Are NFTs a Good Investment

Are NFTs a Good investment?

New to the world of investing, NFTs or non-fungible tokens, have made their way onto the scene. The term “non-fungible” relates to the idea that it is unique and cannot be traded for anything exactly like it. For example, if you purchase Vincent Vangough’s Starry Night, you would be the only person who owns that piece and you can’t trade it for something exactly like it. NFTs work similarly in that they’re unique assets. Conversely, when you purchase common stock in a company, you are purchasing the same exact common stock that every other investor is purchasing. Should you sell your stock and decide to purchase again later in the future, you may pay a different price but you are still buying the same stock.

While the idea of owning something unique sound exciting, before purchasing one should ask, are NFTs a good investment? Are NFTS here to stay or will they suffer from the same hype and crash of new investments like Dogecoin? Before we get into whether or not they’re a good investment, let’s dive into exactly what they are and where you can purchase.

What and Where Can I actually Buy?

Well the beauty of an NFT is that it can virtually be anything unique. Some examples include art, music, collectibles like trading cards, and even tweets (Jack Dorsey famously tried to sell an autographed version of his first tweet). In order to buy an NFT, you have to select a marketplace, secure a digital wallet, and fund your wallet with the appropriate crypto. When selecting a marketplace, make sure that the NFT you want is available on that platform.

Popular marketplaces include:

What Are Some Considerations?

Should you choose to buy an NFT, just like any other investment there are a few things you should consider:

  1. How does this fit into your portfolio? Whenever you choose to add an asset class to your portfolio, you should think about how this will rebalance your allocation. Will you now host 50% of your money in the NFT or a more conservative share like 5%?
  2. How will you access the NFT? Whenever you purchase an NFT, the asset may be accessed via a URL directing to a website that may host the image. (1) However, consider the possibility that the hosting site is hacked or goes belly up. For safety precautions, download the image and store on a protected hard drive.
  3. Are you buying in too soon? Right now, there is a craze around NFTs just like there was with Dogecoin earlier this year. However, with these crazes often comes a crash. While we don’t know what is going to happen, approach these purchases with caution and really evaluate the authenticity and longevity of the investment.

Are NFTs a Good Investment?

The short answer is, it depends. Overall, our assessment sites NFTs as very high risk. If purchasing an NFT for the sheer desire to simply own the rights to a unique asset is what you’re looking for (such as purchasing an original painting), then by all means do so. However, if you’re banking on purchasing an NFT with the intent of selling for a high return, we would encourage you to think twice for a few reasons.

 

  1. The market for NFTs is very new and there is no promise that it will exist 10, 20 or 30 years from now. Compared to other investments like ETFs, mutual funds, and even common stock, NFTs are very new and their marketplaces have not yet had enough of a run to solidify their stance in the investment world.
  2. NFTs are unregulated, meaning you have to rely on the good will of the seller. There may be situations where a buyer pays a hefty price for an NFT, only to realize it’s not worth much in the long run.
  3. Digital does not necessarily mean environmentally friendly. While these are digital only assets, there is a big environmental impact to buying/selling NFTs in the form of energy usage (storing, hosting data). Elon Musk took a similar stance earlier this year regarding the mining of bitcoin.
  4. These trades are taxable. If you think that buying an NFT will enable you to avoid taxes, you are wrong. NFTs are considered collectibles and are therefore taxed at the max capital gains tax.(2)

 

NFTs are relatively new to the investing world and we highly encourage you to explore your risks before purchasing. While this can be a cool addition to your portfolio, there is not a proven track record that matches that of other assets. For other investing ideas, we encourage you to check out our article on the most common investment types.

Sources:

(1) Are NFTs a Good Investment? Dawn Kawamoto. The Street. April 13, 2021. https://www.thestreet.com/investing/are-nfts-a-good-investment. (accessed June 24, 2021).

(2) 10 Things You Should Know About NFTs. Hartford Funds. 10 Things You Should Know about NFTs. Hatford Funds. https://www.hartfordfunds.com/practice-management/client-conversations/10-things-you-should-know-about-nfts.html (accessed June 24, 2021).