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NFTs for small-time investors – opportunity or risk?

NFTs for small-time investors – opportunity or risk?

So far, NFTs have been largely associated with digitally created works of art, such as pixel images or music files. The problem with such works of art is that, unlike real art objects, they can be reproduced with just a few mouse clicks.

That’s where NFTs come into play. The acronym stands for non-fungible token and these are used to certify the authenticity of a digital work of art and thus make the original distinguishable from copies.

Unlike a pixel image or piece of music, the token cannot be reproduced. Just like cryptocurrencies, NFTs are stored on a blockchain, a cryptographically encrypted concatenation of data blocks. Manipulation and forgery is thus almost impossible.

Instead of the actual art object, the NFT is then traded. The owner of the NFT doesn’t even have to have a copy of the art object that the token authenticates.

NFTs could have many uses

Stephan Witt of the financial services provider Finum Private Finance in Hamburg, Germany estimates that the use of NFTs will be much larger in the future than it has been to date.

That’s because proof of authenticity and ownership could also play a role in many other areas, for example, event tickets, membership receipts, and computer games.

So, for the normal investor, is it worth looking at NFTs? “Finding profitable NFT investments is as difficult as finding a needle in a haystack,” says Furkan Yildirim of analytics firm Coincheck TV.

Of the thousands of NFT collections, there are only a few that have long-term value, he says.

It’s very difficult to determine the actual value of an NFT as it depends on supply and demand. The scarcer the supply and the higher the demand, the more expensive the NFT.

The problem is that because the NFT market is unregulated, and buyers and sellers remain anonymous, demand is sometimes generated artificially.

Computer programs can carry out such manipulation on a grand scale, according to Yildirim. There’s no guarantee of being able to resell the NFT at a profit later.

Only a few will survive long term

Witt compares the NFT hype to the arrival of the Internet. That new technological development generated a lot of financial speculation and profit expectations were greatly overestimated.

However, many of the highly valued companies were unable to fulfil the potential investors saw in them. Eventually the speculative bubble burst and the asset losses were enormous.

“It’s similar with NFTs,” says the financial advisor. “A large portion of the projects are way overvalued and, as a result, will see a crash-like downside in the future.”

Only a small fraction of NFT projects will survive over the long term, Witt believes.

“The few exceptions that offer long-term benefits to investors will enable profits that are otherwise hardly possible in any other market,” says Furkan Yildirim.Sales of digital artwork virtual and avatars could be cooling off from their pandemic-fueled highs. GameStop must also compete with other established NFT marketplaces, such as OpenSea.

Total losses are possible

Computer scientist and researcher Tim Weingärtner recommends that any layperson who does not have the time or desire to delve deeper into NFTs and the technical background of the blockchain to keep their hands off such investments.

“Otherwise, we are moving into the casino area,” he says. Yildirim gives a similar warning: “The smallest mistakes can result in a total loss that cannot be reversed.”

Investors need to have a basic understanding of blockchain technology, digital wallets and the cryptocurrencies used to acquire NFTs, including all the risks involved.

Those who have their eye on a particular NFT should also inform themselves about the artwork behind it.

Weingärtner advises people to invest only money that they are prepared to lose. And if you’re given profit promises about an NFT, “the alarm bells should ring,” Yildirim warns. – dpa

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