Have NFTs Become an Asset Class?
With their exponential growth in value, NFTs are now beginning to form considerable parts of investors’ portfolios. Although their main purpose is arguably being overlooked, many are considering NFTs as the newest and fastest-growing asset class.
What’s important to note is that NFTs by themselves are not asset classes, but rather what they’re attached to. An NFT by itself is a technological method for proving ownership in a tamper-proof way. It’s a record of ownership that cannot be manipulated as its existence is stamped on the blockchain - a public ledger for recording data of all sorts.
The exorbitant prices of NFTs has caused many to consider them as a significant asset class, but it’s more what’s behind the NFT that gives these wild prices — the NFT is just there to provide a fault-proof form of ownership.
So rather than considering NFTs as asset classes themselves, we can look to potentially consider them as tools to benefit the market around different asset classes.
Acknowledging The Real Potential of NFTs
As mentioned above, an NFTs key purpose prove ownership of an asset digitally, leveraging the blockchain. NFTs started out in digital assets like collectibles and digital art, and this market is continuing to thrive, but NFTs also have the potential to transform markets around physical assets.
Any asset can be tokenised, which involves transferring the rights to something of value into a digital token that can be stored on a blockchain. This essentially means that ownership of an asset can be represented as a digital token on the blockchain — meaning any market can tap in to the benefits that the blockchain provides.
Knowing this, it’s important to consider that we could see NFTs implemented in all kinds of asset classes. Here’s what comes with NFTs:
Turning Illiquid Assets Liquid
Once tokenised, assets can be made available to a much larger audience, bringing in liquidity and a greater rate of sales. Having ownership of an asset represented as a digital token rather than traditional paperwork, the tokenised asset therefore has greater access to global markets.
Removing the Need for Intermediaries
With tokenising assets on the blockchain, you can remove the need for intermediaries as transactions can be made on an open marketplace on a peer-to-peer basis. Intermediaries and middlemen can make the transfer of high-value assets considerably more expensive and they make it open to potential human manipulation.
Every transaction made around an NFT with the attached asset is publicly visible on the blockchain. This means buyers that track back to the origin of the NFT, as well as who has previously owned it. When looking to invest in high-value assets, this is the kind of information you’d like to know — it contributes to a buyer's confidence.
Assets of all kinds can be divided into a determined amount of virtual shares. This means that fractional ownership of any asset can be digitised and made a lot more efficient. Think about a CryptoPunk for example. Full ownership of a CryptoPunk is limited to a select wealthy portion of people. By fractionalising a CryptoPunk, this brings in a wider range of investors and makes the asset more liquid overall. The same can be done with any asset.
Best Way to Invest in NFT Technology
NFTs became famous for their iconic profile picture projects — CryptoPunks, BAYC, DeGods are just a few collections that are now considered royalty when it comes to digital assets. These assets are now expensive, making them available to a limited sector of investors.
These legendary collections may hold their value for years to come, heck, they will probably increase in value. The success of these projects has drawn many to the space, including new collections as well as investors and traders seeking a new investment strategy. The ecosystem quickly became saturated with projects, and there simply wasn’t enough liquidity to support the growth in value of collections.
This doesn’t mean the end for NFTs, but it does mean that the utility behind the tokens needs to evolve — something we’re already seeing. NFTs are being experimented with in various industries, in a digital and physical context. This implies that NFTs may very well be linked to traditional investments in the near future, such as real estate.
NFTs now present digital investment opportunities that we’ve never seen before — such as virtual assets. The ‘Metaverse’ is expected to be a $1 trillion industry — and virtual real estate is high in demand. Blockchain gaming also promises to attract digital property investors. Games like Heroes of Mavia offer plots where you can rent out your land to other players — creating a new form of passive income. If you're interested in Clash of Clans, Heroes of Mavia is right up your alley.
When it comes to considering the best way to invest in NFT technology, one should consider their individual long-term investment goals. Even though many have coined it, Its questionable whether these speculative profile picture projects will last in the long-term, unless there is real-world benefits attached to holding these tokens.
Before investing in an NFT, consider the tokens offering in terms of utility. While many are still ‘day trading’ NFTs, if you’re a more long-term investor, it might be wise to consider NFTs that have a tangible use-case as well as dividends attached to them - such as gamified land.
Pros and Cons of Investing in NFTs
The future of investing in NFTs looks bright as they begin to merge into various sectors. There are however a few potential downfalls to consider. Here are the pros and cons of investing in NFTs:
Pros of Investing in NFTs
If NFTs are asset classes, they're without a doubt one of the easiest asset classes to get involved in. Here are some of the pros of investing in these blockchain-based tokens:
1. Investment is made easy
NFTs make it easy to invest in assets of all sorts. There is very little admin involved, as well as almost zero transactions fees (for some). Another bonus is that there’s no border for investment. Anyone can set up an account or wallet and buy into established projects.
2. Asset ownership is secured through the blockchain
Ownership of the asset is validated through the blockchain — a public ledger that records transactions that cannot be tampered with. Having rights digitised and stored on-chain removes the threat of human error and ownership cannot be questioned.
3. Gateway to blockchain
Purchasing NFTs off user-friendly marketplaces has drawn millions to the blockchain space and has thus drawn interest to the real potential of this technology. Many consider NFTs to be the gateway to understanding the purpose of the blockchain and bringing interest in various other facets that it beholds.
Cons of Investing in NFTs
Although there are many positives to learning about and investing in NFTs, there are also some less inviting factors to consider in this very much unregulated ecosystem.
1. Project Trustworthiness
There are some incredible teams using NFTs to both fund their venture and enhance their offering, but there are also less trustworthy groups that overpromise and underdeliver — often resulting in a depreciating investment. Because of the little regulation within the space, these teams will often go anonymous and avoid any sort of repercussion.
2. Cryptocurrency Barrier
Many investments may require that you own a cryptocurrency within your blockchain wallet. Although this may seem simple to some, the process involved with acquiring cryptocurrency can be a barrier to others.
3. NFTs Alone Aren’t Actually Asset Classes
NFT enthusiasts may purchase expensive NFTs and treat them as high-tier asset classes. The fact is, NFTs by themselves aren’t actually asset classes, it’s what they’re attached to that makes places them within an asset class. For this reason, NFT investments made in the future will most likely have real-value assets behind them.
4. Exploits & Hackers
This unregulated environment is unfortunately prone to exploits and attacks from sophisticated hackers. Whether it's interacting with spammy links, or wallets getting drained through supply chain exploits, it's tough to feel completely secure with some digital investments.
Although NFTs are technically an asset class, we're beginning to see them implemented within various major asset classes as they promote market efficiency and security in ownership.
When it comes to considering which type of NFTs to invest in, it's best to consider the utility behind the token itself - what are you gaining for buying and holding this token? NFTs are going to begin providing completely new investment opportunities through virtual assets, while potentially benefiting the process around investing in traditional assets.