What To Consider Before Adding NFTs To Your Portfolio

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When it comes to NFTs, it’s hard to know who to believe. Enthusiasts tend to make larger-than-life predictions about how they are poised to fundamentally change the economy, while skeptics point to the market’s exceptional volatility and dismiss them as a mere fad. As is often the case in conversations as polarized as this one, the right answer is probably located somewhere in the middle.

In general, valuations of the NFT market are quite optimistic. The market was valued at $15.54 billion in 2022 and is estimated to reach up to $163 billion by 2027. However, with a market this new and surrounded by hype, it can be difficult to make confident long-term predictions. Because they are such a new technology, there has not been much consistent regulation of the NFT space, so there is no telling how government intervention might affect the NFT market.

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Regardless of where one falls on the spectrum of opinion, however, it’s important to understand exactly what NFTs are and how their underlying technology works. Looking not just at how they are being used now, but how they might be used in the future, is critical to deciding whether they should have a place in your portfolio.

Who Is Investing?

News coverage of the NFT space has tended to emphasize a certain image of “the” NFT investor. They are typically younger, tech-savvy, white-collar workers with decent salaries and, frequently, an independent streak. This image of the typical investor coincides with a perception of the typical NFT investment: fun, frivolous internet collectibles such as Twitter CEO and founder Jack Dorsey’s first tweet or NFTs from the Bored Ape Yacht Club.

In reality, however, NFTs are capable of much more, and established investors are exploring their potential. Major players in the crypto space such as Andreessen Horowitz and Paradigm have made large investments in NFTs in anticipation of the central role that digital assets will play in the Metaverse platform. Meta Platforms Inc (NASDAQ:META) (formerly Facebook) is expected to play a leading role in expanding the uses of NFTs and making them more mainstream. Some companies have begun work on creating virtual real estate, whose ownership is demonstrated by an NFT. These digital spaces may be used to hold virtual events, or act as digital retail space for users’ avatars in the Metaverse. Some investment firms have already begun purchasing digital land and seen dramatic increases in value.

The investment firm Sfermion has sought to raise $100 million to invest in NFT items for video games, a new technology that is expected to fundamentally change the way gamers buy and sell their in-game items. By allowing gamers to demonstrate exclusive ownership over a unique in-game item, avatar, or username, NFTs will greatly drive up the scarcity, and thus the value, of these collectibles. This technology is expected to transform the thriving but largely valueless digital economies of video games into real, vibrant marketplaces.

What Are The Risks?

Of course, it’s always important to be clear about the risks involved with any investment. In their current state, NFT assets are especially sensitive to market fluctuations. While they are generally considered to be liquid assets, they can lose that designation when the market is in distress, making it difficult to sell or trade them for reasonable prices.

Other undesirable qualities of NFTs include security issues related to the novelty of the technology. While blockchain tech is considered safe because a blockchain ledger keeps tabs on the transfer of the NFTs and cryptocurrency on it, scams still occur. Because blockchain is not yet regulated by governments, it can be especially difficult to resolve any complications that arise.

At this current moment, the value of NFTs may seem too speculative for traditional investors to wish to get on board. While visual art, music, and video games are all obviously massive industries that are not going anywhere, those without a pre-existing niche interest in these fields might see no reason to explore NFTs at all. Before dismissing NFTs entirely, however, it’s important to look into the rapidly evolving world of utility NFTs.

What’s The Use Of NFTs?

Although less hyped–and less well-understood–than their more entertainment-focused uses, NFTs are rapidly demonstrating their potential to revolutionize a variety of industries. Because they are stored on the blockchain, NFTs serve as transparently accessible, unalterable records of ownership. This technology has a slew of practical applications in any industry that benefits from quick and secure authentication–which, it turns out, applies to most industries.

In fashion, for example, a variety of luxury brands have begun using NFTs to create encrypted certificates of authenticity, which enables consumers to ensure that they are receiving authentic goods and prevents a traceable account of any resale transactions, greatly reducing the potential for fraud. This same logic applies to any collectible asset, and, theoretically, to any consumer good, period.

NFTs can also revolutionize the identity verification space. The blockchain’s permanence and transparency makes it the ideal platform for storing important records and documents. Companies have begun experimenting with adding everything from medical records to birth certificates to records of blood donations onto the blockchain, which could precipitate massive changes to the efficiency and effectiveness of healthcare.

In a similar vein, NFTs have had major impacts in the real estate industry. Using NFTs to represent ownership of a property–with the aid of smart contracts, which automatically execute a transaction once their requirements have been fulfilled– is poised to increase the efficiency and security of real estate transactions. Moreover, some firms have begun experimenting with fractionalized investing, in which ownership of a property (represented by an NFT) can be divided up among a number of investors, allowing more people to profit off a single property than ever before.

Even if investors are wary of purchasing NFTs directly, keeping a close eye on startups with big ideas about the future of NFTs will be essential going forward. With the potential to revolutionize so many industries, these companies may well become the biggest players in tomorrow’s economy.

In all, investors who are eying NFTs need to be comfortable with a certain amount of risk. At this point in the technology’s life cycle, it would be unwise to dedicate a large portion of one’s portfolio to the technology. A few experimental investments to get a feel for exactly how the field works might be a good idea, however, as there’s a high chance that NFTs will only grow in popularity as time goes on.

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