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It’s obvious to assume that we’ve all heard of “NFT.” But what precisely is it, and what are its pros and cons?
What are NFTs?
NFT refers to “Non-Fungible Token,” which has two essential functions: The “non-fungible” characteristic refers to the fact that it is the only uncopiable form of the asset. You might think of it as each NFT asset possessing its digital footprint, with the bit of individuality of each project having its worth. Next, we’ll examine the “token” side, which refers to the NFT asset’s evidence of ownership.
When you purchase an NFT, you obtain a token or proof of ownership stored on the blockchain and can be readily verified by anybody looking it up. So, when it comes time to sell that NFT or use its real-world benefits, having the legitimate NFT rather than simply a snapshot has a lot of worth.
NFTs are distinctive digital art assets, real estate, collectibles, event tickets, website domains, and even tweets sold on the blockchain to investors. They can be any digitally created art, such as music, film, graphics, memes, or a mix of media.
To understand them better, let’s see some pros and cons of NFTs.
Pros of NFTs
- NFTs help to improve market efficiency.
The most apparent advantage of NFTs is their ability to improve market efficiency. Converting a physical item to a digital asset may speed up procedures, reduce mediators, improve supply chains, and increase security.
In many parts of the art world, a great example is currently being played out. Artists can increasingly connect directly with their fans, thanks to NFTs, removing the need for expensive agents and time-consuming transactions. Furthermore, the digitalization of artwork improves the verification process, streamlines transactions, and lowers expenses.
NFTs, on the other side, have applications that aren’t limited to markets. For example, they may eventually become a viable tool for people and businesses to manage and regulate sensitive data and records.
Consider our usage of actual passports, which must be presented at each entry and exit point. By separating them into independent NFTs, we might significantly simplify the process of limiting travel and identifying people. When we see the involvement of time and money, both are saved at a high rate.
- They can be used to fractionalize tangible asset ownership.
Fractionalizing ownership of some assets, such as real estate, artwork, and expensive jewelry, is challenging today. For example, a computerized replica of a structure is considerably easier to split among several owners than an actual one. The same may be said for a valuable piece of jewelry or a limited-edition bottle of wine.
Digitalization may significantly expand the market for particular assets, resulting in more liquidity and higher price. In addition, it can improve the way financial portfolios are built individually, allowing for more diversification and more accurate position size.
- NFTs’ blockchain technology is hugely safe.
Blockchain technology is used to create NFTs, which hold data that is difficult to hack, edit, or delete. A blockchain is essentially a digital record of transactions copied and distributed throughout a peer-to-peer network of users.
In principle, all NFTs stored on the blockchain have special records of authenticity and chain-of-ownership, making them impossible to mishandle or steal. In addition, data can’t be edited or removed after being added to the chain. This ensures that each NFT’s scarcity and authenticity are retained, generating a degree of trust uncommon in many marketplaces.
- NFTs can help diversify your investment portfolio.
When we talk about traditional investments, like stocks and bonds, NFTs are considered to be a different form of investment. They have particular characteristics and provide benefits that we are only beginning to understand and appreciate. Ownership, however, is not without danger.
In the next part of the article, we’ll discuss the cons. But, for the time being, please keep in mind that the risk profile of NFTs differs from that of other asset classes. As a result, by including NFTs in an investment portfolio, you may be able to increase their efficiency. Ultimately, this entails establishing a better risk-to-reward ratio.
Cons of NFTs
- NFTs are unpredictable and illiquid.
As the NFTs have just started gaining traction, the industry isn’t exceptionally considered liquid. In addition, NFTs aren’t well-understood, and there aren’t many potential buyers or sellers. As a result, NFTs can be tough to trade, particularly during times of stress. As a result, NFT pricing can be quite volatile.
- NFTs don’t bring in any money.
Unlike stocks and bonds, or real estate, where the owners get dividends, interest, and rent, NFTs do not provide any such income to their owners. The rewards on NFT investments, like those on antiques and other collectibles, are dependent on price appreciation, which is not something you should bank on.
- NFTs have the potential to spread fraud.
While a blockchain’s integrity is indisputable, NFTs may be leveraged to spread fraud. Indeed, some artists have recently reported finding their work for sale as NFTs on online platforms without their permission.
This goes against using NFTs to ease the selling of paintings. An NFT’s value proposition is that it uses a unique token to verify a physical work of art, ensuring that the person who owns the token also owns the actual work of art.
- NFTs have the potential to damage the environment.
Computer power is massively involved in building the blockchain record and it’s very well known how damaging the process is for the environment in the long run. According to some projections, the carbon emissions related to mining cryptocurrencies and NFTs would exceed those associated with the entire city of London in the following years if current trends continue. However, as NFTs revolutionize global marketplaces, eliminating the need for travel and office space consumption, blockchain supporters say that an offsetting drop in pollution happens.
Bottom line
NFTs are a fascinating invention gaining much attention as their applications grow. The eye-catching prices on a few NFTs are only stoking the flames. However, because NFTs are very illiquid and volatile, smart investors should be careful when purchasing these assets.
Purchasing them with the expectation of receiving triple- or quadruple-digit price returns is not a wise idea. The actual value of NFTs rests in their ability to change the way markets work and improve how we handle and regulate critical data. The sky is the limit here.
Nonetheless, if you want to be a part of the blockchain revolution and think owning NFTs is a reasonable choice, go for it. Please, however, do it responsibly. Try to avoid investing a huge portion of your income in NFTs and choose low-cost positions. You might end up in a bad financial and emotional scenario.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
