7 Risks Investors Need to Know Before Jumping Headfirst into the NFT Train

It’s highly unlikely that you haven’t heard of NFTs yet. NFT stands for Non-Fungible Token. These are digital assets that buyers and sellers can buy and sell or create themselves and sell online on marketplaces like OpenSea. NFTs can be artwork, music, videos, photos, trading cards, autographs, or other collectibles. The difference between NFTs and fungible tokens is that the former is rare, unique, and impossible to copy. NFTs are mutually non-interchangeable and this is where the term “non-fungible” comes in. For context, you can buy Bitcoin using Bitcoin and therefore, it is fungible.

But there is more than meets the eye. The NFT market is polarizing, some are skeptical, while others approach it without considering the risks associated with NFTs. When a buyer purchases an NFT, they receive legitimate title to it, embedded deep within the blockchain technology where transactions are verified. Once the records are made, they cannot be modified or altered in any way, making trading in NFTs a safe bet against the real frenzy that NFTs find themselves in at the moment.

You can buy and sell NFTs on NFT Markets or create your own NFT and sell it for a few dollars to a few million dollars. Since the uniqueness and rarity of any NFT is taken into account when choosing its price, it can make you a millionaire just by taking a picture of you every day and creating an NFT, as in the case of Sultan Gustaf Al Gozali, a student who won a million dollars after selling an NFT containing 1,000 selfies.

Risks of Investing in NFT Blockchain in Financial Services

NFTs can be a great option for diversifying a fortune into digital assets, but they also come with risks. Let’s explore why NFTs are not a preferred investment for many skeptics:

It’s not easy to make a fortune

You cannot just buy NFTs that may be priced too high or too low. Since the price of an NFT depends on demand, it can be inflated using illegal or unethical methods, such as simply selling and buying from multiple fake accounts while increasing the price each time. transaction. An NFT that you buy for $100 can be sold on your second account for $1,000 and suddenly its intrinsic value becomes $1,000. This practice is called washing trade.

This is a sleight of hand that scammers could play with a new investor. This does not only apply to the price, but also to the artwork or part of a digital asset offered. Thus, it becomes difficult to search for a legitimate NFT instead of coming across a copy of it.

Bad for the environment

Businessman Elon Musk talked about making DogeCoin efficient and much less energy intensive than Bitcoin. The traditional banking system remains a major consumer of energy resources; however, cryptocurrencies and NFTs are not lagging behind. Blockchain in financial services still consumes a lot of energy on a daily basis, as it requires computers around the world to support transactions. If it is not just energy consumption, cryptocurrencies and NFTs contribute to increased CO2 emissions, thus worsening the already detrimental state of the environment. While this may not affect short-term investors, it will soon reach the point of no return.

Ownership volatility

Buying a popular NFT sounds good and might even generate profits. However, does an individual still retain ownership of the NFT they have purchased? To elaborate, when an NFT is purchased, a smart contract on the blockchain assigns the buyer the owner of said digital asset. However, if the digital asset is on someone’s computer, say Coinbase, and it shuts down, does the buyer still own it? It remains to be seen what happens if the token points to nothing. It can also create ownership conflicts. NFTs will soon be available in decentralized services which would be a game-changer, even if it remains to be adopted.

Easy to get scammed

NFTs are available on many NFT marketplaces, such as Coinbase, Binance NFT, and OpenSea, among others. When an individual invests in an NFT, they may be looking at a fake or a copy of an artwork from a seller disguised as the rightful owner or artist. In reality, the artwork could be from an unverified seller tricking investors into paying for an NFT that they might not have the right to access or sell. Since the nature of transactions on the blockchain is irreversible, the buyer will not get back the money he spent on such tokens that either do not exist or have been used as bait.

A highly volatile and illiquid asset

The NFT market is very volatile as prices change almost every minute. Buyers may end up buying an NFT for $100, hoping for an increase in price, only to find that it has dropped exponentially. Alternatively, they may also make a lot of money relative to their investment, but that’s a probability, not a certainty.

The illiquidity of an NFT also adds to the frenzy. An individual can only sell an NFT if there is a buyer ready to buy it. Liquidity refers to how quickly one can exchange a digital asset for cash. NFTs can be ambidextrous for now.

Not recognized by federal laws

Different countries have different policies regarding NFTs. In the United States, the government is catching up with the latest trends where NFTs could be recognized as a commodity or a service, thereby attracting bans, regulations, and rules accordingly.

There is also uncertainty as to whether NFTs are subject to anti-money laundering laws under the Bank Secrecy Act 1970.

The same goes for the Securities and Exchange Commission (SEC), where NFTs will have to comply with various sections of the Securities Act of 1933.

Not a quick lucrative technology

Contrary to popular belief, NFTs should not be treated as a quick way to make money. Blockchain in financial services can add a lot of value to the systems in place, however, investors need to know how much money they can make on NFTs or else they risk losing it all in minutes.

NFTs allow investors to buy and sell digital assets much like real, one-of-a-kind works of art. However, one should not just jump on the bandwagon as this can put them under financial pressure. So, acquiring knowledge about NFTs, buying and selling and other related information can help in making informed decisions once an individual is in the NFT market for trading.

NFTs are a nascent technology and the craze for buying, holding and selling NFTs has just started to grow. It is uncertain where the future will take us, given the illiquidity, volatility and extremely fast-paced world of NFTs, and the many associated risks for investors, buyers and sellers. It is a technology that allows blockchain to be used in financial services for various applications just like cryptocurrencies, so it is highly likely that we are going to see several upgrades to counter the risks mentioned above.

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