Over recent years NFTs have caught the attention of pop culture. Celebrities have been rocking them as profile pictures and they have been plastered on billboards across the country. Not to mention, they sell for millions of dollars.
But what if I told you there is a dark side, thats right. In this article, I will be going over 10 reasons not to invest in NFTs. So without further ado let’s jump right.
TL;DR:
The majority of individuals should not invest in NFTs as the space is poorly developed with little regulation. As a result, it is rampant with scams and hacks. Moreover, they are largely based on speculation rather than any inherent value.
1. Speculation
Like traditional art, the value of NFTs is subjective. In most cases, they do not generate revenue or have any products and services.
This makes them difficult to evaluate. There aren’t any balance sheets or a P/E ratio to analyze. Consequently, this leads to speculation.
2. Scams
If you have been involved in the NFT space then you have probably heard of the constant scams and hacks. To put it into perspective, NFT marketplace OpenSea estimated that over 70% of NFTs were fake or plagiarised.
Popular scams range from phishing to rug pulls. With phishing scams, projects imitate official sources to get personal information and access investors’ accounts.
Conversely, rug pulls are when NFT projects cease support while stealing users’ funds. Overall, scams plague the space and this doesn’t look like it is stopping anytime soon.
3. High fees
When compared to stocks and other cryptocurrencies, NFTs have considerable fees. For instance, the average transaction fee on NFT marketplaces is 2%.
Not to mention, royalties are anywhere from 3% to 10%. Therefore, the effective fee for each trade can be upwards of 10%.
In comparison, stocks and various cryptocurrencies are a fraction of a percent for each trade.
4. High barrier to entry
The barrier to entry for reputable NFT collections is extremely high. Collections such as Fidenza and CryptoPunks are priced at over $50,000.
Consequently, the vast majority of investors are priced out of blue-chip NFTs and oftentimes have to resort to lower-quality assets.
5. Volatility
All in all, NFTs are an extremely volatile asset. To put it into context, the two biggest NFTs Bored Ape Yacht Club and CryptoPunks have fallen over 60% in a matter of months.
Although they have appreciated considerably over a longer time duration this demonstrates the inherent risk involved in these assets.
6. Taxes
Unfortunately, NFT trading or investing is subject to a hefty tax bill. In the United States, this can be up to 37% for short-term capital gains tax.
If you hold for over a year then they are subjected to a 20% tax rate, similarly, the UK also has a 20% tax rate.
Therefore, if you are looking to pay fewer taxes then it’s better to utilize low-tax investment vehicles such as a retirement fund.
7. Hacks
There is no denying that NFT theft is rampant. Hackers exploit poorly developed smart contract code to steal unsuspected investors’ NFTs.
Moreover, due to the decentralized nature of cryptocurrencies, there is little in the form of compensation. If your NFT is stolen the burden is placed in your hands.
On a side note, if you do decide to invest in NFTs it is vital to use a hardware wallet. The one that I recommend is the Ledger Nano X. Click here to check out my review.
8. Environmental impact
Surprisingly, NFTs can have a significant impact on the environment. This is down to the large amount of computational power needed to secure the network.
For example, a single transaction on the Ethereum network emits approximately 0.02 kilograms of carbon dioxide.
When users mint and trade multiple NFTs this can add up. Therefore, if you are environmentally conscious it may be best to avoid NFTs or use a more eco-friendly blockchain.
9. New technology
NFT and blockchain technology has only been around for a little over a decade. As a result, the technology and infrastructure is poorly developed.
For instance, users have to store a seed phrase to access their crypto wallets. Moreover, a complex alphanumeric wallet address is used for transactions.
This is unintuitive and can lead to the loss of funds if managed incorrectly. This is not even mentioning the large number of smart contract bugs that compromise the security of NFTs.
At the end of the day, the technology has not matured and therefore it is inherently risky.
10. Low liquidity
Thanks to the non-fungible nature of NFTs the overall liquidity is low. After all, as each asset is unique they are not interchangeable.
This makes it much harder to buy and sell them. Selling NFTs can take days or weeks depending on the demand. Conversely, fungible assets such as stocks and crypto can be sold in a matter of minutes with little slippage.
If you want to view the article in video format the please check out my video below:
Conclusion
As you can see, there are plenty of reasons not to invest in NFTs. From the speculative nature to the high volatility.
That being said, the space is in its infancy therefore as it continues to develop the issues will become less prominent. I hope you found this article useful and thanks for reading it.
Want to learn about the 3 best NFT hardware wallets? Click here to read my review.
