NFTs are digital collectibles built mainly on the Ethereum blockchain. With the rise of interest in NFTs, creators are starting to use other blockchains to create NFTs as well. The common risks of investing in NFT are similar to investing in sports jerseys, name-brand shoes, and other collectibles. Instead of a physical product, people display NFTs through computer and smartphone screens.
Fungible vs non-fungible
Fungibility is an uncommon word, but it describes the uniqueness of an item. NFTs are non-fungible or the opposite of fungible.
Gold is a fungible asset since a one-pound bar of pure gold is worth the same as a one-pound worth of coins and ingots. Other fungible assets include oil, company shares, bonds, other commodities, and currencies.
In those examples, a barrel, share, certificate, or bill have the same value as another identical barrel, share, certificate, or bill. We can make copies of fungible assets, and they will retain the same value as the original.
Diamonds, land, houses, and original art are examples of non-fungible assets.
No two diamonds, plots of land, houses, or art pieces are the exact same. Even though we make copies of non-fungible assets, the original is still one-of-a-kind.
Digitalization of reality
Part of the appeal of NFTs is the belief in the partial or complete digitalization of reality. Virtual reality and augmented reality could provide clues to what the future has in store. NFTs could eventually replace the Yeezys, Louboutins, and Mona Lisas if a digital world overcomes the actual world. Instead, luxury might look something like this:
Other supporters of NFTs include artists and art enthusiasts. By listing their pieces as NFTs, artists around the world can sustain their livelihoods while maintaining $0 shipping costs, and gaining access to a worldwide market, instead of just their local market.
Common risks of investing in NFTs
There are some key risks to consider before buying an NFT.
NFTs can be affected over time by websites going down and image file format changes. If the owner forgets or losses the password to the digital wallet, the NFT is lost forever.
Unlike utility tokens, speculation ultimately drives the value of NFTs. The value of an NFT is only as much as anyone else is willing to pay for it. Some of the highest selling NFTs have been memes or other art forms because of their novelty; however, what is popular or vintage today might not be tomorrow. Pop culture is constantly changing and hard to predict.
NFTs do not fit neatly in our current systems of regulations and laws.
Some unaddressed concerns include:
- What intellectual property rights, if any, are transferred through an NFT sale?
- Should NFTs be treated as a commodity or security?
- Are NFTs counted in US sanctions against other countries?
- Are NFTs subject to state laws?
Liquidity risk refers to "How quickly can I sell an NFT?" Due to speculation, if an NFT goes out of style, we might not find a buyer before we need the cash.
Copies have sprung up pretending to be the originals. It is up to us to protect ourselves from scams and make sure that what we buy is the original.
NFTs are sold on online marketplaces for ETH and require a crypto wallet. There are many marketplaces available for us to search and find an NFT that might interest us.
Speculating with NFTs comes with a large degree of risk. As a responsible investor, it's a good idea to only buy NFTs with your extra cash or play money and not your retirement savings.
Here are some popular NFT marketplaces: