NFT profitability: Bubble or opportunity?

What is an NFT?

064 – Non-Fungible Tokens (NFTs) are assets that are managed through blockchain technology and have a code and data that differentiate them from other tokens or assets related to blockchain technology.

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An NFT is an asset that is said to be non-exchangeable or fungible due to the fact that it is unique in its kind, i.e., no two NFTs can be exactly the same. Unlike cryptocurrencies in general, both are tokens that are managed through blockchain technology, but the difference lies in that cryptos can be interchangeable, i.e., there can be two cryptocurrencies coming from the same exchange and both will have exactly the same value and characteristics towards the investor.

The NFT is created through a process called “minting”, which means that the digital asset is created and its information is stored through a new block in the blockchain chain. Once the process is finished, the NFT has a unique identification code, which distinguishes it from the rest; although there may be NFTs that look similar, each one of them is unique in the world and in the crypto ecosystem.

NFTs as an investment opportunity

Over the last few years NFTs have emerged as an alternative investment, as many of them have proved to be very profitable for the market, just as many of them have been branded as scams; as always, every investment carries an associated risk.

NFTs are characterized by being mainly digital art, although they are intended to serve as a digital asset that can be used in everyday life, today their main function is reduced to a select market of people who are interested in digital art. The value will depend on the rarity of the NFT and the demand for the asset.

One of the most viral projects so far is the Bored Ape Yacht Club, which consists of a collection of more than 10,000 NFTs that offers investors various benefits for owning one of the NFTs; this digital asset has gone viral on social networks because they are the famous monkeys.

The NFT collection was offered at a price of ETH 0.08 at the time of issuance, but being a limited issue, many people have valued some of them in the millions of dollars; a clear example is Bored Ape #8817, which was traded in October 2021 for a price of ETH 819, that is, the equivalent of USD$ 3.41 million.

It should also be taken into consideration that NFTs are highly speculative assets, and their value over time could be affected dramatically. There are several cases of celebrities who have been branded as swindlers and others have been swindled through NFT art.

One of the most outstanding cases is that of Justin Bieber, since in January 2022 the singer published on social networks that he had acquired one of the NFTs from the Bored Ape #3001 collection for an amount close to USD$1.3 million; but as of July 21, 2023 the value of the NFT is estimated to be $62,304.83, thus marking a loss of 95.20% in a year and a half.

Bubble or reality?

By 2021, the NFTs market size was recorded to be USD$15.54 billion, while by 2022 it was reported to be USD$38.2 billion, marking a year-on-year growth of 145.81%.

However, despite the enormous growth in the world of NFTs it must be taken into consideration that the value of NFTs has been highly speculative, as they are driven primarily by emotions and benefits that are impacted in real life.

But the mere fact of seeing that NFTs have a value of millions of dollars and as a counterpart there is no benefit that has a similar value, leaves much to think about. Clearly people are the ones who decide to invest in the projects and “bet” that their value will increase over time; but cases like Justin Bieber’s are in the millions and it shows the lack of institutionality to issue NFTs.

Today any person or entity is able to issue an NFT without major problems, which has caused many of the assets to be overpriced and then over time adjust to a much more realistic value.

Undoubtedly, NFTs can offer multiple advantages, not only in the crypto world, but also in everyday activities. Among the main benefits is the exclusive ownership of the asset, i.e., being an asset that is unique and not fungible, the owner of the NFT is assured of having a unique ownership of an asset, but its value will come rare from the project or the benefits that come with having it in their hands.

But there is also the other side of the coin, and that is that there are several risks associated with investing in this asset class. As of today, it can be said that NFTs are nothing more than digital art, which has led to multiple criticisms and, in turn, multiple scams.

Several experts in the area consider that NFTs still have a great margin for improvement and projection, but it is an asset that must be treated with care to prevent its functionality from being affected. Today it seems to be more of a bubble than a realistic investment option, but this does not mean that it cannot become a good alternative if handled responsibly.

One of the safest ways to consider whether or not it is prudent to invest in an NFT is through the study of its creator, the benefits it provides, the possible supply and demand it may generate, among other things. This does not guarantee 100% that the investment will be a success, but it does guarantee greater confidence in the project.

Time will tell whether NFTs are a bubble that has provided great benefits to some users or the beginning of an investment and innovation opportunity for the cryptocurrency world.