Investments can be tricky especially given the several asset classes, fund structures, and tax-advantaged options available today. On top of that, the recent Pandemic and the global recession aren’t making things easier.
Technologies including peer-to-peer lending, one-tap payment processes, blockchain, Robo advisors, and many others are revolutionizing business processes and financial management. Blockchain, specifically, has been a booming technology recently. With inventions such as crypto and NFTs, blockchain technology is taking the digital asset industry to new frontiers.
NFTs serve two purposes. The Non-fungible part relates to the sole non-replicable version of the asset, and the token feature assures ownership of the asset. A few examples of NFTs include an essay, a digital collectible, an in-game item, a domain name, and several others. In short, NFTs can be any digital art used in music, movies, media, graphics, or memes.
Here, we will discuss a few pros and cons of NFTs to understand them better.
Pros of NFTs
1. Enhance marketplace efficiency
NFTs’ potential to make markets more efficient is the most evident benefit. Digital assets build better brand consistency, enhance access control, tighten security, and streamline collaboration. Moreover, converting physical assets to digital assets eliminates intermediaries, expands integrations, opens new market opportunities, and saves time and money.
A prime example of NFTs fostering efficiency is visible in the art world. Thanks to non fungible tokens, artists can access a global market without physically crossing borders. Since NFT trade occurs online, artists can conveniently sell their work in the worldwide market without being physically present. Moreover, NFTs promote more security, lower entry barriers, easy monetization, and high convenience. Lastly, artists can connect with more people without undergoing cumbersome interventions.
However, NFT uses go well beyond the marketplace. Management can use NFTs to govern and collect sensitive data. Similarly, we can convert passports into independent NFTs and eliminate the need for physical copies.
2. Unique ownership
NFTs are not dependable on any specific regulations or property ownership rules. Since they don’t have an owner assigned, you can use NFTs in several ways. An interesting fact is that no matter how you utilize your NFT, it will remain un-replicated.
Blockchain ensures transparency in business processes. Transparency leads to increased efficiency, high employee engagement, enhanced member service, and clear-eyed leadership. It is imperative for business success, and blockchain ensures that all transactions are entirely transparent, even for uninformed users. Transparent transactions prevent corruption and eliminate unethical or unusual activities.
3. Easy to fractionalize asset ownership
Fractionalizing ownership of physical assets is usually a challenging task. Several barriers and regulations are making the process excessively tough and tedious. Think about fractionalizing ownership of assets such as artwork or jewelry. It seems unlikely due to several limitations. However, the case with NFTs is different. Instead, splitting ownership between multiple owners is a simple process with digital assets.
Digitalization enhances liquidity and the price of assets while expanding the market. Further, it improves financial portfolios, allows for diversifications, and fosters more precise position sizing.
4. High Security
Blockchain is a remarkable invention. It speeds up processes, increases visibility, enhances traceability, and reduces cost. However, the most pivotal advantage of using blockchain remains its highly safe nature. Repeated studies and sources have confirmed the security levels of blockchain technology.
Blockchain fosters a recording system that is nearly impossible to hack to alter. All stored NFTs carry a distinct record and ownership, preventing mishandling and theft. Moreover, all recorded transactions must confirm with the consensus method. Further, blockchain encrypts data and adds links to previous transactions.
Blockchain preserves NFTs security by preventing changes in data once added to the system. Moreover, the system makes copies of each transaction, so data remains safe from malicious actors.
Cons of NFTs
1. NFTs don’t generate income
The worst downfall of NFTs is their zero potential to generate income. NFTs work differently than dividend-paying stocks, interest-bearing bonds, and rent-generating real estate. The returns on NFTs depend on price appreciation of assets.
Dependency on price appreciation isn’t a sound investment technique and not something one should consider counting on to make money. It also makes NFTs highly unreliable and risky. Since NFT is still a new concept, investing too much risk into it would be inadvisable.
2. NFTs might promote perpetuating fraud
A highly concerning thing about NFTs is that people might use them to perpetuate fraud. Blockchain’s integrity is still questioned; hence, the chances of fraud through NFTs are high. For instance, people sell art as NFT without the original creator’s consent.
Such incidents violate the purpose of using NFTs instead of physical assets. Moreover, when NFTs cannot confirm the security of an artist’s work, they would naturally not prefer using digital assets over physical ones.
A more concerning issue arises when someone duplicates an electric image of someone else’s work and sells it on the marketplace. Experts have still been unable to develop practical solutions for these problems, making NFTs more troubling.
3. Inability of digitizing physical art
Physical art is a three-dimensional real-life object that you cannot transform into an NFT. NFTs are mere digital assets that only exist within the blockchain. Hence, there is no way to digitize real-world assets such as paintings and sculptures.
You can consider minting physical art and selling it as an NFT. However, the process is slow and highly unreliable since there is no set procedure. There is a possibility that it might cost you more than you can earn by selling your asset.
4. Blockchain harms the environment
Environmental impact is essential, and you must consider it while investing in different assets. Environmentally friendly investments play a pivotal role in enhancing a healthy lifestyle and making the planet a better place to live.
NFTs, however, do more harm than good for the environment. They use significant computing energy to create and record blockchain tokens. A recent study confirmed that blockchain is a highly energy-intensive technology, so much so that blockchain mining raised global warming by 2%.
NFTs are a transforming technology that has a lot to offer. They are captivating more and more attention every day, and an increasing number of people are leaning toward investing in NFTs. However, since the technology is still developing, you might have to make several compromises. Hence, don’t buy NFTs with the hopes of making profits. Instead, you can consider them as a long-term investment. There is no doubt that technology will revolutionize the global financial system. However, it will take time, and no one can say how long.