With Non-Fungible Tokens (NFTs) increasingly becoming popular, you might be thinking about investing in them. But what does it mean to invest in NFTs, and what are the pros and cons of NFTs? It is always good to understand any asset class before investing in it.
Whether you’re a trader, or digital artist, or are just interested in the buzz surrounding NFTs, this article will help you learn more about NFTs, NFT pros and cons, and how to invest in NFTs. Let’s get started!
What are NFTs?
NFT stands for “Non-Fungible Token.” An NFT is a digital token stored on the blockchain. NFTs act as digital certificates of ownership for digital assets, which can be real-world objects and arts like paintings, games, photography & videography, virtual real estate, music, and such.
NFTs have metadata code stored on the blockchain for establishing uniqueness and ownership. Each NFT is one-of-a-kind, meaning that it cannot be exchanged for another NFT. NFTs also have different values based on their rarity.
After a digital asset is created, it is uploaded as a file to the blockchain alongside metadata containing the information about the asset to make an NFT. NFTs can be purchased, sold, and collected.
What are the Pros and Cons of NFTs?
Just like any other asset class, there are pros and cons of NFT investment. Let us discuss them. Knowing NFT pros and cons will help you make the right decision regarding investing in them.
Pros of NFTs
There are many reasons why investors should buy assets tokenized into NFTs. Some of the NFT pros include:
#1: NFTs can help to fractionalize the ownership of physical assets
One of the pros of NFTs is that they can easily fractionalize ownership of nearly any asset. A computerized replica of an asset is easier to divide among several owners than a physical asset. For example, companies are now selling fractionalized ownership of real estate in the form of NFTs. Platforms like Futurent, Aqar Chain, Labs Group, and RealT sell fractionalized real estate as NFTs. The Kings of Leon band is also selling part of their album as NFTs.
#2: NFTs improve market efficiency- Most Obvious NFT Pro
This is the most obvious advantage of NFTs. NFTs have the potential to make markets more efficient. By converting a physical asset into a digital one, you can eliminate intermediaries, streamline processes, bolster security, and improve supply chains.
With NFTs, digital artists can interact with their customers directly, eliminating the need for cumbersome transactions and costly agents.
Digitization of art is also enhancing authentication, which further reduces costs and streamlines transactions. NFTs could evolve as an effective way of managing sensitive data and records for both individuals and companies.
Consider the physical passports that need to be produced at the entry and exit points. By converting them into unique NFTs, the process of identifying individuals and managing travel can be streamlined significantly.
#3: The Blockchain Technology Powering NFTs is Very Safe- another Benefit of NFTs
NFTs are powered by blockchain technology, which provides a way of recording information in a way that cannot be hacked, deleted, or altered. A blockchain is a digital ledger of transactions that is duplicated and distributed across a peer-to-peer network of participants.
Each NFT stored on the blockchain has a unique record of authenticity and chain of ownership, which protects the NFT from theft and mishandling. Once data is recorded on the blockchain it cannot be changed or deleted. This preserves the scarcity and authenticity of the NFT, creating a level of confidence that cannot be found in other markets.
#4: NFTs Can Diversify an Investment Portfolio- An Advantage of NFTs
NFTs are different from traditional assets like stocks and bonds. They have different characteristics and come with benefits that many are only starting to fully appreciate. However, ownership of an asset doesn’t come without risk.
The cons of NFTs will be discussed in the next section. For now, note that NFTs have a different risk profile from other types of assets. Thus, adding NFTs to an investment portfolio is a good way of boosting its efficiency. It is a good way of having a great risk-to-reward ratio.
#5: Creators can earn continuous royalties
Creator royalties are next on our list of pros and cons of NFTs. The NFT creator can set a royalty rate for each sale of the NFT. For example, a digital artist can set a royalty of 10% for each sale of their NFT. This means that if the NFT is resold or changes hands 5 times in a year, the artist will be paid 10% of each sale.
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Cons of NFTs
While Non-Fungible Tokens are an incredible innovation, there are NFT cons as well. The following are some of the cons of NFTs:
#1: Minting can be expensive- one of the disadvantages of NFTs
NFTs are created through a process known as minting. Creators who need to mint their NFTs on the Ethereum blockchain have to pay for gas fees, which is the cost of recording the NFT on the blockchain. Ethereum gas fees can be extremely expensive, especially when there is high traffic on the Ethereum network.
#2: The NFT market is volatile- one of the major cons of NFTs
One of the cons of NFTs is the volatility of the NFT market. This can be attributed to the fact that the NFT market is still new. It is not uncommon for some NFT prices to double within hours due to speculation. Some NFTs also lose nearly all their value within minutes.
#3: NFTs don’t generate revenue- An NFT con compared to other assets
Unlike bonds, stocks, or real estate where owners get interest, dividends, and rent, NFTs don’t generate any such revenue. Like collectibles such as antiques. NFT owners only get rewards from price appreciation, which is not a guarantee considering the volatile nature of the NFT market.
#4: NFTs can be used to initiate fraud- A disadvantage of NFTs as NFT scams rise
The blockchain is known for its integrity, but one of the NFT cons is that it can be used to initiate fraud. Some NFT artists have recently reported finding their work listed for sale on NFT marketplaces without their consent.
This is a violation of the intent to use NFTs to sell art. The purpose of NFTs is to authenticate a physical piece of art with a unique token, which is an assurance to the owner of the token that they also own the original physical asset.
A serious challenge happens if an individual creates an electronic image of the original work, attaches a token to it, and lists it for sale on an NFT marketplace. The token will have no link to the physical work, but it is linked to a fraudulent reproduction.
#6: NFTs can be harmful to the environment- A challenge for Ethereum-based NFTs
A lot of computing energy is needed to write records on the blockchain, and there is a debate about the long-term effects of the process on the environment. Some estimates indicate that at the current rate, the carbon emissions from minting NFTs and mining cryptocurrencies will exceed those associated with the city of London in the coming years.
Should you invest in NFTs?
As discussed above, there are both pros and cons of NFTs. However, that doesn’t mean that investing in NFTs is a bad idea. If you identify an asset tokenized into NFT and you have the funding, you can go ahead and buy it. If the ownership of the asset is tokenized, you will enjoy the additional benefits of NFTs.
However, don’t just buy an asset because it is tokenized into NFT. NFTs by themselves are not investments, so it is good to understand the value of the underlying asset before you buy an NFT.
For the list of some of the coolest NFTs to buy in 2023, read this blog.
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