Should You Invest in NFTs?
It seems we are learning a whole new language lately and, potentially, new ways of investing. First, there was bitcoin and its related vocabulary of cryptocurrency, blockchain technology, and digital wallets. Now we have non-fungible tokens, or NFTs.
If you are scratching your head, wondering what NFTs are and whether you should invest in them, read on. We introduce this rapidly expanding market and discuss whether NFTs belong in your portfolio.
What Is an NFT Anyway?
As stated above, “NFT” stands for non-fungible token—but what exactly does that phrase mean?
Let’s start with the word fungible. A fungible asset is an item that is interchangeable. For example, you could trade the dollar bill in your wallet for someone else’s dollar bill—the value will be the same. The same concept applies in the digital world—you can trade one bitcoin for another.
But a non-fungible asset, whether you are talking about real-world assets or virtual ones, is not interchangeable. It is unique. The Mona Lisa is non-fungible. The first-ever published Tweet is non-fungible.
So a non-fungible token shows ownership of the unique asset. Consider it like the real estate deed that proves you own your home. An NFT is an electronic deed—it is a public record of ownership. And the NFT for that first-ever Tweet? It recently sold for $2.9 million.
Who’s the NFT Marketplace Good for?
Just like blockchain technologies and cryptocurrencies, non-fungible tokens could end up being a game changer. But for now, they are in their infancy, and prices are often driven by hype and FOMO (i.e., fear of missing out).
NFTs can represent anything—not just digital items. They could end up representing physical-world ownership of your collectible car or art acquisition. Right now, though, they are primarily certificates of authenticity for the virtual world—digital art, music, collectibles, trading cards, video games, and so on.
The NBA recently got into the NFT act with a trading card marketplace called NBA Top Shot. Its LeBron James Moment, featuring a clip from the 2019 Western Conference finals, recently sold for $208,000!
Although the $69 million purchase of a photo collage by artist Beeple also made headlines, perhaps the real news is the financial opportunity that NFTs provide to artists. NFTs can be coded so that artists receive income every time a piece of art is sold.
And what if you’re a cat lover but maybe don’t appreciate the mess of a litterbox? You could collect virtual felines via CryptoKitties, which inadvertently helped set off the NFT mania. NFTs for some digital cats are selling for $100,000.
That’s great for NBA fans, art collectors, and cat ladies. But what does all this mean for investors?
Non-fungible Tokens as an Investment
Buying non-fungible tokens should not be called investing right now. Much like cryptocurrency, the NFT market has achieved neither mainstream use by the public nor widespread acceptance by regulators.
That makes “investing” akin to speculating, and if you’re going to buy NFTs, you need to be prepared for the steep highs and lows of a speculative market.
Also, you should be knowledgeable about the market you are going to buy into, as this InvestorPlace article points out. If you are not a diehard sports fan, you should steer clear of trading cards. If art museums bore you, you will lack the ability to select the crypto art world’s rising stars.
You will want to be familiar with blockchain technology, cryptocurrency, and the markets that are trading in NFTs. You should also note that the future of NFTs depends on the future of blockchain technology and cryptocurrency. Regulatory actions, exchange bankruptcies, price volatility, and the lack of valuation transparency make this industry risky for investors seeking reliable returns.
Given the speculation, we think you would be better off investing in a diversified mutual fund or exchange-traded fund (ETF). Over the long term, you are likely to enjoy more consistent returns than a market prone to extreme highs and lows.
But if you love the adrenaline rush of betting on the roulette wheel in Vegas, then go ahead and give the NFT wheel a spin—but not with any funds earmarked for your savings or investment portfolio. Your NFT “bets” should come from extra cash that you are OK with losing. Don’t invest any amount that may put you in a difficult financial situation.
If you are unclear about the role that non-fungible tokens should play in your financial picture, then consider working with a fiduciary financial advisor who will give you advice that puts your best interests first. Our fee-only fiduciary wealth management firm advises clients on potential investment routes based on their overall financial situation and long-term goals.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.