. It holds data on the blockchain. This feature means that while the NFT is unique, it can be sold and traded.

2. It is associated with various media. NFTs can come in multiple forms, which can be any type of media, including photos, videos, artwork, and even gaming codes.

3. You cannot break down an NFT. Many investment products can be broken into smaller pieces, giving people more options to start building their wealth. NFTs, however, are an entire entity of their own, although it does “represent” a person’s fractional ownership of an asset.

Advantages of Investing in NFTs:

There are multiple advantages for NFTs for both investors and creators. Here are some benefits for both:

1. It offers artists ownership of their work.

NFTs are popular because it has allowed artists an innovative solution to establish ownership and authenticity of their creations online. With NFTs, artists can tokenize their products by creating a unique and verifiable certificate of ownership on the blockchain. 

This feature challenges the current copyright protection and other forms of provenance, giving the artists more options to monetize their work and secure their intellectual property rights without a mediator.

2. They help fractionalize ownership of tangible assets.

Many entrepreneurs love NFTs because they can quickly sell fractionalized ownership for any asset. For example, some companies sell a fraction of real estate ownership via NFTs, making it seamless and accessible for more investors online. Even artists like bands can sell a part of their album as an NFT to generate interest from various investors.

3. They offer ongoing royalties to owners.

Many artists create NFTs because they receive a royalty rate for every sale of said NFT. For instance, a famous digital artist can set a royalty rate of 20% for each sale of their NFT, enabling them to make passive income.

4. The technology surrounding NFTs is safe.

Many NFTs include a digital ledger for every sale while securing the blockchain. When a person creates an NFT, they can keep track of the chain of ownership through the digital ledger, which they can access via a smart contract.

Disadvantages of Investing in NFTs:

While NFTs have offered countless advantages to modern investors and artists, there are still some setbacks on what happens when you invest or use them. Here are some examples:

1. It’s expensive to mint.

Minting is a process that generates an NFT into existence. If you’re an artist and want to mint NFTs on a blockchain, you must pay a “gas fee.” A gas fee is a payment for blockchain miners to process the transaction to be secured on the blockchain. In some cases, gas fees can be very pricey.

2. The market is volatile.

NFTs are a hot commodity because they are new and have caused controversy since their conception. This controversy leads to a volatile market, which can be tricky for investors who prefer to go through the low-risk route.

3. Fraud is possible.

Even though NFTs are made with artists in mind, many famous investors have been riddled with cheap imitations from malicious entrepreneurs. Unfortunately, it’s common for the latter to make cheap copies to take advantage of the NFT hype while it’s still popular. Due to these limitations, some people perceive NFTs as unreliable and a fad.

4. They are not environmentally friendly.

It takes a lot of work to mint genuine NFTs on the blockchain. In addition to its minting, some blockchains use “proof of work,” which requires a lot of energy to validate and verify new data on the blockchain. Producing proof of work needs high energy levels, rendering it an environmental risk throughout its various transactions.

Should I Invest in NFTs?

Now that you’ve figured out the pros and cons of NFTs, you can be better informed on whether or not you want to include these assets in your portfolio. If you’re still on the fence about whether you should take the plunge and buy your first NFT, here are some questions to consider first:

1. Do the benefits outweigh the risks, or do the risks outweigh the benefits?

There is no doubt that NFTs pose both significant advantages and disadvantages. While they are relatively modern and use blockchain technology, NFTs are still volatile because of the number of frauds and other issues.

Nevertheless, this is where you start evaluating your risk profile: Do you want to take some risky investments? Or Do you prefer to play it safe? If you prefer the latter, skip this asset for now.

2. Are you an artist?

NFTs aren’t just for entrepreneurs but for creators, too. Whether or not you’re a “famous” artist, having an NFT can be a great backup asset when you want to own your work. Should your artistic career grow, you can use the royalty rates such NFTs provide, which can be a great source of passive income.

3. Do you want to include crypto assets in your portfolio?

People who want to diversify their investment portfolios may find including digital assets like crypto and crypto-adjacent products beneficial. NFTs are the latter since they operate on the blockchain but do not function as cash, unlike Bitcoin and similar crypto coins.

4. What are your long-term plans?

Ultimately, NFTs are better off in the short term because they are new and volatile and help improve blockchain technology. In regards to long-term investments, they still risk being deemed a “fad,” which may be the case unless someone finds a better way to use blockchain without wasting energy. If you want to make short-term investments, a few NFTs can benefit your portfolio. Otherwise, you can skip this and look for something else.

Takeaway: Non-fungible tokens are fashionable because of their relative ease of buying and trading. However, the market for these assets is still volatile, and while it is less volatile than in 2022, some issues still need to be addressed with these products. Nevertheless, a couple of NFTs can be good for short-term investments if you like to diversify your portfolio. Remember to do proper research first before making your first purchase. Good luck!