Are NFTs worth it? Pros and cons of investing in NFTs in 2023

May 17, 2023
10:05
2 min reading

Choise.com team

Are NFTs worth it? Pros and cons of investing in NFTs in 2023

In this guide

What are NFTs?
Proof of work vs Proof of stake
Do I need NFTs in my portfolio?
Is investing in NFTs worth it?
Disadvantages of investing in NFTs and tips on how to avoid them
Are NFTs just a bubble?
What does the future of NFTs look like?

What are NFTs?

NFTs, or Non-Fungible Tokens, are digital assets that represent ownership or proof of authenticity of a unique item or piece of content, using blockchain technology. While cryptocurrencies like Bitcoin and Ethereum are fungible, meaning they can be exchanged on a one-to-one basis, NFTs are non-fungible, as each token is distinct and cannot be exchanged on a like-for-like basis.

NFTs have gained significant attention and popularity in recent years, especially in the art and collectibles space. They enable creators to tokenize their digital works, such as artwork, music, videos, virtual real estate, and more, and sell them on various blockchain platforms. Each NFT contains a unique identifier, metadata, and ownership information stored on the blockchain, ensuring its authenticity and provenance.

The blockchain technology underlying NFTs provides transparency, immutability, and decentralization. It allows anyone to verify the ownership and transaction history of an NFT, preventing counterfeiting or duplication of digital assets. The Ethereum blockchain, specifically its ERC-721 and ERC-1155 standards, is commonly used for creating and trading NFTs, although other blockchains like Flow and Binance Smart Chain also support NFT functionality.

NFTs have sparked debates around topics such as digital ownership, copyright, and environmental concerns due to the energy consumption associated with blockchain technology. Nonetheless, they have opened up new opportunities for creators, collectors, and investors in the digital realm, creating novel ways to value and trade digital assets.

Proof of work vs Proof of stake

Proof of Work (PoW) and Proof of Stake (PoS) are two distinct consensus mechanisms used in blockchain networks. While they both aim to achieve consensus and secure the network, they differ in several key aspects.

Here's a comparison:

Resource Consumption

PoW: It requires substantial computational power and energy consumption as miners compete to solve complex mathematical problems.
PoS: It consumes significantly less energy as it relies on participants' ownership or stake in the network's cryptocurrency rather than computational power.

Block Creation

PoW: Miners compete to find a solution to a mathematical problem, and the first miner to solve it adds a new block to the blockchain.
PoS: Validators are chosen to create new blocks based on the number of tokens they hold and stake in the network. The selection process is often based on factors such as stake size, coin age, or a random element.

Security

PoW: It provides robust security due to the computational power required. Changing the contents of a block would necessitate redoing the proof of work for that block and subsequent blocks, which becomes increasingly difficult as the chain grows.
PoS: Security is enforced through validators' economic incentives. Validators have something at stake (their staked tokens) and can lose them if they act maliciously or validate fraudulent transactions.

Decentralization

PoW: It is considered to be decentralized as multiple miners from around the world participate in the network, contributing to block creation and validation.
PoS: Decentralization depends on the distribution of cryptocurrency ownership. While PoS can be decentralized, concentration of tokens in a few hands may lead to centralization risks.

Sybil Attacks

PoW: It provides resistance against Sybil attacks since miners need substantial computational resources to mine blocks, making it difficult to create multiple identities or nodes.
PoS: While PoS systems can also resist Sybil attacks, they rely on the assumption that a large number of tokens are not concentrated in the hands of a single entity.

Economic Incentives

PoW: Miners receive rewards in the form of newly minted cryptocurrency and transaction fees for their mining efforts.
PoS: Validators earn transaction fees or newly minted cryptocurrency as rewards for participating in block creation and validation, based on their stake in the network.

Both PoW and PoS have their strengths and weaknesses, and each has found application in various blockchain networks. PoW is well-established, highly secure, and widely used, while PoS offers energy efficiency and potential scalability advantages. The choice between the two depends on the specific goals, characteristics, and requirements of a blockchain project.

Do I need NFTs in my portfolio?

The decision of whether to include NFTs in your portfolio depends on your investment goals, risk tolerance, and understanding of the NFT market.

Basically, NFTs can add diversification to your investment portfolio, especially if you already have exposure to traditional asset classes like stocks and bonds. NFTs offer a unique asset class with potential for value appreciation, but they also come with their own risks and market dynamics.

That is, NFTs are still a relatively new and evolving market, and as such, they can be highly volatile. Prices of NFTs can fluctuate dramatically, and the market may experience periods of hype and speculation. It's essential to assess your risk tolerance and be prepared for potential price swings or even the possibility of losing your investment.

