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What are NFTs and Why Are They So Popular?

NFTover $1.8 billion worth of NFTs has been traded over the last few months

 

Pick up today’s copy of the Wall Street Journal, and chances are you’ll see some mention of NFTs. This new investment vehicle is grabbing much attention these days, in part because over $1.8 billion worth of NFTs has been traded over the last few months.

But what, exactly, is an “NFT?”
And why is this new type of investment capturing so much attention?

To start with, an NFT is a “non-fungible token.” It’s a unique digital asset that is transacted through blockchain. While still in the early days of discovery, NFTs have been created based on popular tweets, character skins from the game Fortnite, and digital artwork (amongst other things). And, in purchasing an NFT, the investor is buying a digital collectible.

Because of the high price tag of many early NFTs, investors are looking to dive in.

Some are trying to buy these digital assets at a discount. In comparison, others speculate that NFTs will increase in value over time and that purchases now will translate to gains later on.

There’s an abundance of liquidity in the market, as well as a certain degree of boredom. With investors holding excess cash and unsure about other investment avenues, it’s not surprising to see a decent number speculate on a new market.

But, as with any new market, the mantra is buyer beware.

First of all, there’s an element of behavior around NFTs that sounds a lot like FOMO (“fear of missing out”). When investors read about NFTs in the newspaper, start talking with friends about them, and see influencers like Gary Vaynerchuk getting into the NFT game, it can be easy to lose sight of the bigger picture. It can be easy to think, “I’m missing out on something big.”

When this happens, investors may be tempted to put their money in first and research the opportunity later. This is, obviously, in reverse order, and I would encourage everyone to focus on learning at this stage. Keep an eye on the movements of NFTs. And continue to learn about how the market is shaping up.

In all fairness, there may be some great opportunities with NFTs.

Owning a digital asset can alleviate the storage concerns of other collectibles—housing art in a garage, for example. It also shifts the destruction risk from tangible (fire, theft) to electronic (data corruption, hacking).

At the same time, there are some significant unknowns when it comes to NFTs. Since the market is so new, there is great valuation volatility. Investors do not have data to lean on when deciding, so early adopters are “setting the market,” as it were.

It’s also important to note that there are no regulations established around NFTs yet.

As such, it’s best at this point to think of an NFT as more of an art collectible than security to purchase as part of your portfolio. Self-Directed IRAs, for example, would not be legally allowed to buy NFTs at this time.

All this to say that NFTs are exciting and new. But that doesn’t mean they’re the right vehicle for investors today. In my opinion, there is no such thing as a predictable retirement ticket or get rich quick scheme. There is always a tremendous amount of risk in buying into a new market.

At Vantage, we work with our clients to identify long-term strategies to build wealth. There are no shortcuts. So, we’ll continue to keep an eye on NFTs and see how they play out for today. And if our clients decide to pursue NFTs on their own, our words of advice are simple. Due diligence.

 

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