What you should know before investing in NFTs

NFTs are something of an anomaly. Like cryptocurrencies, they are powered by blockchain technology.

However, unlike cryptocurrencies, NFTs are not used to transfer funds or as a medium of exchange. Known as non-fungible tokens, NFTs are used to verify the legitimacy of a digital file.

Digital Art

This has made NFTs extremely popular in the world of digital art where videos, music, and other collectibles are traded.

To the mainstream investor, this does not make any sense. After all, digital art can be perfectly replicated with no noticeable difference from the original copy. 

So why is there a need for certification?

The Psychology of Collecting

The answer lies in the perceived value of an item. And in this case, some people get satisfaction from knowing that they own something that is truly unique.

Just like how enthusiasts of trading cards, classic cars, and antique collectors enjoy adding an item to their already vast collection.

Things to Consider

Given the amount of money that has been pumped into the NFT market, you may be tempted to invest in some NFTs. 

While NFTs do have the potential to be a worthwhile investment, they are also extremely volatile. So if you’re looking to snap up a few pieces of digital art, maybe consider the following.

1. You’ll be investing in an intangible asset

Just like cryptocurrencies, NFTs do not exist in a physical form. In fact, when you purchase an NFT, you’re likely paying a premium for an image or video that almost anyone can obtain.

The difference here is that you’re the owner of the true original item. For example, Twitter founder; Jack Dorsey sold the rights to his first-ever tweet for $2.9 million.

That’s $2.9 million just to prove that you’re the owner of the first ever Tweet. While there may be a niche market for such items, it’s hardly a solid asset.

2. The NFT Market is Heavily-Based on Speculation

If there’s one thing that analysts can agree on, it’s that speculation has played a large part in the mania for NFTs.

Punters hoping to get ahead of the next crypto rush have speculated heavily on NFTs. This means that there is an incredible amount of volatility in the market.

For example, zero demand for an NFT can lead to valuations falling by as much as 80% in a single day. While it can also lead to phenomenal returns, the lack of predictability makes investing in NFTs akin to gambling.

So if you’re looking to get in on NFTs, be prepared to lose your principal investment.

3. NFTs Are Extremely Illiquid

While this may be less of an issue for long-term investors, the lack of liquidity in the NFT market is cause for concern.

An asset’s liquidity refers to the ease in which it can be converted into cash. In a slow moving market, it can take months for an asset to be transacted. 

When you’re dealing with assets such as digital art, it can take an even longer time to track down a willing buyer. 

So if you’re trying to exit the market in a hurry, you may be forced to accept a much lower price than expected… Or be trapped with an asset that cannot be liquidated due to the lack of demand.

Closing Thoughts

Getting into the market of NFTs can be quite a tricky proposition if you don’t know what to look for. There are some of the best Bitcoin auction sites, like Auctionity who specialize in selling NFTs. Be sure to check them out.

As a rule of thumb, invest only in what you’re comfortable with and be prepared to take a loss. The unpredictable and volatile nature of the NFT market means that there can be little room for error.