Are NFTs a Good Investment?

David Akilo
By David Akilo
Joel Taylor
Edited by Joel Taylor

Published April 30, 2022.

NFT written on a notepad with a pen and glasses alongside on a light blue background

Non-fungible tokens (NFTs) are non-swappable units of data stored on the blockchain. They are digital assets used to denote artistic designs like art, music, in-game items, and videos. NFTs can be bought and sold on the internet, often with cryptocurrency, and they are usually encoded with the same software as many cryptos.

However, unlike cryptos, NFTs are non-fungible, meaning each one is unique and cannot be traded at equivalency. The uniqueness of NFT makes it very simple for users to verify ownership and transfer tokens between owners.

How Do NFTs Work?

NFTs are created by hashing a unique token identifier with a distinct algorithm; this creates a unique string of characters that is the only representation of that token. Once created, NFTs cannot be copied or replaced. This approach protects the token's value and ensures that each NFT is unique.

NFTs contain ownership details coded into them, allowing easy identification and transfer between NFT holders. They are also customizable, as owners can add new features or metadata to their NFTs. NFTs also have a "breedable" attribute, meaning owners can combine them to produce new NFTs. This feature is popular in play-to-earn games like cryptokitties, where players can breed two characters (NFTs) to create a new distinct character.

NFTs originally started on the Ethereum blockchain as ERC-721 standard. However, Ethereum competitors like Solana and Cardano now offer NFT options too.

The Pros of Investing in NFTs

As a relatively new type of digital asset that can be stored and traded on the blockchain, NFTs are pretty versatile and incredibly useful.

Here are the pros of investing in NFTs:

  • NFTs are open and accessible to anyone interested in purchasing them.
  • This asset class provides a verifiable record of ownership and authenticity, all stored on the blockchain.
  • NFTs provide an additional means for portfolio diversification and allow investors to spread their risks.
  • Some NFTs give their owners additional perks and merits both offline and online. For instance, one could gain access to exclusive real-life events or a highly sought-after group membership by holding specific NFTs.

The Cons of Investing in NFTs

There are a few potential disadvantages to investing in NFTs, including the following:

  • There is the potential for scams and fraud in the NFT space. Investors who fall victim to fraudulent NFT projects may lose their money.
  • NFTs are speculative and illiquid investments. Most people are not familiar with these digital assets, which means that the NFT market size is still small, and it could be challenging to trade NFTs, especially in times of distress.
  • Like most proof-of-work cryptocurrencies, producing NFTs is also energy-intensive, and, in the long run, this could have negative repercussions on the environment.
  • They are volatile investments; their value is only based on what someone is willing to pay. For instance, when created, Jack Dorsey's NFT tweet initially sold for $2.9 million. However, after the owner listed it for sale again, the price plummeted to just under $280.

What Are the Best NFTs to Invest In?

There is a world of NFT collections that enthusiasts can invest in, with different perks for holders. However, based on classification, here are some exciting NFT projects making positive waves in this space:

NFT Collections

These are the most common type of NFTs. They usually come in a limited number and sometimes may have additional perks for the holders. Some of the most popular NFT collections are Bored Ape Yacht Club (BAYC) and CryptoPunks. These NFTs have garnered a lot of attention from celebrities and have gone mainstream. However, they are costly for the average investor, seeing as one of the recent BAYC sold for over $600k!

For the regular investor looking into NFT collections, one has to pick and research a project while still in its early phase. Some unique NFT collections that will launch in 2022 include Yubo, CryptoBaristas, Doddles, and Invisible Friends.

NFTs in Blockchain Games

NFTs from blockchain games also prove to be a good investment vehicle. Blockchain games allow players to own in-game items which are tradeable as NFTs. These could be characters, weapons, or other items. The rarer the in-game asset, the more expensive it will be. Due to this factor of earning from the game, blockchain games are often referred to as play-to-earn games. Investors can purchase rare in-game items and sell them for a profit on the marketplace. Some popular blockchain games include Axie Infinity, Illuvium, and Sandbox.

Fractional Ownership NFTs

Some NFT projects fractionalize physical asset ownership by dividing a digitized version of the asset using NFTs. This approach lowers the barrier of entry for many expensive physical assets. It allows the NFT holders to be part of an industry usually cut off from the average investor. These NFTs are popular for fractionalizing ownership of assets like real estate, artwork, or jewelry. Service providers in this niche include Propy and Milo.