It is highly unlikely that you haven’t heard about NFTs yet. NFT stands for Non-Fungible Token. These are digital assets that buyers and sellers can buy and sell or create on their own and sell online on marketplaces like OpenSea. NFTs can be anything from artwork, music, videos, photos, trading cards, autographs or other collectibles. The difference between NFTs and fungible tokens is that the former is rare, unique and impossible to copy. NFTs are mutually non-interchangeable and that’s where the ‘non-fungible’ in the term comes into play. For context, you can buy a Bitcoin using Bitcoin and thus, it is fungible.
But there’s more than what meets the eye. The NFT market is polarising, where some are skeptical, while others approach it irrespective of the risks associated with NFTs. When a buyer purchases an NFT, they are granted a legitimate ownership deed, embedded deep into the blockchain technology where the transactions are verified. Once the records are made, they cannot be changed or altered in any way, which makes transactions in NFTs a secure bet towards the bonafide frenzy that the NFTs are in at the moment.
You can buy and sell NFTs from NFT marketplaces or create your own NFT and sell it for a few dollars to a few million dollars. Since the uniqueness and the scarcity of any NFT is factored into deciding its price tag, it can make you a millionaire just by snapping a photo of yourself every day and creating an NFT out of it, like in the case of Sultan Gustaf Al Gozali, a student who made a million dollars after selling an NFT containing 1,000 selfies.
Risks of Investing in NFT Blockchain in Financial Services
NFTs can be a great option to diversify a fortune into digital assets, but they come with risks as well. Let’s explore why NFTs are not a preferred investment for many skeptics:
Not Easy to Make a Fortune
You can’t just go around buying NFTs that may be priced too high or too low. Since the price of an NFT depends on the demand, it can be inflated using unlawful or unethical methods, such as simply selling and buying from multiple fake accounts while increasing the price with every transaction. An NFT that you purchase for $100 can be sold to your second account for $1000 and suddenly, its intrinsic value becomes $1000. This practice is referred to as wash trading.
This is a go-to trick that scammers might play with a new investor. This doesn’t just apply to the price but also the artwork or piece of a digital asset offered. Thus, it becomes difficult to look for a legitimate NFT instead of falling for a copy version of it.
Bad For the Environment
Businessman Elon Musk has been talking about making DogeCoin efficient and a lot less power-hungry than Bitcoin. The traditional banking system is still a major consumer of energy resources; however, cryptocurrencies and NFTs aren’t lagging much behind. Blockchain in financial services still consumes a lot of energy daily, as it requires computers across the globe to support transactions. If not just energy consumption, cryptocurrencies and NFTs contribute to increased CO2 emissions, thereby worsening the already detrimental state of the environment. Although this might not affect investors in the short run, it will soon cascade to the point of no return.
Volatile in Ownership
Buying a popular NFT sounds great and could even generate profits. However, does an individual still retain ownership of the NFT they bought? To elaborate, when an NFT is purchased, a smart contract on the blockchain assigns the buyer as the owner of the said digital asset. However, if the digital asset sits on someone’s computer, say Coinbase, and it shuts down, does the buyer still have the ownership? It remains a question of what happens if the token points at nothingness. This can create ownership disputes as well. NFTs will soon be available in decentralized services that would change the game, although it is still to be adopted.
Easy to Be Scammed
NFTs are available across a lot of NFT marketplaces, like Coinbase, Binance NFT and OpenSea, among others. When an individual invests in an NFT, they may be looking at a fake or a copy of an artwork from a seller disguised as the legitimate owner or an artist. In reality, the artwork could be from an unverified seller duping investors into paying for an NFT that they might not have rights to access or sell. Since the nature of transactions on the blockchain is irreversible, the buyer will not get back the money they spent on such tokens that either do not exist or were used as bait.
A Highly Volatile and Illiquidable Asset
The NFT market is highly volatile as the prices keep changing almost every minute. Buyers can end up purchasing an NFT for $100, hoping for an increase in the price, only to find that it has dwindled exponentially. Alternatively, they can also end up making a lot of money compared to their investment, but that’s a probability and not a certainty.
The illiquidity of an NFT adds to the frenzy as well. An individual cannot sell an NFT unless there’s a buyer ready to purchase it. Liquidity refers to how soon one can exchange a digital asset for cash. NFTs can be ambidextrous at the moment.
Not Recognized By Federal Laws
Different countries have different policies regarding NFTs. In the US, the government is catching up with the latest trends where NFTs could be recognized as a commodity or a service, thus attracting prohibitions, regulations and rules accordingly.
There’s also an uncertainty if NFTs are subjected to anti-money laundering laws as per the Bank Secrecy Act of 1970.
The same applies to the Securities and Exchange Commission (SEC), where NFTs will have to abide by the various sections under the Securities Act of 1933.
Not a Quick Money-Making Technology
Contrary to what people believe, NFTs shouldn’t be treated as a quick way to make money. Blockchain in financial services can add a lot of value to the systems in place, however, investors should know how much money they can make on NFTs, or they are likely to lose it all in a matter of minutes.
NFTs allow investors to buy and sell digital assets much like one-of-a-kind trading real artwork. However, one mustn’t just jump the bandwagon as this can put them under financial stress. Thus, acquiring knowledge about NFTs, buying and selling and other related information can help with informed decisions once an individual is on the NFT marketplace for trading.
NFTs are budding technology and the craze around buying, holding, and selling NFTs has just started to mushroom. It is uncertain where the future will take us, given the illiquidity, volatility, and extremely fast-paced world of NFTs, along with the many risks associated with it for investors, buyers and sellers alike. It is a technology that enables using blockchain in financial services for various applications just like cryptocurrencies, so it is quite likely that we are going to see several upgrades to counter the above-mentioned risks.