NFT is increasingly becoming a "fever" in the field of crypto investment in particular and finance in general. However, along with the opportunities when investing in NFTs come potential risks, especially for newcomers when investing in this market.
1. Overview of NFTs
1.1. What are NFTs?
NFT stands for Non Fungible Token and is a unique type of digital asset represented and stored on the blockchain.
To put it simply, think of NFTs as a type of "digital certificate" for works of art, videos, music, or even social media content. Unlike other cryptocurrencies like Bitcoin that can be easily replaced and exchanged for value, NFTs are "non-fungible," meaning they cannot be equally replaced with one another. .
When you purchase an NFT, you are essentially purchasing sole ownership of a digital version of a work of art. NFT information recorded on the blockchain helps ensure accuracy and uniqueness of ownership, which can be audited by anyone.
Read more: What is NFT? Everything You Must Know About This Future Asset
1.2. Who created NFTs?
NFTs can be created from many organizations or individuals including creators, artists, collectors, etc. You will find NFT creation very simple and accessible, NFTs can come from all social classes. However, there are a number of prominent entities majorly involved in the NFT creation process including:
Artists: Currently, artists are selling NFTs of paintings, drawings, photographs, or other visual media works on NFT marketplaces like OpenSea or SuperRare.
Musicians: Many musicians are leveraging NFTs to sell their music directly to fans.
Celebrities: Many celebrities, from Paris Hilton to Snoop Dogg, have created NFT projects in the past two years.
Game Developers: We are seeing more games and platforms selling game assets and characters as NFTs.
Entrepreneurs: Many business owners and entrepreneurs are selling fractional ownership of assets through NFTs.
NFTs are created by many different people and entities, contributing to the diverse and expanding NFT market. However, it is important to note that the creation of NFTs is not limited to platforms and celebrities. Anyone with access to blockchain technology can create and sell their own NFTs.
From here, NFT is growing and opening up a world of more opportunities for digital creators, photographers, music or online game developers. NFTs are supported for trading and buying on NFT trading marketplaces with a stable source of liquidity to help NFT creators and issuers make a profit from their products. Access to NFTs is now easier and more people can seek benefits from NFT investments, helping the NFT niche to expand.
2. Benefits of investing in NFTs
2.1. High profitability
Many people are attracted by the high profit opportunity when participating in NFT investment, and the larger the community of NFT investment participants, the higher this profit opportunity. In fact, there have been some classic cases of success in making profits from NFTs creating a huge wave of interest in this model. Specifically:
CryptoPunks:
CryptoPunks is a collection of 10,000 unique pixel art images representing punk style characters.
Many CryptoPunks have been sold for millions of dollars, with members of the blockchain community and celebrities participating in the shopping.
Beeple's "Everydays: The First 5000 Days":
Beeple is a famous artist in the NFT space, and his work "Everydays: The First 5000 Days" sold for $69 million in an auction at Christie's.
Jack Dorsey's "Valuables":
Twitter CEO Jack Dorsey sold his first tweet as an NFT through the Valuables platform.
Tweet was purchased by an investor for $2.9 million.
Nyan Cat:
The "Nyan Cat" animation was sold as an NFT and fetched a significant amount of money in auctions.
However, it is also important to note that the NFT market is a risky and volatile market. The value of NFTs can change rapidly based on market fluctuations and shifts in community interest. Investments should be made carefully with a solid understanding of the risks and potential.
2.2. Blockchain technology provides high security
NFTs are created using blockchain technology so NFTs limit the risk of being hacked and stealing information from bad actors. All NFTs will be recorded on the blockchain and transparent about information such as quantity, owner, rarity, etc. NFT investors can rest assured about the safety when investing in this type of asset.
2.3. NFT investing does not require large amounts of capital
Nowadays, investing in NFTs is easier and they especially do not require investors to spend large amounts of money to own. The value of NFTs ranges from a few dollars to hundreds of thousands of dollars for each different NFT collection. Users can choose investments that suit their personal conditions.
Not only that, you can also own NFT with only 0 VND capital through free NFT issuance programs (freemint), airdrop, test game,... These are investment opportunities with almost equal risk. 0 brings great benefits to NFT investors and requires users to closely monitor the project, actively participate in activities and perform tasks from the project.
Read more: How to own NFTs with 0 VND capital?
2.4. Opportunity to subdivide ownership of physical assets
In fact, some real-world assets such as works of art, real estate, and high-end jewelry are difficult to divide and have an extremely limited number of owners. However, NFTs can become digital copies of these types of assets, and they are easier to divisible. For example, artwork may be released in many small editions throughout the collection, or jewelry may be separated into multiple parts.
Digital technology helps expand the market for these types of assets, bringing flexibility to users and stimulating prices to increase. NFT investors themselves can diversify their financial portfolio and determine a suitable position when participating in this type of investment.
2.5. Benefits that come with NFT investing
A trend for NFT collection publishers is to always include additional benefits for their NFT holders. An NFT owner not only receives profits when that NFT increases in price, but also receives other additional benefits from the project.
