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Is it a wise investment to buy and sell NFTs? Here’s what investors need to know:
NFT had a record year in 2021 and there is still high interest in this class of digital assets. Chainalysis data shows that collectors have sent more than $37 billion to NFT marketplaces by 2022, surpassing the $40 billion sent in 2021.
NFTs are not only useful for collecting art but also because they are built on smart contract technology.
Although the NFT market is still in its infancy and transactions have declined in recent weeks due to a lack of activity, investors, companies, celebrities, and institutions continue exploring this new world of smart contracts and digital tokens. Investors who are interested in a share of the token market should know more about NFTs and how they can be managed:
- What are NFTs, and how do they work?
- NFTs and art.
- Buying and selling NFTs as investments.
What Are NFTs, and How Do They Work?
NFTs are not-fungible tokens. Fungibility is the ability to trade assets of the same type interchangeably. Bitcoins are an example of fungibility. Users can trade one Bitcoin for another, and it will still be the same asset.
Each token can only be reproduced because NFTs cannot be fungible. This unique characteristic means that NFTs can only be represented on a blockchain as unique information, which ensures digital ownership integrity. Because it is recorded on the blockchain, this record of original ownership can’t be altered.
Each NFT can be either a digital or physical asset. This can include anything, from intellectual rights to the title of ownership to assets.
Nick Donaraski (CEO of blockchain technology company ORE System) says that NFTs are bits of information on a blockchain. They can be represented in an interactive format with visual representations. If you buy an NFT early, you will have limited ownership rights. Donaraski said that this scarcity is what allows the NFT’s value to increase over time.
Smart contracts are the engine that powers NFTs. Smart contracts, in particular, are responsible for managing the transferability of NFTs. Donaraski explains that blockchain can be thought of as a computer network. The smart contract is the computer running the website.
[READ ALSO: Complete Guide on how to Mint NFTs]
NFTs and Art
In the context of digital art, NFTs are well-known. NFTs can be created by artists and traded on an open-source marketplace such as OpenSea. NFTs are expanding beyond their use in the art industry. They can be traded on a marketplace like OpenSea. NFTs will continue to gain popularity and utility as they become more widely used.
NFTs can only be reproduced and manipulated because they are authentic. A limited-edition of an item makes it more valuable. NFTs are speculative. People buy them up because they believe that one day they will be more valuable than the next. People are buying art NFTs to believe they will be more valuable in the future.
Buying and Selling NFTs as Investments
NFTs can be bought low and sold high using the traditional investing principle. NFTs can be bought by market participants early on and then turned around to make a profit if interest grows in the token. Daniel Strachman (Managing Partner at A&C Advisors) says that NFTs should not be considered an investment that can go to zero or pure speculation.
Strachman explains that there are NFTs you can purchase where you can turn right away and others that you can keep.
NFTs do not have the same market value as stocks or bonds. You cannot calculate the intrinsic value of an investment. They have a market price that is determined solely by the number of crypto-community members willing to pay.
Investors need to decide how much exposure they should have to NFTs. He says that investors would have a set amount of money to put into their risk capital bucket. This would be the amount you would be willing to spend on NFTs, he adds. Strachman suggests another way to look at NFTs exposure. If investors are exposed to cryptocurrencies, NFTs may be a subset.
Strachman suggests that investors think of NFTs like silver, gold or art as a commodity-like assets. He says that art is an illiquid asset when it’s bought as an investment. “Some would consider that part of a commodity allocation. Strachman states that NFTs have one commodity-like feature: they are “completely uncorrelated” with any other market.
Experts agree that your long-term investment goals should dictate the type of NFTs that you choose to examine. Donaraski states that you need to look for NFTs that are compatible with your portfolio growth strategy.
Donaraski states that some NFTs may offer investors greater growth opportunities depending on the applications. NFTs that have a real-world utility such as real estate contracts will eventually hold more value.
If investors are able to understand the purpose of NFTs, an NFT can be considered a legitimate investment. Donaraski states that it is better to make sure you have utility than a short-term investment in an NFT. “The utility’s lifespan is determined by the lifespan of the use case.”
Conclusion: Buying and Selling NFTs as an Investor
Research is the most important thing investors should do before they enter the NFT market. This task should be approached in the same manner as research on stocks or bonds. Strachman states that market participants often follow a craze. This is good for the people who sell assets but bad for the ones who buy them. Investors need to understand the risks involved in order to make better decisions.