What investors need to know about NFTs

What investors need to know about NFTs

About a week ago, I read that an Indonesian student was selling the selfies he took every day for five years as Non-Fungible Tokens (NFT). What started as a joke is now worth $1 million. It wasn’t the first time I read about NFTs and it certainly wouldn’t be the last. This prompted me to investigate what these innovative items are all about and I found that they are increasingly becoming popular investment opportunities.

While there is no harm in venturing into the new, caution is always advised. In fact, the success of cryptocurrencies and the rapid pandemic boosted the NFT market, which actually grew by 299 percent in the year 2020 and showed no signs of stopping. But NFTs are still not simple concepts because they are still evolving, unregulated and volatile. That said, you may want to invest anyway. Here are some things you should know about NFTs before anything else.

An introduction to the world of NFTs

NFTs, as already mentioned, are called Non-Fungible Tokens. They are digital assets, very similar to crypto, and cannot be valued relative to others. They operate through a global network of data servers that record every transaction for every asset called the blockchain. But what is distinctive about NFTs is that they are in the form of digital works of art.

For any digital artwork, whether it’s a high-resolution image or a simple audio file, the blockchain will provide you with a virtual marketplace to trade them. They have recently become very popular on social media; even movie stars and athletes participate in the NFT market. Note that NFTs are unique in the sense that they have confirmed ownership and cannot be manipulated.

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They are not healthy for the environment

You might think that NFTs are digital in nature, should have minimal impact on the environment. I used to think the same before I read about cryptos and their environmental impact. The same is the case with NFTs. Mining, a process many of you may be aware of, is the most damaging aspect of NFTs. All the NFT transactions have to be added to the blockchain and this is the job of miners, who have to generate a security system for the protection of all these transactions.

This process comes at the expense of massive energy which ultimately takes a toll on the environment. Of course, right now. NFTs are all the rage, and environmental concerns have been put on the back burner. Nevertheless, as an investor you need to keep this in mind, as the fact that NFTs are environmentally harmful can affect your financial goals.

Selling NFTs is not necessarily a cheap task

You are not reading enough if you thought that all you have to do is auction your NFTs and you have your profit. There are several NFT marketplaces, such as Rarible and OpenSea. Access to these marketplaces does not come for free, as they charge fairly high auction and transaction fees. The fees can take up to 5 percent of every sale you make.

Unless your item sells for a good price, you will find the whole thing unfit for business. There is no price target, so companies often tend to undersell or oversell their goods in the market. Before you decide to invest, you must therefore take these expenses into account.

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Price volatility is a real thing here

We all know that the crypto market is highly volatile, so one can imagine the scenes in an NFT marketplace. There is no way to tell how much a particular NFT will sell. Mostly it depends on how much people are willing to pay. I’ve read news stories about junk art being sold for sums you and I would struggle to get our hands on.

Because of this price volatility, investors will need to make a rigorous risk assessment. Consider how much you are willing to risk in a particular NFT before jumping on the bandwagon. Pure speculation is what drives the NFT market and you don’t want to risk everything with this.

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