If you’ve been watching the Crypto marketing, I’m sure you have noticed investing in NFTs (Non-Fungible Tokens). While many people have made money in NFT investing, it doesn’t mean that people have not lost money in it. Investing in NFTs can be a risky venture, and there are several factors that potential investors should consider before making any investments. Here are some of the risks associated with investing in NFTs:
Market Risk
Like any investment, the value of NFTs can fluctuate, and there is no guarantee that an NFT’s value will increase over time. The market for NFTs is also relatively new, and it is not yet clear how the market will evolve over time. The value of NFT is directly proportional to the price of the cryptocurrency it is attached to. For example, if an NFT is minted on Ethereum, the price of ETH directly impacts the value of the NFT. If you purchased an NFT for 1 ETH while the ETH price was $2,000 and now 1 ETH is $1,700, the value of your NFT is down.
Liquidity Risk
NFTs can be illiquid, meaning that it may be difficult to sell an NFT when an investor wants to exit their position. There may not be a ready market for the NFT, or the market may be too small to support large-scale buying and selling. If you look at the recent crypto winter, many investors have left the market, and liquidity in the market has dried.
Legal Risk
NFTs are a new and emerging asset class, and the regulatory framework surrounding them is still in flux. It is possible that governments could decide to regulate or ban NFTs, which could impact their value. Some NFTs may also be treated as security.
Counterparty Risk
Rug pulls is another big scam in the crypto world. When an investor buys an NFT, they are essentially entering into a contract with the seller. If the seller is untrustworthy or goes out of business, the investor could lose their investment. Some NFT creators mint NFTs just to make money and get out of it. You must be aware of those types of creators.
Utility Risk
Many NFT creators are minting NFTs just to make money and once the NFTs are minted, they have no utility. Without a utility, NFT may not have sustainable growth.
How to protect from NFT investment?
After considering all the risks involved in NFT investing, if you still want to invest in NFTs, here are some of the tips that may help reduce your risk.
Do your own research (DYOR)
The biggest assets of any company or project is the team behind it. Before investing in any NFT, thoroughly research the project and the creators behind it. Look into their past projects, reputation, and track record. Make sure that the project is legitimate and has a solid community following. Most projects have a website, social media channels, a whitepaper, a lightpaper, and other details. Learn from the website about the team. If a website doesn’t list the team members and their experience, that should be the first flag to stay away from the project. A whitepaper details the use case of the NFTs. Visit social media accounts and learn about the community. Join Discord and Telegram channels and see what the community is talking about the project. Don’t forget to learn about the size of the community. Many followers on these channels may be fake. Try to learn how many legit followers and investors a community has.
Understand the value
Just because an NFT is unique does not mean it has value. Consider the current market demand for the particular NFT and the potential for future demand. Some creators put images on the blockchain in the name of NFTs.
It is also important to see if the NFT has a utility and if that utility is useful to you. For example, if you are a software developer and looking to learn new technologies, get certified, and grow your career, buying a utility NFT that helps your career growth is not a bad idea.
NBA Top Shot platform has launched NFTs with player highlights, signed photos, and more. If you are a fan of a player and would like to own a video highlight, you can buy it.
Consider the platform
There are many different NFT platforms out there, each with its own rules and fees. Make sure you understand the platform you are investing in and the potential risks associated with it.
Secure your assets
Once you have invested in an NFT, make sure to store it in a secure wallet. Use a cold storage wallet to protect against hacking or theft.
Be prepared for volatility: NFTs are a new and volatile market. Be prepared for price fluctuations and the potential for the value of your investment to decrease.
I hope these tips can help you protect yourself and make informed decisions when investing in NFTs.
