The Pros and Cons of Investing in NFTs

Posted by  Fintra , updated 2022-05-30

In various ways, technology has changed our world, and recently, blockchain technology has led to the cryptocurrency craze- It sent Bitcoin to values in the several thousands of Rupees range and created a new trend. Non-Fungible Token (NFT) has two main parts: The "non-fungible" flank refers to the NFT's non-replicable aspect- it is the unique version of the asset having its own value. The "token" side refers to the proof of ownership of the NFT asset itself. A few examples of NFT include unique digital art assets, collectables, real estate, event tickets, website domains, and/or tweets that get sold to investors on the blockchain. NFTs can also be any kind of art which can render in digital forms like video, music, imagery, memes, or a combination of media.

One must be pondering what are NFT's pros and cons? Well, you've reached the right space where your questions will get answered. In this blog, Fintra highlights the following topics:

1. Fungible v/s Non-Fungible Assets
2. Pros and Cons of Non-Fungible Tokens (NFTs)
3. Where to Purchase Non-Fungible Tokens (NFTs)?
4. Is It Worth Investing in Non-Fungible Tokens (NFTs)?

At times, it can get tough to understand the investment world, especially when considering the myriad of asset classes, fund structures, and tax-advantaged vehicles that are available in the marketplace. Nowadays pervasive technologies, such as mobile payment applications, peer-to-peer lending platforms, robo-advisors and blockchain-based databases have revolutionized the way individuals conduct their business, manage financial transactions, and invest. However, this blog focuses on the blockchain-based databases, especially the Non-Fungible Tokens (NFTs).

Fungible v/s Non-Fungible Assets

Let's begin with the word fungible. A fungible asset is an asset that is easy to exchange for something else of the same value and type. For example, a Rupee note is fungible because one can trade it for another and receive the same value. The same rule applies to a cryptocurrency, such as Bitcoin. One Bitcoin is worth the same amount as another.

In contrast, a Non-Fungible asset is claimed to be one-of-a-kind because of its characteristics of being unique, irreplaceable, and non-interchangeable. Examples of such assets are diamonds and original artworks. Each of these assets bears unique qualities which can’t be authentically replicated. For instance, a diamond has a distinct colour, cut, size, and grade; just like the fingerprints of human beings, no two diamonds are the same.

One may debate that no asset is truly fungible. A handful of Rupee notes are bound to have some noticeable physical differences like maybe ink stains, tattered corners, or different series dates. Although this is a fact, it highlights the importance of focusing on the use-value of an asset and not its technical characteristics while categorizing it as fungible or non-fungible.

To learn what are Non-Fungible Tokens (NFTs) please click here and to know what NFTs are trending please click here.

Below, we will dig in a little deeper and explore the pros and cons of NFTs.

Pros and Cons of Non-Fungible Tokens (NFTs)

Like any other purchasing of artworks, when purchasing NFTs, in a way it's like making an investment. Moreover, just as with any investment, before trading your hard-earned money for a digital masterpiece, there are various pros and cons to consider.

It is extremely accessible for anyone to invest in NFTs. The assets that get tokenized into an NFT can easily and efficiently get transferrable among people anywhere. Since their ownership is secured by a blockchain, it makes the assets even more secured and transparent to trade.

Some of the pros and cons of investing in NFTs are as follows:

Pros

1. Anyone can invest in NFTs: Investing in such tokenized assets is now accessible to everyone. Asset ownership which is tokenized into an NFT is easily and efficiently transferred among various individuals anywhere in the world.
2. Due to blockchain technology, NFT ownership is secured: Using blockchain technology to digitally signify ownership makes an investor's ownership of an asset more secured and transparent.
3. More possibilities to learn about blockchain technology: Diversifying their portfolios by allocating small sums to tokenized assets can enable investors to become more knowledgeable about blockchain.
4. NFTs foster marketplace efficiency: One of the most evident benefits of NFTs is their potential to make markets more efficient. The transformation of physical assets into digital ones can streamline processes, eradicate intermediaries, enhance supply chains, and strengthen trading security. It is easy to authenticate NFTs, and once their authenticity gets verified on the blockchain, can’t be changed. Moreover, NFTs have empowered a new marketplace for artists, enabling them to directly sell to collectors and receive royalties whenever the art gets resold.
5. NFTs can be used to fractionalize ownership of physical assets: It’s challenging to fractionalize ownership of certain assets, such as real estate, a rare case of wine, artworks, and fine jewellery. However, it is much easier to divide digitized versions of a building among numerous owners than a physical one. Thus, through digitization, the market for certain assets can be significantly expanded, leading to higher prices and greater liquidity. On an individual level, it can enhance the way financial portfolios get constructed, permitting for greater diversification and precise position sizing. 

