Are NFTs a Good Investment?
You keep hearing about cryptocurrency and non-fungible tokens (NFTs) and you are curious about this lucrative world. No wonder, people claim that they went from living from paycheck to paycheck to quitting their dead-end jobs to live the lavish lifestyle they never dreamed of.
Teen influencers, who are making millions with NFTs, add even more fuel to the fire. When you see people around you effortlessly getting rich, you naturally want to become rich, too.
In short, an NFT is a digital token that attests ownership of a digital item. If you are not familiar with inner workings of NFTs, check out this article Non-Fungible Tokens Explained in Simple Terms.
Before you add NFTs to your investment portfolio, you should understand the reasons for their appreciation. There is plenty of noise about the upcoming crypto revolution and the future of investing. But are they just selling FOMO - fear of missing out? Here is our take on it.
As of the time of writing the article, the current market for NFTs is centered around digital art. Let's start with this segment and later touch on some other examples of non-fungible tokens.
Let's pretend that NFTs are an asset class. These tokenized digital art assets are nonperforming. They do not produce returns and do not have any intrinsic or objective value. Their commercial value is created and sustained by trends and demand. To put it simply, an NFT is worth what someone is willing to pay for it. You can think of these NFTs as collectibles.
The main factors that determine the value of a collectible are trends and the law of supply and demand. The greater demand and the greater hype around a collectible - the higher its price. A shortage, created when the demand exceeds the supply, drives up the price of that collectible. This is also true the other way around. Lack of interest in a collectible and excess supply will decrease its price.
Physical collectibles have a finite or limited supply. This scarcity helps determine their artificial value. Sometimes the scarcity is created artificially. For example, trading card companies will create limited editions of cards. Or photographers would print and sign only a certain number of photos to create the lasting value of their work.
The novelty of NFTs and the buzz around them create the demand, but there is no lack of supply. Any artwork can be tokenized and there are more artists than the people who are willing to own a token for their art.
Many people, including non-artists, are just looking to make a quick buck. Although every token is unique - the artwork associated with it may not be. Artwork can be algorithmically generated or replicated with minor changes to create a large number of "unique" images.
As long this is profitable - there will be a constant stream of new collectible NFTs by unknown artists and little reason to pay more for NFTs that had already been purchased. This means that most collectible NFTs will be worthless.
That doesn't mean that investing in NFTs is inherently a bad idea. Investing in NFT collectibles is a viable option. But as with investing in fine art - this is not for everyone. It is an involved process that requires careful examination and understanding of the asset class. Buying a piece that you liked and hoping that someone in the future is going to pay more for it for reasons that you don't particularly care about - is not a solid investment strategy.
Most average investors owning collectible NFTs will be at a loss.
There is More to NFTs Than Trendy Pics
Currently, NFTs are synonymous with digital art. But NFTs are more than just art and collectibles and there are other uses for non-fungible tokens. There are in-game items, like playable characters, weapons, equipment, and resources. NFTs for accessories, avatars, and plots of land can be bought and sold in the metaverse. Tokens for domain names, event tickets, and other more "material" things are already a reality. Any of these NFTs can be potential investment opportunities.
The NFT industry is rapidly evolving and expanding, but it is still in its infancy. There will be much more types of non-fungible tokens in the future. Every major brand will have its own NFTs. And when virtual reality becomes everyone's reality - people will want to own and trade virtual things as they do in real life. There are now and will be unique NFTs that people will always want to own. Usage of utility NFTs that give their owners real-world benefits will grow with time. New investment opportunities will come along, but right now, this technology is not mature for safe investments.