Okay. What in the world are NFTs and why have they suddenly become the talk of the town? Interest in cryptocurrency has been on the rise for years now. Most recently, it’s become even more popular with the rise in price of Bitcoin along with the whole Dogecoin frenzy of 2021.
However, NFTs aren’t a form of cryptocurrency. Confusing, right? If you’re new to NFTs, we’d suggest familiarizing yourself with our guide on How Investing in Crypto Works. That’ll give you a good idea of what cryptocurrency investing consists of, as well as a base for understanding Blockchain.
Really, the only similarity between NFTs and cryptocurrency is that they both have a stored digital record on a blockchain. That’s it, really. NFTs are tokens (NFT actually stands for non-fungible token). The tokens have a unique value that can’t be exchanged for another token with the same value.
Confused yet? It’s okay. We’ll explain it simply. Follow along to learn about what NFTs are and why friends don’t let friends invest in them.
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What is an NFT?
As mentioned, NFT stands for non-fungible token. Cryptocurrencies, for example, are fungible. This means that you can sell or exchange them for another token.
So, if you have one Bitcoin, you could sell that for another Bitcon because they hold the same value. It’s the same as trading $1 for another $1 bill. They hold the same value.
Now, NFTs aren’t the same in that way. They’re a sort of token that’s one-of-a-kind. In this sense, each NFT is unique. They’re unique assets that each hold unique values. Really, they’re digital versions of something such as artwork or even real estate.
Because most NFTs represent a piece of art, a music album, or another type of creative asset, they’ve become intriguing for those following pop culture trends. However, that doesn’t make them a wise investment.
NFTs are digital examples of the Greater Fool Theory. Hartford Funds defines this theory well, stating that, the idea is that “during a market bubble, one can make money by buying overvalued assets and selling them for a proﬁt later.”
Just take a look at the Tulip Mania in the Netherlands. During the 16th century, tulips became seen as a symbol of wealth. So, people would pay a fortune just to purchase them. People started selling their properties just to purchase a single tulip. Why? Because everybody else was doing it, and because they thought it was a symbol of status. Now, you can imagine what happened next. The people selling the tulips won big for a while.
It’s important to note, just so we don’t sound like a bunch of haters, that the people selling tulips got paid. However, everyone holding on at the end lost everything. So, we’re not saying that this won’t make people rich, but we are saying, with a fair amount of confidence, that the people holding the bag at the end are gonna get left way out.
Why Would You Buy an NFT?
That’s a great question! Most people seem to be buying them because their friends are. And, if you know anything about our ideals here at Wealth Stack then you’ll know just how wrong we think that is.
However, we will note that there is one area in which NFTs can be beneficial. Modern financial systems are pretty complex, especially when it comes to business finances and transactions. Just think about the process and documents required to buy a home, right?
NFTs, in this sense, do simplify certain processes. They’re tokens that are digital representations of some sort of physical asset. This means that they’re tamper-resistant and can be used to eliminate lots of middlemen when buying and selling whatever the token represents.
As Blockchain Council points out, this can help companies expand their activities and offerings. “For example, an NFT for a designer purse will make it easier for different supply chain players to connect with it and track its provenance, production, and delivery.”
Should You Invest in NFTs?
We’ll imagine that you can already tell by the title of this article what our stance on that is. In short, the answer is no.
Millennials are always looking for new ways to make money. And, there’s a lot of interest in alternative assets like cryptocurrencies. That’s understandable! But while these investments sound exciting, they come with risks that many millennials don't understand or know how to manage.
NFTs seem to have been gaining traction lately because they can be used as an asset class where you might find similar returns on your investment as stocks or bonds. And while it sounds like a good idea at first glance, NFTs are not without their own set of problems that could leave investors out in the cold if they're not careful.
Listen, we understand that investments are emotional decisions. So if you feel that you must invest in NFTs then we suggest that you focus on position sizing. An NFT investment should be no more than 1% of your total net worth. This means that if you have a net worth of $10,000 then don’t invest more than $100.
NFTs are Speculative Assets
Up until now, NFTs have mostly been used as a way to buy and collect art. In this sense, an NFT doesn’t mean that other people can’t copy or download the artwork they see online. What it does mean, however, is that if you’re the owner of that NFT, you have ownership of the work.
This makes NFTs speculative assets at best. By that we mean that they’re like any other piece of artwork you might invest in. You purchase a print from an up-and-coming artist with the hopes that they’ll make it big and that the print will one day be worth millions of dollars. You can view NFTs in pretty much the same manner.
So, should you invest in NFTs? If you’re looking to build long-term wealth like you might by investing in the stock market, no way. If you’re an art collector, sure. Want to support your favorite digital artist? Absolutely!
Our point here, though, is that investing in NFTs isn’t a good way to diversify your existing portfolio or as a way to build long-term wealth. We fundamentally believe that there are a lot of ways to make money, but one of the most rewarding is through free cash flow analysis.
Cash rules everything around us. NFTs could be popular today and mean nothing tomorrow, but cash will continue to rule everything. When you invest in companies that are generating cash...you’ll be better off.
What to Invest in Instead of NFTs
If the idea of investing in something similar to NFTs interests you then we suggest learning how to invest in actual cryptocurrencies (again, our guide on that can be found here). If you’re truly interested in investing as a way to build sustainable wealth then we suggest starting with the basics.
Learn how to invest in the stock market from financial experts who’ve done it themselves. That’s what we’re all about here at Wealth Stack. We want to help you learn about what makes a good investment. And, at least with where NFTs are currently at, that means not investing (and not letting your friends invest) in them.
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