6. The blockchain technology behind NFTs is extremely safe: Blockchain technology, which creates NFTs, is a system of recording information in such a way that it is impossible to hack, alter, or delete. A blockchain acts as a digital ledger of transactions which is duplicated and distributed across an entire peer-to-peer network of participants. Thus, every NFT that is stored on the blockchain has a distinct record of authenticity and chain-of-ownership, which prevents them from facing any mishandling and theft. Once the data gets added to the chain, then it cannot be altered or deleted. This signifies that each NFT’s scarcity and authenticity are preserved.
7. To an investment portfolio, NFTs can provide diversification benefits: Unlike traditional investments like stocks and bonds, NFTs are different. As described above, NFTs have unique qualities, and they offer benefits, which we are beginning to realize and comprehend. Do note that the NFT's risk profile differs from other asset classes. As a result, by adding NFTs to an investment portfolio, one can improve its efficiency, and achieve better balance of risk and return.
8. One of the good ways to divide ownership of physical assets is to use NFTs: As we know, assets such as real estate and bonds are hard to fractionalize. Thus, NFTs provide a much easier way to divide ownership of asset portfolios. Dividing a digitalized version of an asset among multiple owners is easier than a physical one. Moreover, adding NFTs to your investment collection will in turn significantly expand the market for certain assets which will lead to greater liquidity and higher prices. This leads to greater asset diversification and a better balance of risk and return.
9. Data Record: With the ongoing popularity of digital artwork in online marketplaces, records of authenticity and chain-of-ownership for valuable artwork can sometimes be tough to maintain. This is where NFT shines. This is so due to NFT’s leverage of blockchain technology, it allows clear ownership records of all NFTs. Investing in NFTs eliminates the chances of raising questions or doubts about a digital artwork’s authenticity. NFTs blockchain technology has paved the way for easy management of all digital collectables and has provided more opportunities for better ways to manage sensitive data and records.
10. The value growth: Similar to any other investment, whenever anyone purchases NFTs, there'll always be the potential for growth in the value of the investment.
11. Ownership of something unique: Since these digital collectables are non-fungible, they’re irreplaceable. Thus, by owning them there will be a good unique feeling of owning a one-of-a-kind piece, whether it's a painting, piece of furniture, digital image, audio clip, and/or other digital assets.
12. Excitement: At the moment, lots of excitement is occurring around blockchain technology. Hence, it's an exciting notion of purchasing an NFT and actively taking part in the technological evolution!

