Non-fungible tokens, or NFTs, are digital assets that use blockchain technology to create unique and verifiable ownership of any type of content, such as art, music, memes, or even tweets. NFTs have exploded in popularity in 2021, with some of them selling for millions of dollars and attracting celebrities, investors, and collectors alike. But are NFTs really worth the hype, or are they just a fad that will soon fade away? In this article, we will explore some of the risks and challenges that NFT buyers and sellers should be aware of before jumping into the market.
Volatility and Illiquidity
One of the main risks of investing in NFTs is their high volatility and low liquidity. Volatility refers to how much the price of an asset fluctuates over time, while liquidity refers to how easily an asset can be converted into cash or other assets. NFTs are extremely volatile because their value is determined by supply and demand, which can change rapidly depending on the popularity, scarcity, and quality of the NFT. For example, the average price of an NFT rose from around $150 to $4,000 in 2021, but then plummeted by over 50% in just one month1. This means that buyers could lose a lot of money if they buy an NFT at a high price and then try to sell it when the demand drops.
NFTs are also very illiquid because there is no standardized or regulated market for them. Unlike stocks or cryptocurrencies, which can be traded on various platforms and exchanges, NFTs are mostly sold on specialized marketplaces that cater to specific types of content or communities. Some of the largest NFT marketplaces are OpenSea2, Rarible3, and NBA Top Shot4, but there are hundreds of others that focus on different niches. This means that buyers may have a hard time finding a buyer for their NFT if they want to sell it, especially if the NFT is not very popular or well-known. Moreover, some marketplaces may charge high fees or commissions for listing or selling an NFT, which could reduce the profit margin for sellers.
Fraud and Cybersecurity
Another risk of investing in NFTs is fraud and cybersecurity. Because anyone can create an NFT out of anything, there is a lot of potential for scams and counterfeit products. For instance, some sellers may try to impersonate famous artists or celebrities and sell fake or stolen NFTs at a low price. Alternatively, some sellers may try to sell multiple copies of the same NFT or create an NFT out of something that they do not own or have the rights to. Buyers should be careful to verify the authenticity and legitimacy of the NFTs they are interested in, as well as the reputation and credibility of the sellers.
Cybersecurity is also a concern for NFT investors because they need to store their NFTs in digital wallets that are connected to the blockchain. These wallets are protected by private keys that act as passwords to access the funds and assets in them. However, these keys can be lost, stolen, hacked, or compromised by malicious actors who can then take over the wallets and transfer the NFTs to themselves. Therefore, buyers should use secure and reputable wallets that have encryption, backup, and recovery features. They should also avoid sharing their keys with anyone or storing them on unsecured devices or platforms.
Legal and Regulatory Uncertainty
A final risk of investing in NFTs is legal and regulatory uncertainty. Because NFTs are a new and emerging phenomenon, there is no clear legal framework or consensus on how they should be treated or taxed. Different jurisdictions may have different laws and regulations regarding intellectual property rights, consumer protection, anti-money laundering, securities, and taxation that could affect the ownership, transfer, and valuation of NFTs. For example, some countries may consider NFTs as digital goods that are subject to sales tax or value-added tax (VAT), while others may consider them as capital assets that are subject to capital gains tax or income tax5. Additionally, some countries may impose restrictions or bans on certain types of content or transactions involving NFTs.
Therefore, buyers and sellers should be aware of the legal and regulatory implications of their actions and consult with professional advisors before engaging in any NFT-related activities. They should also keep track of their transactions and records for accounting and reporting purposes.
NFTs are an exciting and innovative way to create and collect digital content that can have artistic, cultural, or sentimental value. However, they also come with significant risks and challenges that could undermine their potential benefits. Investors should be cautious and informed before entering the NFT market and avoid making impulsive or emotional decisions based on hype or speculation. They should also diversify their portfolio and invest only what they can afford to lose. NFTs may be the future of collecting, or they may be a bubble waiting to burst. Only time will tell.