The market for NFTs might be booming, but they are still a high-risk asset. for all the benefits and hype that surround them, it is important to understand the risks they pose too.
Liquidity, the ease of exchanging an asset for cash, is a major consideration when buying an asset. NFTs are relatively illiquid – every seller needs to find a buyer who is willing to pay a certain price for a one-of-a-kind item. This can put collectors in a difficult position if they spend a lot on an NFT and then the market starts to tank.
A lot of NFTs don’t have an intrinsic value and buying an NFT only transfers the ownership of the asset, not its copyright. This means that the artwork can still be copied and used by anyone.
Due to the speculative nature of NFTs, the market suffers from massive volatility. There are few mechanisms in place to help people price the assets. The huge million-dollar-sales of some assets only adds to the volatility of the market. Some people think this wild market is creating a bubble and leaving investors vulnerable to a market crash.
While an NFT lives on a Blockchain, the asset it refers to is typically stored separately. This means that if the party that issued the NFTs goes out of business, the buyer could be left with a token that points to files that no longer exist.
While Blockchain technology offers some degree of protection for investors, various types of fraud are still prevalent. Anybody can mint an NFT out of a file that doesn’t belong to them and sell it on to unsuspecting buyers. As well as that, the practice of artificially blowing up the price of an asset by opening multiple accounts and trading with themselves is very common with NFTs.
There are several hidden fees that a new investor or creator might be unaware of. Some of the fees are so astronomically high that the fees itself can often add up to a lot more than the price of the NFT. Sites charge a ‘gas’ fee (the charge for the energy consumed to complete the transaction) for every sale on top of the fee for selling and buying. The account conversion fees and fluctuations in the price of the cryptocurrency used should also be taken into consideration.