It's safe to say that most people today are no stranger to the term non-fungible token, which is popularly abbreviated to NFT. Some are even interested in investing in them. However, what does it mean to put your money in NFTs? Also, what are the NFT pros and cons? Before investing in this blockchain technology, it's always better to comprehend it thoroughly.
The term 'NFT,' which stands for a non-fungible token, is a digital asset with blockchain-based proof of ownership. If you are new to this NFT world, its definition may sound confusing to understand. Therefore, let's break it down into two primary functions to make it much easier to comprehend fully.
Let's start with the "non-fungible" characteristic, which refers to the fact that it is the only unique version of the digital aspect that cannot be replicated. You can view this as an NFT asset with its digital fingerprint, where the minor variations in each work come with their worth.
Then there is the "token" aspect that can be easily understood as a digital certificate stored on a blockchain. The buyer of an NFT asset will automatically obtain the certificate or, in this case, a token to prove that they are the sole owner of the original item.
What can be considered an NFT? The types of non-fungible tokens are varied. It can be one-of-a-kind digital artworks, collectibles, in-game items, website domains, event tickets, and many other digitized items.
Why Do People Invest in NFTs?
Since 2021, the rich have spent millions of dollars on NFTs. It undoubtedly raises a question: What drives these people to get into the NFT space and spend hundreds to millions?
There are generally many reasons that motivate people to buy NFTs. Some people develop a keen interest in owning the underlying value of an asset. In contrast, others may invest in an NFT to better understand blockchain technology.
Regardless of the reason, investors in this crypto-verse unquestionably have thoroughly comprehended the NFT pros and cons. It should be done to lessen the possibility of losing cash due to the fluctuation of NFT.
Related Article: Weighing the Cost: Are NFTs a Good Investment?
Pros of Investing in NFT
People have a range of reasons why they might wish to purchase digital assets in the form of NFTs. The following are some of the benefits of investing in NFT projects.
1. Digitizing the Physical Assets' Ownership
Dividing ownership of assets is never an easy task. NFT provides a way to digitize physical assets, making it easier to divide its ownership. Also, this enables specific asset markets to expand, resulting in increased prices and liquidity. Additionally, it can improve the construction of financial portfolios on an individual basis.
2. NFTs Help to Improve Market Efficiency
One of the most apparent advantages of the emergence of NFTs is their ability to improve market efficiency. Transforming a real-world asset to a digital one can speed up procedures, improve supply chains, increase security, and minimize middlemen. NFTs, on the other hand, may eventually become a viable tool to manage and regulate critical records and data.
3. NFTs Improve Investment Portfolios Distinctively
NFTs are not the same as conventional investments, like stocks. They offer unique benefits that investors are only beginning to grasp. The risk profile of NFTs also significantly differs from that of other types of investments. By having NFTs in your investment portfolio, you could have the possibility to increase its efficiency. It means a better risk-to-reward ratio could be achieved.
4. NFTs' Blockchain Technology is Highly Secure
NFTs employ blockchain technology that cannot be hacked, altered, or even deleted in any possible way. This technology is used to digitally represent ownership of assets, making investors' asset ownership more secure. The use of blockchain technology also prevents assets from being mishandled or stolen. Also, the authenticity and scarcity of each NFT item remain protected, thanks to the blockchain tech.
Cons of Investing in NFT
Investors have legitimate concerns about investing in NFTs. Listed below are some of the downsides of buying an NFT.
1. NFTs Don't Bring in Any Revenue
NFTs don't work the same as conventional stocks. They don't provide revenue to their holders. The returns of investing in NFTs are not much different from investing in antiques and other forms of collectibles. They are entirely dependent on price growth, which is something investors should not rely upon.
2. NFTs Are Unstable
NFTs are practically new; thus, the market is not stable either. While it has been a hot topic, only certain people comprehend how it works. The number of potential sellers and buyers is also relatively small. As a result, the trade of NFTs can be tough, and the fluctuation of NFT prices is volatile.
3. NFTs Are Prone to Fraud
NFTs may be exploited to propagate fraud despite the unquestionable blockchain's integrity. Someone with an ill will can develop a digital version of original work and sells it on a nft marketplace after attaching an NFT to it. It undoubtedly will create a severe problem because there will be no link redirects to the original work.
4. NFTs Aren't Environmentally Friendly
A considerable amount of energy is required every time a record is added to the NFT blockchain to streamline the process. As a result, all procedures in NFTs (sell, buy, and trade) are not a process that can be regarded as environmentally friendly. According to a study published by Cambridge University, almost all blockchain-related projects are highly harmful to the environment due to the energy consumed.
Is it Worth Buying an NFT?
No one can deny the appeal of NFTs. This blockchain-based technology has been gaining much attention as its applications grow. As previously elaborated, NFTs are generally volatile and illiquid. Therefore, investors should consider many things before buying these non-fungible assets.
It's not good to buy NFTs merely to obtain higher price returns. The NFTs' real value is in their ability to change how markets work and improve critical data management.
If you are interested in participating in this exciting blockchain movement, then have at it. Nonetheless, it's always advisable to do it responsibly by considering all the NFT pros and cons. Never invest a great deal of cash in NFT lines. Otherwise, you may find yourself trapped in a difficult financial situation.