Are NFTs a safe investment?

Non-fungible tokens (NFTs) are next-generation investment products that largely appeal to generations that have grown up in a digital age.

This article explores whether NFTs are legitimate investments, what their appeal is, and what to look out for when investing.

Tip: NFTs can diversify a more traditional investment portfolio. To put a long-term saving strategy in place, click here.

What are NFTs?

NFTs are digital assets that represent ownership, or proof of authenticity, of a unique item or piece of content. This can include digital artwork and music, or real-world assets such as real estate, vehicles, stocks, or physical art.

Unlike cryptocurrency, NFTs can’t be exchanged for an asset of equal value, or split into smaller parts. Sean Sanders, CEO and founder of crypto platform Revix, explains, “Each NFT represents a distinct and irreplaceable asset.”

NFTs are bought and sold on blockchain platforms such as Ethereum, and their ownership and transaction history are publicly recorded and verifiable.

Sanders says NFTs are popular among collectors, artists and investors. “They are seen as a novel way to monetise and showcase digital creations,” he explains.

How do younger generations view NFTs?

Sanders says that younger generations find NFTs more compelling than traditional investment options, for the following three reasons:

• They are accessible and inclusive. You don’t need large amounts of capital to invest in the NFT market, which means almost anyone can participate. Many NFTs are sold through online marketplaces, and the transaction process is generally straightforward.
• They are subject to social media influence. Social media platforms have popularised NFTs, with celebrities and influencers promoting their own NFT collections. This can lead to FOMO (fear of missing out) among younger people.
• Novelty and excitement. NFTs offer unique ownership of digital assets, and a novel way to monetise and showcase digital creations. “This can be attractive to a generation known for valuing experiences and authenticity,” says Sanders.

Christo De Wit, country manager at Luno, says that collectors see NFTs in the same light as any other speculative investment – they buy them hoping their value will increase so that they can then sell them at a profit.

He notes further, “As the sole owner of the original version of the underlying asset, buyers can support creatives whose work they enjoy, and claim the blockchain-based bragging rights of ownership”.

They can also claim ownership in a project, which can be resold or traded.

An interesting global example is architectural design studio iheartblob’s Fungible Non-Fungible Pavilion, which allows people to design and “mint” their own building blocks to create architectural structures in the real world.

How does the investment industry view NFTs?

The investment industry is sceptical of NFTs, mainly because traditional investors don’t know enough about this evolving asset class. Most consider NFTs to be a speculative bubble or a fad, with limited intrinsic value or long-term potential.

“Traditional investors generally prefer investments backed by tangible assets, which have a history of consistent returns,” says Sanders.

However, he notes that NFTs can potentially disrupt traditional markets and create new opportunities for digital ownership and value creation.

Why invest in NFTs?

As with any investment, along with potential rewards, NFTs carry risks.

“The value of NFTs can be volatile and subject to market fluctuations,” notes Sanders.

De Wit agrees. “The market for NFTs is still relatively new and untested, and there is no guarantee that the current hype and demand for NFTs will continue over the long term.”

That being said, they do offer some advantages, including the following.

• Diversification. NFTs can diversify traditional portfolios, and provide exposure to blockchain-based assets.
• Potential for high returns. Some assets – especially those associated with popular artists or viral memes – have sold for millions of dollars. However, this is the exception rather than the rule.
• Supporting creators. Fans of art, music, and gaming can support and reward their favourite creators for their digital content.

Tips for investors

The following tips are highly recommended for first-time investors.

• Protect yourself. Invest only what you can afford to lose. Have a diversified investment portfolio to help mitigate any risk.
• Do your research. Before investing, identify the most reputable, and safest NFT platforms.
• Watch out for scams. Scammers may reach out to you to gain access to your private information to steal your NFTs, says De Wit. Never share your private key with anyone.
• Beware of hidden fees. De Wit says many popular sites charge users a “gas fee” for creating a token, and a fee for buying and selling. This can inflate the cost of your purchase.
• Know the risks involved. The Financial Sector Conduct Authority (FSCA) has classed crypto assets, including NFTs, as financial products. However, this doesn’t mean they are regulated. It simply means you may be able to make a complaint about a service provider, especially if you are the victim of a scam.

Tip: Reach your short-term financial goals by creating a savings pot. You can then use a portion of your savings to invest. Find out more here.