NFTs (non-fungible tokens) were the talk of the town a few years ago. In fact, the Collins Dictionary team chose NFT as 2021's word of the year. Since then, they've lost a lot of their shine. Seriously so. We're talking diamond-to-coal levels of shine loss. One study by dappGambl showed that around 95% of NFT collections are now almost worthless.
You read that right. In 2021, some NFTs sold for millions of dollars. But almost 70,000 of the 73,000 or so NFT collections the researchers looked at are now worth 0 ETH. So does that mean NFTs are dead? Not quite. Read on to understand why NFTs may have a new lease on life in 2024.
It's an NFT, Jim, but not as we know it
When you think of NFTs, you may well think of the memes, cartoons, and avatars that sold for huge amounts during the height of the NFT frenzy. Some CryptoPunk characters sold for over $1 million a pop. But these are only one type of NFT, and a highly speculative one at that.
The best way to understand NFTs is as a digital certificate of ownership. It is a token that's stored on the blockchain that can't be altered or deleted. The certificate can include rules about how the item can be used or what royalties need to be paid if it is sold. In theory, an NFT can demonstrate authenticity. In practice, that's complicated because people can (and do) use plagiarized art to create NFTs.
To understand how NFTs may be used in the future, we need to think beyond animated characters and digital art. If you think of NFTs as digital certificates of ownership, there are all kinds of potential ways they can work. These include books, tickets, music, gaming, domain names, and even real estate. It is these, more concrete, use cases that may gain traction in 2024 and beyond.
For example, last year, TicketMaster launched token-gated sales. Essentially, it means holders of certain NFTs can unlock special benefits such as access to pre-sales, prime seats, or exclusive experiences. A German publisher called Bookwire launched an NFT book platform called Creatokia.
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What it means for NFT investors
People think investing in NFTs means buying or selling the digital artworks we talked about earlier. However, if we accept that the NFT landscape is moving toward NFTs that offer value and utility, NFT investors may need to change focus as well.
For sure, it is easier than ever to open an account on an NFT marketplace and buy an NFT. Make sure you research the piece you're buying, the artist involved, and be prepared to pay gas fees. You'll also need a digital wallet to store your NFT.
Unfortunately, buying an NFT for the sake of buying an NFT is a bit like going to a book fair and picking up an old book for $1 in the hope that it might one day be worth a lot more. What matters is what the digital certificate of ownership is tied to, not the certificate itself.
So, how can you invest in an NFT world that's moving away from speculative purchases of cartoons and memes? If you are into gaming, that might involve NFT assets in games -- such as an avatar, a piece of land in a virtual world, or an in-game asset.
Another way might be to invest in the infrastructure behind NFTs. That could be by buying a cryptocurrency like Ethereum (ETH), where many NFTs are stored. Or perhaps buying an exchange-traded fund (ETF) that gives you access to NFT-related companies. NFT ETFs don't hold actual NFTs. Instead, they give you exposure to stocks in businesses that are involved in the industry.
NFT investing is still extremely risky
NFTs may be entering a new phase, but NFTs and cryptocurrencies are still high-risk investments. The market is in its infancy, and the technology and legal environments are still evolving. Bear in mind that many NFT investors have already lost money. Some NFTs might go to the moon, but many others could collapse completely.
Making consistent lower-risk investments that generate a safer rate of return can be a better way to build wealth over time. For example, looking back over the past 30 years, the S&P 500 has delivered a compound average annual growth rate of about 10%. The S&P 500 tracks the top 500 companies in the U.S. and is a common benchmark for stock market investments.
Let's say you invested $1,000 in an S&P 500 index fund today and left it generating returns of 10%. There are no guarantees, and there will be years when the stock market loses value. All the same, if that $1,000 grew at 10% per year, it could reach around $17,500 in 30 years. If you'd put that same $1,000 into NFTs in 2021, you may well have lost it all.
Key takeaway
Make sure risky assets like NFTs only make up a small portion of your portfolio. For the rest, consider opening a brokerage account and investing in a mix of other assets, including the stock market.