You should also bear in mind that NFTs are primarily associated with digital art and collectibles, but their use cases are expanding. It's crucial to understand the underlying dynamics of the NFT market, including factors like authenticity, scarcity, the reputation of creators or platforms, and the potential for liquidity.

Some proponents believe that NFTs have the potential to revolutionize ownership and digital content monetization. If you believe in the long-term viability of NFTs and their ability to transform various industries, you might consider allocating a portion of your portfolio to NFTs.

It's worth noting that NFTs can be subject to regulatory changes, technological advancements, and shifts in market sentiment. Therefore, before investing in NFTs, it's important to conduct thorough research and due diligence. Evaluate the reputation and credibility of artists, platforms, and marketplaces. Understand the terms and conditions, ownership rights, and potential resale opportunities for the NFTs you are interested in.

Is investing in NFTs worth it?

The worthiness of investing in NFTs depends on various factors and is subjective to individual circumstances. You should consider the following points when evaluating the potential worthiness of investing in NFTs:

Market dynamics

NFTs have experienced significant growth and attention in recent years, particularly in the art and collectibles space. However, it's important to recognize that the market can be subject to hype cycles. Prices of NFTs can fluctuate greatly, and it can be challenging to predict long-term value.

Volatility

NFTs can be highly volatile and speculative investments. Prices can rise and fall rapidly, and it's possible to lose your investment.

Understanding the market

To make informed investment decisions, familiarize yourself with factors such as authenticity, scarcity, the reputation of artists or creators, and the platforms or marketplaces where NFTs are traded.

Investment goals

Consider your investment goals and how NFTs align with them. Are you investing for potential financial returns, or do you have a personal interest in supporting artists or owning digital collectibles? Clarify your objectives to determine if investing in NFTs aligns with your broader investment strategy.

Due Diligence

Thorough research and due diligence are essential before investing in NFTs. Understand the terms and conditions, ownership rights, potential resale opportunities, and the overall quality of the NFTs you are interested in.

Long-Term viability

Some proponents believe that NFTs have the potential to transform various industries and redefine ownership and monetization of digital assets. If you believe in the long-term viability and potential of NFTs, you might consider investing in them as part of a diversified portfolio.

Disadvantages of investing in NFTs and tips on how to avoid them

Speculation – consider setting a budget for NFT investments and allocate only a portion of your portfolio to this asset class.
Lack of regulation – look for well-established marketplaces, and transparent information about the provenance and authenticity of the NFTs.
Liquidity – be prepared for potential challenges in finding buyers or liquidity when you want to sell your NFTs.
Sustainability concerns – research and choose NFTs built on blockchain platforms with more energy-efficient consensus mechanisms or explore environmentally conscious NFT marketplaces.
Market hype – be cautious of investing solely based on hype and consider the long-term value proposition of the NFTs you are interested in.
Technological risks – choose established platforms with robust security measures and keep your digital wallet and software up to date with the latest security patches.
Emotional bias and FOMO – avoid making investment decisions based solely on social media trends, celebrity endorsements, or speculative hype.
Lack of historical data – conduct thorough research on similar assets, track the market trends.

Are NFTs just a bubble?

The term "bubble" refers to a situation where the price of an asset rises significantly above its intrinsic value, driven by speculative demand rather than fundamental factors. While there has been a significant amount of hype and speculation in the NFT market, it is difficult to definitively classify it as a bubble.

What does the future of NFTs look like?

The future of NFTs is still evolving, and its exact trajectory is uncertain.

Still, while NFTs have gained significant traction in the art world, they have the potential to expand into other industries. We may see NFTs being used for virtual real estate, music, film, collectibles, fashion, sports, and more. The ability to tokenize and prove ownership of digital assets opens up possibilities for new business models and revenue streams.

NFTs can be integrated with decentralized finance (DeFi) protocols, enabling liquidity, fractional ownership, and lending against NFT collateral. Additionally, there is potential for tokenization of real-world assets, such as real estate or intellectual property, allowing individuals to invest in and trade fractional ownership of these assets.

NFTs also have the potential to play a crucial role in the development of virtual worlds and metaverses, immersive digital environments where users interact, create, and trade virtual assets. NFTs can represent land, avatars, items, and other digital goods within these virtual spaces, allowing users to have true ownership and monetization opportunities.

As the NFT market continues to grow, regulators may become more involved in establishing frameworks to protect consumers, prevent fraud, and ensure compliance with existing laws related to intellectual property, taxation, and securities. Clear regulations and industry standards can provide more stability and foster mainstream adoption.

Besides, in the future, there may be efforts to improve interoperability and establish common standards, enabling easier transfer and exchange of NFTs across different platforms and ecosystems.