Some common benefits that NFT holders may receive include:
For PFP NFT collections, the NFT holder has the IP (image exclusive rights) to use the NFT's image for personal business models.
NFT holders can also share in a portion of the revenue that comes from the project's own business model.
Enjoy incentives when using products provided by the project, such as travel vouchers, free movie tickets, etc.
3. Risks of NFT investment
3.1. The cost of creating (minting) NFTs is very expensive
All NFTs are created (minted) on the blockchain network and the cost the issuer has to pay to the network is very expensive.
For example, creators or collectors who want to create NFTs on popular blockchains like Ethereum will have to pay a fee called a gas fee. In some cases, gas fees can be very expensive so the risk of investing in NFTs is also quite high.
3.2. The NFT market is highly volatile
The crypto market itself is plagued by high volatility because of its much smaller scale compared to other traditional financial markets. Meanwhile, the NFT market is an emerging market within the crypto market so the volatility is even stronger.
You will find it unsurprising that some NFTs have increased in price by 3.4 times in just a few days or even hours. On the contrary, there are also many NFT sets that lose all their value in just a few minutes due to blind speculation. The NFT market capitalization is still small, so the possibility of manipulation from organizations or individuals with large financial resources is very high. These entities themselves can directly impact the price and NFT market, so retail investors will be at risk of manipulation.
3.3. High chance of being scammed
For every famous NFT collection like Cryptopunk, BAYC,... and worth tens of thousands of USD for 1 NFT, there will be many fake copies and sold for a lower amount. If buyers do not know how to choose and trade NFTs on reputable exchanges, it is easy to buy these fraudulent NFT sets.
Additionally, there are bad actors who have created NFT projects with the sole intention of "taking the money and running" without delivering on any of the promises set out in the roadmap or whitepaper. When there are a number of people who buy NFTs and they feel they have earned a certain amount of revenue, they will let the project go and gradually that NFT collection will have no liquidity and no buyers. From there, investors will lose all their money.
3.4. NFTs can impact the environment
Because NFTs are created on the blockchain, it can lead to some environmental concerns. The cause of this problem comes from the fact that some blockchains use a method called "proof of work" to verify a smart contract transaction.
To operate the Proof of work mechanism requires blockchain to consume a large amount of energy, which can be harmful to the environment.
4. Notes when investing in NFTs for newbies
4.1. Thorough research on the NFT market
Before starting to invest in NFTs, it is important for users to embark on thorough research on how NFTs work, the minting process, popular exchanges, and market trends to ensure an informed investment decision. given based on accurate and detailed information.
4.2. Diversify your investment portfolio to reduce risk
When it comes to investing in NFTs, as with any other type of investment, diversifying investments reduces the risk of loss to a specific asset class, while optimizing the opportunity for profit.
4.3. Choose a reputable NFT exchange to trade
Choosing to purchase NFTs from reputable exchanges and artists helps protect against scams and counterfeit copies. Checking provenance is important to ensure the accuracy and uniqueness of the NFT. Currently, some popular NFT exchanges on blockchain networks support users quite well such as Blur (Ethereum), Tensor (Solana), Hyperspace (Avalanche), ...
4.4. Follow the market and participate in NFT project communities
Monitoring the latest trends and information about the NFT market helps make informed decisions and gain a clear understanding of how NFTs influence the digital art market.
4.5. Know how to use a secure digital wallet to store NFTs
Using a secure e-wallet is important to ensure the safety of passwords and credentials. Wallet protection is a necessary measure to avoid asset loss, especially for NFTs.
You need to know which wallets support the NFTs you own and make choices accordingly. After choosing a storage wallet, learn how to keep it safe and improve wallet security to avoid unwanted situations such as being hacked, revealing private keys, etc.
4.6. Understand the Gas Fee mechanism and transaction fees when buying and selling
Pay attention to gas policies and transaction fees when minting and purchasing NFTs, as they can affect profits. Cost optimization helps ensure that your investment is not overextended.
In case you see that gas fees are pushed up too high, in the case of peak gas fees that can reach $100-200/transaction, you need to have an appropriate decision and strategy. You can wait until gas fees stabilize or accept high-fee mints to increase competition and transaction speed to take the opportunity to mint NFTs from the project. In short, when you understand the gas mechanism and transaction cost structure, you will be more proactive in making your investment decisions.
5. Conclusion
Investing in NFTs offers great profit opportunities, but also comes with significant risks, especially for those new to the market. It is the creative elements and uniqueness of NFTs that can generate impressive profits for developers and investors. However, it should be noted that the market is highly volatile and can change over time. If you do not catch up quickly, you will risk losses.
The risks of investing in NFTs include uncertainty of value, potential financial loss, and security risks. To avoid these situations, you need to continue to research and learn continuously to make wise decisions. As a new investor, you should follow basic principles such as reducing risk by diversifying your investments and only investing the amount you can afford to lose.
