Pros and Cons of Investing in NFTs

Non-fungible tokens (NFTs) are similar to cryptocurrencies but with key differences. While transactions for both are recorded on blockchain ledgers, NFTs also represent ownership in a digital or real asset—anything from computer-generated media to sports trading cards, or physical artwork.

So, should you invest in NFTs? That depends on whether the items they represent are authentic, hold value, and stand to gain from being tokenized.

Pros and Cons of Investing in NFTs

NFT Pros Explained

Investors have many reasons to want to buy and sell assets that are tokenized into NFTs. Some advantages include:

• Allowing anyone to invest: NFT markets have broad and global reach—an advantage to driving value to an NFT. Investing is accessible to anyone in the world with a working computer, Internet connection, and knowledge of transacting on NFT marketplaces.
• Memorializing portable contracts: NFTs can digitally signify from an app or website any item that benefits from having its ownership documented. Being able to instantly create, verify, and transfer what is effectively an electronic contract disintermediates legal services and reduces time and costs associated with drafting, managing, and retrieving physical contracts.
• Strengthening legal evidence: NFTs are minted and hosted on blockchain technology and compatible wallets. Because the blockchain is a tamper-proof ledger, ownership of an asset is easier to prove and harder to be challenged in a court of law.
  
• Fractionalizing ownership: Ownership in items can be divided up efficiently through primary markets and resold quickly through secondary markets among hundreds, thousands, or millions of investors, improving liquidity to markets for those goods and opening up an alternative avenue for streamlined crowdfunding. Raising and distributing equity has been traditionally relegated to fragmented communications and administrative paperwork without central visibility. Note that NFTs used for equity financing may be classified as securities.

NFT Cons Explained

Investing in tokenized assets through NFTs can also come with disadvantages, including:

• Lack of market regulation: NFTs are an unregulated asset class with little to no investment laws and consumer protections in most jurisdictions. Market manipulation tends to run rampant and fly under the radar, with misinformation and speculative hype contributing to inflated prices, volatility, and pump-and-dump schemes.
• Fraud, scams, and crime: Anyone can make claims about an NFT, execute an NFT transaction, and set up an NFT marketplace online, allowing criminals to prey on unsuspecting buyers and sellers with ease. The remote nature of NFT transactions makes it difficult to vet physical goods purported to be the tokenized asset and to maintain compliance with anti-money laundering (AML) laws. Some goods, like fine art and luxury goods, are already difficult to determine if they're genuine and originated from a compliant source with professional expertise. Supporting documentation corroborating the asset's provenance, the counterparty's identity, and the marketplace's legitimacy may be needed to ensure the transaction isn't for a forged replica, a hoax, or illicit commerce.
• Limited legal rights: NFTs can document ownership and provide substantiating evidence in a dispute, but they can't stop the tokenized asset from being contested and pirated altogether. NFTs don't waive legal claims and grant patents, trademarks, and copyrights. Third parties can choose to litigate ownership, duplicate the asset, and sell the replica. Electronic images and videos, which can be copied, pasted, and saved with a few clicks of a button, are particularly vulnerable to intellectual property theft and infringement.
• Securing the NFT: NFT security is largely self-managed unless the NFT was purchased through an external party. Properly storing, unlocking, and invoking public and private keys to an NFT wallet is a complicated and time-consuming process with room for error that could potentially result in losing access to hackers and technical glitches. NFTs also don't offer privacy assurances due to the public transparency of blockchain transactions and are a common vector for introducing malware.
• Weighing a dual investment structure: The value of the NFT is inextricably intertwined with and maintains certain distinctions from the value of the underlying asset. Investment fundamentals for the underlying asset and the economic characteristics of the NFT will need to be taken into consideration in parallel and in combination. Intangible, digital-only goods tend to have less intrinsic value than tangible, hard-asset items.

The Bottom Line

Investing in NFTs has just as many benefits as downsides. In general, NFTs should be purchased if the tokenized asset has an established market and interests you—otherwise, it's unlikely the NFT will experience price appreciation and that you'll be happy owning it following your purchase.

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