Collins Dictionary recently declared the term 'non-fungible token' (NFT) as 2021's word of the year after recording a staggering 11,000% increase in its use in conversations and other media.
From financial articles to social media, the prevalence of NFTs in discussions says a lot about the digital currency market and where it's headed. (1)
Thanks to NFTs, any drawing, Tweet, or even meme template can be worth millions of dollars.
This reason alone has people putting their hard-earned money into this new yet high-risk investment.
However, anyone wanting to make it big in this market needs to ask themselves some hard questions, like the following:
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Do I know what NFTs are?
A prominent figure once stressed that there could be no compromise when it comes to learning the basics. As such, the journey to NFT success should begin with understanding what it means and how investors can turn it into a lucrative opportunity.
NFTs are a type of digital currency tied to a specific medium, be it an illustration or text. The keyword here is 'non-fungible,' meaning it's unique to that medium and irreplaceable, unlike other digital currencies like tradeable cryptos.
In a way, the nature of NFTs helped manage a problem plaguing artists and other intellectual property (IP) owners. Even with duplicates making rounds on the internet, NFTs enable them to confirm their works as the original. Anyone can make the same Tweet as Twitter CEO Jack Dorsey did in 2006, but only his Tweet—the first of its kind—can sell for USD$2.9 million.
Given how it has dominated online discussions, NFT basics are abundant in websites such as NFT Club and others. Aside from talking about how NFT works, these sources also detail tips and tricks in buying NFTs and choosing the right marketplaces.
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Do I have a good reason to invest in NFTs?
This next question doesn't necessarily talk about the advantages of investing in NFTs, like their uniqueness among one another. Instead, it focuses on the reasons to consider putting thousands or millions on original art and media.
Experts point at two reasons, the first being the satisfaction of owning such works. Avid fans will go to great lengths to obtain something significant, if not irreplaceable, from various IPs. Buying NFTs grants them ownership rights to that particular work.
The second is the crypto market's continued boom, specifically the rise in the value of Ethereum. Despite some price drops, Ethereum has been on the rise this year––from USD$730.97 at the start of the year to over USD$4,000 this November. Coupled with the COVID pandemic and falling confidence in the U.S. dollar, NFTs are sending people on an investment frenzy. (2)(3)
It's also worth noting that millennials are driving this significant shift in investing due to holding more purchasing power than other generations. These investors have money to lose and can risk investing in decentralized markets, though this shouldn't make them less cautious.
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Does buying NFTs make the work mine?
Since NFTs are concerned with buying rights to a specific work, this question should be on any investor's mind. While they grant ownership rights to the buyer, NFTs don't give rights to distribution and reproduction. In other words, anyone who buys original media through NFTs shouldn't expect to be named the copyright owner.
Copyright law guarantees copyright owners' rights to their works, even after selling them via NFTs. As mentioned earlier, NFTs only serve to confirm art or media as original among the duplicates and derivatives circulating on the internet. The same law also mandates that only the owner has the authority to turn their works into NFTs. (4)
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Will NFTs retain their value in the long run?
NFTs may be the talk of the town, but it doesn't necessarily make them good—at least the way it is now. One industry expert believes that the current market is within a 'bubble' similar to the dot-com tech boom that defined the late 1990s. The more people invest in NFTs, the bigger the bubble gets and the greater the risk of popping.
Ironically, according to experts, the same technology that gives NFTs their advantages also has its disadvantages. Apart from NFTs not granting absolute ownership over a medium, below are other risks explained.
◼ Being Ethereum-based makes NFTs decentralized currency, meaning no third party (let alone a regulatory body) overseeing the market. The values are highly speculatory, unlike physical money that bases its value on gold.
◼ Anyone can make their own NFTs out of anything, which presents the risk of fraudulent NFTs and markets. More often than not, such activities would sell art and media without consent from their creators, a clear breach of copyright law.
◼ NFTs aren't known for their liquidity, as selling them requires looking for someone who would pay top dollar for a collectible. An investor who paid for six figures in an NFT might suffer if the market value suddenly nosedives.
◼ Lawmakers in countries like the U.S., the U.K., and Japan have yet to classify NFTs in a specific manner. Without this, they can't formulate a legal framework to protect investors if the market goes south. (5)
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How much can I afford to lose?
If you're still adamant about investing in NFTs despite the pros and cons, this last question will matter. As with any big-ticket investment, it pays to ask how much you can afford to invest.
Experts highly advise against putting every dollar in high-risk investments like NFTs; they suggest spreading capital over different (and much safer) ones. Placing the bulk of your money on safe investments will ensure financial security regardless of the direction the NFT market heads. That way, even if NFTs tank, you'll still earn when other assets increase.
Bottom line
NFTs may be a buzzword in today's economy, but they're relatively new and lack essential protective measures. Thanks to being at the heart of financial discussions and the influx of professionals to manage the market, NFTs will eventually get better. Until then, asking these hard questions and doing due diligence are any NFT investor's best means of protection.
References
1 "NFT or non-fungible token is Collins Dictionary's word of the year", Source: https://www.bbc.com/news/newsbeat-59401046
2 "Ethereum price", Source: https://www.coinbase.com/price/ethereum
3 "We talked to crypto-art investors to figure out what's driving people to spend millions on NFTs, despite no guarantee their value will increase", Source: https://www.businessinsider.com/why-are-people-buying-nfts-investing-in-nft-crypto-art-2021-3
4 "What are the copyright implications of NFTs?" Source: https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/
5 "Non-fungible Tokens: bubble or future?" Source: https://www.finextra.com/blogposting/21162/non-fungible-tokens-bubble-or-future