NFTs: The Future of Alternative Investment?

February 14, 2022

In recent years, Non-Fungible Tokens (NFTs) have been steadily gaining traction as an alternative investment. Although NFTs do come with unique risks, they offer a number of benefits and advantages that make them an exciting new option for investors who want to diversify their portfolios and minimize risk.

In this article, we will explore the basics of what NFTs are, how they work, common misconceptions about them, and what makes them such a promising new form of asset in today’s market. We’ll also look at some potential pitfalls that NFTs might face in the future and how you can protect your investments from possible losses or unforeseen changes in the regulatory landscape.

What Are NFTs?

NFTs, which can also be referred to as Non-Fungible Tokens or Unique Tokens, are a type of digital asset that are unique and one-of-a-kind. While cryptocurrencies such as Bitcoin and Ethereum operate on the blockchain protocol and share many of the same properties, NFTs are more like digital IOUs than actual currencies. They exist solely as cryptographically unique, indelible pieces of code that cannot be duplicated or copied. By nature, every NFT is singular and therefore has no value outside its own ecosystem or system.

How Do NFTs Work?

NFTs are made possible by blockchain technology and its trustless, decentralized nature. Because NFTs only contain a single asset in a cryptographically secure environment, they essentially can’t be hacked or counterfeited. This has led to an increase in the popularity of Non-Fungible Tokens as an alternative investment option for people who want to diversify their investment portfolios. NFTs are also transparent because transactions and ownership history can be viewed on an open ledger.

Why Are People Investing in NFTs?

Compared to other forms of alternative investments, such as cryptocurrencies or gold, NFTs offer several distinct advantages that have led them to become a more popular option with investors. For one, they are somewhat immune to market fluctuations and do not rely on stocks or commodities for stability. Additionally, because there are a finite number of tokens available in the NFT system, their prices can easily fluctuate based on demand.

In recent years, cryptocurrency investors have been looking towards alternative investment options to diversify their portfolios and mitigate risk. While cryptocurrency prices have skyrocketed in recent months, many fear that the market may be approaching a bubble. Even though cryptocurrencies such as Bitcoin and Ethereum will probably continue to rise in value over time, NFTs offer investors another option with their own unique set of advantages and risks.

What Are Some Benefits and Disadvantages of NFTs?

While cryptocurrencies like Bitcoin and Ethereum are generally unregulated, NFTs exist in a number of different regulatory frameworks depending on how they are used. Because each individual asset is unique, the laws surrounding their use can be quite complex. While this also provides advantages to holders of NFTs (such as allowing them to participate in an ICO), it also makes them more difficult to regulate and subject to different rules depending on the environment where they are used.

While NFTs do represent a promising alternative investment opportunity, there are still reasons for investors to proceed with caution. Because every asset is unique, the value of each token rests entirely on what someone else is willing to pay for it. For instance, if a particular digital asset does not have any reliable source of income, it may be difficult to sell at a reasonable price. Furthermore, NFTs are also currently unregulated by the SEC and other regulatory bodies. This means that there is no way to recoup investor losses or refund assets in the event of bankruptcy or theft.

Unique Hazards of NFT Investing

One of the biggest concerns for investors considering an investment in NFTs is their safety and security. In the past, many projects have halted development or been forced to return investor funds because of a lack of funding or other issues. Because every token is unique, once a particular NFT disappears from circulation, it’s gone forever. Investors have no way of recouping their investment or accessing the underlying funds. There is also very little protection for investors in terms of regulatory intervention.

How Can I Invest in NFTs?

Currently, the best way to invest in NFTs is by participating in an Initial Coin Offering (ICO). ICO’s are similar to IPOs, but instead of purchasing stock, investors purchase tokens during a crowd sale event. These tokens are then used to interact with the NFT system or hold their value, depending on how it is designed. Purchasing tokens can be done through a variety of different platforms, but investors should only purchase via trusted parties. While it may seem like an exciting investment opportunity at first glance, ICOs are unregulated and highly risky for investors. This means that it is important to perform due diligence and choose tokens carefully before making an investment.

Are NFTs the Future of Alternative Investment?

While it’s difficult to predict the future, there are reasons to believe that NFTs may become a more popular alternative investment. Unlike cryptocurrencies or gold, which both have practical uses, many NFTs are designed for entertainment and may not always retain value. Even so, the fact that they represent an actual asset that can be exchanged between parties has made them a promising investment option.

While there are risks involved with investing in NFTs, their current potential makes them an appealing alternative to cryptocurrencies like Bitcoin or Ethereum. If they continue to gain momentum and legitimacy, NFTs could become a common alternative investment in the near future.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.