Cons

1. NFTs are not an asset class: Although NFTs are common, they are erroneously regarded as an asset class instead of a technological way to indicate ownership. Thus, the hype and general misinformation surrounding NFTs may cause the values of tokenized assets to be inflated and volatile.
2. Generating NFTs is highly energy-intensive: Nowadays environment is a hot topic of debate. NFTs are currently supported by the Ethereum blockchain that uses an energy-intensive operating protocol known as proof of work. Thus, a single NFT transaction takes significant computing and requires the use of significant amounts of energy. For this reason, over time, the effects of producing NFTs, and/or all other types of cryptocurrency, may leave a tremendous negative long-term effect on the environment. The excessive consumption of energy indicates NFTs are a significant risk to our environment.
3. You may need to own Ether (ETH): Since most NFT sales occur on the Ethereum platform, you may need to own Ether (ETH), the blockchain's native currency, to be able to purchase an NFT. Investors desiring to purchase NFTs with fiat money might have limited options.
4. NFTs are illiquid and volatile: Seeing their relatively immature state, the market for NFTs is not very liquid. Though NFTs have grown in popularity, they're not widely understood and the potential buyers and sellers are not much high in numbers. This makes NFTs difficult to trade, primarily during periods of distress, and the NFT prices can get highly volatile.
5. Income doesn't get generated through NFTs: Unlike the dividend-paying stocks, interest-bearing bonds, and rent-generating real estate, NFTs don’t guarantee any income potential. Like antiques and other collectables, the returns associated with NFT investments only rely on price appreciation, which is at times volatile.
6. NFTs can be used to perform fraud: Though the integrity of a blockchain is unquestionable, there is potential for frauds to occur and scammers within the space. In fact, recently, several artists have reported that without their consent they've discovered their work being on sale as NFTs on online marketplaces. This indeed violates the purpose of using NFTs to facilitate the sale of art. The NFT's value proposition is that it authenticates physical work of art with a unique token, which assures the person who owns the token that they also own the original work of art. Thus, serious problems arise when someone makes an electronic image of the original work, attaches it to a token, and puts it up for sale on virtual marketplaces. Once it's up for sale, there is no link to the original work, and the token is linked to a fraudulent reproduction.
7. NFTs are speculative and illiquid investments. Moreover, since they're new in the concept of assets and various new marketplaces have been invented for them, there isn't much historical data to research about them.

Where to Purchase Non-Fungible Tokens (NFTs)?

Everyone is interested in purchasing NFTs regardless of their drawbacks. The rising demand for such assets has made some be sold for millions of Rupees. Thus, if you're desiring to get your hands on some of the top-grossing NFTs, you can purchase them through the NFT marketplaces and some cryptocurrency exchanges. Fintra has compiled the most common top NFT marketplaces among investors, and they can be viewed by clicking here.

 Is It Worth Investing in Non-Fungible Tokens (NFTs)?

Due to the increasing popularity of NFTs, everyone at some point will ponder whether to invest in them or not. Before moving on with your thoughts, do understand the fact what does it mean to "invest in NFTs" and what are the pros and cons of investing in them? Fintra advises it's always a wise idea to first understand any asset class before beginning to invest in them.

To begin with, "investing in NFTs" is misnamed because NFTs themselves are not precisely an asset class. As described earlier, to digitally signify ownership, NFTs use blockchain technology. In other words, this makes an NFT more like the title of a car rather than the car itself. It's a common sense one wouldn't purchase a car just for the paper title coming along with it. Similarly, it won't be a smart decision of purchasing an asset just because it's tokenized into an NFT.

With this fact in mind, it doesn't mean investing in tokenized assets is a bad idea. When you find an asset appealing and have the funds, then go ahead to buy it. If the ownership of an asset happens to be tokenized, then one can likely enjoy the additional benefits associated with NFTs. However, make sure first to understand the risks of NFT investing.

Conclusion

Without any doubt, NFTs' growth and popularity have been very explosive, thus, hard to ignore. Since their first appearance in 2014, NFTs have become a fascinating phenomenon in the crypto world, disrupting global markets ranging from gaming to art and insurance. Now, one can easily purchase NFT to represent digital ownerships of a huge range of irreplicable intangible items. Although NFTs can be thought fun as they offer a way to own something unique on the blockchain which is not a cryptocurrency. However, as an investment, one should view them as highly speculative, extremely risky assets. 

NFTs are indeed an exciting creation, and it may not a bad idea to invest in assets just because they're tokenized, however. The bottom line is NFTs do bear pros and cons. Regardless of whether an asset's ownership is denoted by a blockchain, the fundamentals of investing still apply. As a prudent investor, always first identify quality assets you desire to own and then process to do the required actions to acquire them. 

If you are purchasing NFTs intending to achieve triple or quadruple-digit price returns, then it is not a wise thought. NFT's real value lies in its potential to transform the way markets function, enhancing the ways we manage and control sensitive information. Nevertheless, if desiring to participate in the blockchain movement and see NFT ownership as yours, then go for it. However, do it responsibly and avoid putting a lot of funds into NFTs. Strive to establish low-cost positions, otherwise, you may find yourself in a painful spot, financially and emotionally.