Since last summer, the non-fungible token (NFT) market has been flourishing. According to Statista, the historical sales volume of NFT has increased from just $74 million at the beginning of 2021 to $41 billion, the majority of which has occurred since last August. In this article, we shall explore if NFTs are a better investment compared to cryptocurrencies.
In order to put this into perspective, in 2020 the worldwide art market had sales of $50 billion. The NFT market is intriguing not just because of its size but also because of its explosive expansion, which should cause any investor to pause. Are NFTs profitable from an investment standpoint?
Since everyone is participating in NFTs, it is essential to separate the investing component from the enjoyable aspects of these transactions. Super Bowl LVI participants received complimentary Virtual Commemorative Tickets (NFTs) from the National Football League (NFL), and a limited number of watchers will receive free Batman NFTs from AMC Entertainment. These NFTs highlight the NFT market segments that are only passing trends.
In terms of investing, NFTs also seem to be a fad, a meme stock substitute for irrational traders, more akin to Beanie Babies than a brand-new investment asset. Since Robinhood Markets, Inc. gamified stock and options trading, NFTs go much further by providing actual interactive investments.
Since most NFTs trade off their social media attention, similar to meme stocks, this result appears plausible. The future of NFTs as an alternative investment class does not appear promising for any of these reasons and more.
NFTs are a unique kind of token used in cyberspace. Each NFT is distinct and connected to a particular digital item. Any type of digital file, including one for music, video, and pictures, may be considered a digital asset.
Some people even assert that it can be a physical asset, like a pair of tennis shoes. An NFT datum is stored on a blockchain, the software that powers all digital currencies and any user on that blockchain is able to trade it. In its digital ledger, the blockchain keeps track of all transactions, including NFT trades.
The blockchain merely stores evidence of ownership; the copyright holders or NFT creators are free to store the actual digital asset anywhere they choose.
The easiest way to think of NFTs is as ownership records for unique digital assets. As a result, they are non-fungible, which means they cannot be swapped for one another since they are not precisely the same. NFTs are traded in return for digital currency.
NFTs are traded and acquired just like any other cryptocurrency. NFTs, on the other hand, are singular and non-fungible, but cryptocurrencies like bitcoin are fungible—you can swap one bitcoin for another since they are identical. This is what distinguishes cryptocurrencies from NFTs for speculators; with fungibility, you know what you’re receiving. Trading NFTs is more challenging than trading cryptocurrencies because of their distinctiveness.
The NFT trading process :
NFT markets, which have organized platforms similar to eBay’s, are where NFTs are exchanged. Although some NFTs are sold at set prices, the majority are sold through auctions. While some marketplaces offer everything, others specialize in a particular category of NFTs, such as art, gaming, or sports. You may use any of the marketplaces to mint fresh NFTs, which is what the process entails.
By dollar trade volume across marketplaces in 2021, OpenSea, the largest marketplace, with nearly a 90% market share. Fees for minting, sales, and account setup are all associated with the creation and trading of NFTs.
Make sure you are familiar with a marketplace’s pricing structure before creating or trading NFTs. To provide some context for fees received, OpenSea reported that in January 2022, fees accounted for around 8% of their sales volume. Additionally, there can be royalties (often between 10 and 30 percent of the sales price) paid to the original author of an NFT each time a transaction in that NFT occurs.
Speculators need to be aware that the market is concentrated on a small number of what are known as NFT collections. A collection is a set of NFTs that differ from one another yet are similar to one another. The same designers purposely make all of the NFTs to be similar but distinctive when they mint a collection.
According to Forbes, the top 10 NFT collections had a 60 percent share of the NFT market as of 2021 and had historical trade values of over $15 billion. Most likely because NFT speculators like to trade inside collections, a few collections dominate the market.
Because there are other NFTs to compare it to, it is simpler to value an NFT from a collection. Therefore, the majority of the money that a small number of traders gain from speculating in NFTs comes from trading inside collections.
It is obvious that knowledgeable merchants are aware of where the money is, yet it is unlikely that the market can support the volume of collections that exist today: 3,264, compared to 193 a year ago. At this point, it is seen that having so many collections defeats their purpose.
How to earn money trading NFTs is mostly not discussed. The Chainalysis 2021 NFT Market Report could be the only research that makes an effort to comprehend this. According to the data study, just 44% of deals in NFTs result in a profit, and these profit-making trades are only made by a small percentage of NFT traders.
The researchers looked at both those who purchase NFTs right once and subsequently sell them, as well as people who purchase NFTs later on in the secondary market. Only 29% of deals involving newly issued NFTs that are afterward sold result in a profit for the dealer.
Most of the customers who do earn money had their purchases discounted from the advertised price. Moreover, half of the minority who profit from these transactions gain more than a 200 percent return on their investment, compared to 60% of those who lose money.
Sixty-five percent of traders who buy NFTs on the secondary market and subsequently sell them profit from their transactions. However, just 5% of these traders actually made 80% of these earnings. The researchers discovered that these traders had a propensity for being the most knowledgeable, trading with the greatest cash, purchasing and disposing of NFTs at the highest prices, trading often, and maintaining a larger portfolio of NFTs.
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