To many, investing in NFTs definitely doesn’t sound nearly as familiar and reassuring as investing in securities. And while it’s completely up to you to decide whether you want to add NFTs to your investment portfolio or not, we’re here to make the decision a little easier. So, let’s look at the main advantages and disadvantages of NFTs for investors.
Advantages of NFTs
- Increase in value
NFTs are first and foremost an investment, so when you buy certain tokens, they may have potential for growth.
- Improving market efficiency
Converting a physical asset into a digital one can simplify many processes: eliminate intermediaries, improve supply chains, increase security, and reduce costs.
All information about NFTs, their purchases, sales and ownership, is recorded on the blockchain. It keeps clear records of authenticity and the chain of owners, which theoretically prevents theft or forgery, in addition to confirming the copyright.
- Exclusive ownership
NFTs, unlike regular tokens, imply ownership of a unique asset. NFT batches are limited and often contain rare collectables. Such tokens not only confirm the status of a collector but also provide them with an opportunity for profitable resale.
If you create an NFT yourself, you can make money on resales. By the way, to do this, you don’t need anything except an authorship entry in the smart contract. The royalty percentage from each NFT sale is embedded in the blockchain and automatically credited to your wallet whenever the token is sold. Therefore, a fraudster can’t really pose as the author of a particular NFT.
- Portfolio diversification
If you are already an active investor, NFTs are a good way to diversify your investment portfolio.
Disadvantages of NFTs
- Low liquidity
The liquidity factor is extremely important for investors. Unfortunately, all the items in the NFT market are in demand only in narrow circles of connoisseurs, culture vultures or crypto investors, meaning that they have relatively low liquidity.
According to primary sales statistics on the OpenSea platform, only 2.5% of NFT sales are worth more than $600. Most NFTs go for less than $200.
While the security of the blockchain is unquestionable, NFTs themselves may well be used for fraudulent purposes. Someone can create a digital image of the original work, quickly tokenize it, and put it up for sale on an NFT marketplace with the real owner staying completely in the dark.
There are no mechanisms to determine the ‘real’ artistic value of an NFT as well as its ‘fair’ price, so low-risk NFT collections are basically non-existent. Among many tokens that are actually worth something, there are, of course, some that are completely worthless. However, that doesn’t prevent those trying to jump on the crypto bandwagon who are often willing to pay through the nose for outright NFT scams. It takes a knack to separate the wheat from the chaff, and that knack only comes with prolonged market exposure.
- Environmental damage
Creating and storing records in the blockchain takes significant, often huge amounts of computational energy. According to some estimates, at the current rate, in the coming years, carbon dioxide emissions from crypto mining and NFTs will likely exceed those produced by megalopolises such as London.
Cryptocurrency is, by its very definition, speculation. The same goes for most works of art, be it digital or physical. The value of each NFT is relative and depends on how much someone is willing to pay for them. This is the unique aspect of non-fungible tokens, but also their fundamental flaw.
In a nutshell, it’s worth noting that you shouldn’t buy NFTs just in the hope of making huge profits. The core value of NFTs lies in their ability to change the principles of market functioning and improve the process of sensitive information management. And, at the end of the day, it’s about fun and sharing, too. Those who are in the market for the sheer fun of it are often the ones finding the sweetest deals.