You probably have heard about non-fungible tokens (NFTs), like the Bored Apes that some people use in their social media profile pictures.
NFTs typically represent the ownership of digital assets such as images, videos and music files. They are bits of information, called tokens, that let people know you have the right to a specific file.
In some cases, NFTs can also represent ownership of an asset available in the “real world.” For example, you might have a digital token that proves your ownership of a fine bottle of wine or a painting.
However, when people talk about investing in NFTs, they are often referring to tokens that represent ownership of a digital file. This can be a specific video of LeBron James dunking a basketball, or an algorithmically-generated CryptoKitty.
So, should you invest in NFTs? Following are some of the potential advantages and disadvantages of doing so. Learning about the pros and cons can help you decide whether investing in NFTs is the right move for you.
1. Pro: Potential to make money
As with any investment, buying NFTs gives you the potential to make money in the long run. Some NFTs have sold for surprising amounts of money. If you buy an NFT at the start of a project, you could benefit if it gains in popularity (and value). You might be able to sell it for more than you paid to get it.
Some popular projects, like CryptoPunks, CryptoKitties, and Bored Apes end up bringing in large amounts of money. In fact, celebrities and others might buy these NFTs, driving the price up. If you choose the “right” project, you could potentially make a lot of money as long as you sell when the price is going up.
2. Pro: Anyone can invest in NFTs
Anyone has access to NFTs via various marketplaces. It’s possible for anyone to easily mint NFTs using a marketplace like Rarible or OpenSea. As a result, you can find NFTs for sale, as well as invest by minting your own NFTs and selling them. If you have the crypto to pay for an NFT, you can buy it. Investing in digital art offers a potential advantage, since there are fewer gatekeepers than you would encounter when trying to buy art in “real life.”
While NFTs can be pricey, they are still more widely accessible than some other assets, especially certain collectibles. It might be harder for you to access an auction that includes a rare automobile or painting. With an NFT, you can access digital collectibles without all the gatekeepers involved.
3. Pro: Ownership is transparent and trackable
Because NFTs exist on the blockchain, it’s possible to track their ownership, verifying provenance. Even if someone copies the image in an NFT, you can prove your ownership of the asset. So, if you want to list it on a reputable exchange later, you will be the one to receive payment for it.
4. Pro: Helps to diversify your portfolio
If you’re looking for a way to add asset diversity to your portfolio, NFTs can be an interesting choice. They offer you the chance to add an alternative asset to your portfolio and take advantage of any growth that might occur if NFTs become more popular in the future.
5. Pro: Learn more about about crypto assets and blockchain technology
For those who want to learn more about crypto assets, NFTs can be a good way to start. Before investing, take time to find out how blockchain technology works and understand how NFTs function as part of the landscape. Plus, as you learn, you might find other opportunities to use emerging technologies to grow your wealth.
1. Con: NFTs don’t necessarily represent ownership of the original intellectual property
NFTs such as CryptoKitties and CryptoPunks offer what amounts to a license to display — only the original creators can profit commercially. This is different from Bored Apes Yacht Club, which allows those who buy the NFT to profit commercially.
Depending on how the NFT contract is written, in some cases it’s actually more of a receipt to access a digital piece of intellectual property, and not the actual property itself.
Additionally, in some situations, there is also concern over who is in charge of maintaining the pathway to the NFT. It’s the use of links that connects you with the ability to view or display what you’ve bought, and it isn’t clear what happens if a link becomes broken later.
2. Con: NFT prices are volatile
NFT prices fluctuate wildly. Because they are so volatile, it’s hard to tell whether they are gaining or losing value. In some cases, if the price of an NFT drops dramatically, you could end up losing your money if the price doesn’t recover.
3. Con: You generally need to own cryptocurrency to make purchases
If you want to buy an NFT, you usually need to have a cryptocurrency. The most popular blockchain for NFTs is Ethereum, so you would need to have this cryptocurrency to make your purchase.
There are other blockchains that issue NFTs. For example, you can buy NFTs on the Polygon, Tezos and Solana blockchains. However, you usually need to have the appropriate cryptocurrency to make your purchase on those blockchains.
4. Con: The process of buying an NFT requires preparatory steps
Just as you can’t usually just purchase an NFT with fiat currency, you also have to take other steps to prepare to buy an NFT. You likely need a crypto wallet that’s compatible with the marketplace you intend to use, as well as the cryptocurrency involved.
Next, you need to know how to connect your wallet to the marketplace involved. For those who use a marketplace like Rarible or OpenSea, it’s fairly straightforward. You can usually use MetaMask for most transactions.
5. Con: No recourse if you lose access to your wallet
Insurance options for NFTs are limited, at least for now. If someone gains access to your wallet, they can send the NFT to their own wallet and you might not be able to get it back, depending on the situation.
Additionally, if you can’t remember the keys to your wallet, and you don’t remember your seed phrase, you can potentially lose access to your NFT. You could potentially lose digital assets by not remembering your seed phrase if you lose your private keys.
NFTs can be an interesting way to diversify your portfolio and dabble in crypto assets and the blockchain. However, there is always a risk when you do not diversify investments.
When purchasing alternative assets — especially cryptocurrencies and NFTs — a good rule of thumb is to risk no more than you can afford to lose. Plus, some experts suggest that your total allocation of alternative investments should be capped at 15% to 20% of your portfolio. This includes all alternatives, including crypto assets and other alternatives like precious metals or tax liens.
If you’re interested in learning how to invest in digital assets, start by learning how to buy cryptocurrency. This will provide you with a starting point, as well as get you access to coins you can use to buy NFTs later.