Text / Phillip Braun

The digital artwork (NFT) market has been booming since last summer, with cumulative sales of $41 billion, most of it generated since last August, compared to just $74 million before the start of 2021. Dollar. To put that in perspective, the global art market totaled $50 billion in sales in 2020. It’s not just the size of the NFT market that’s interesting, but how fast it’s growing — something that should make any investor think twice. From an investment point of view, is NFT worth investing in?

It is necessary to separate the investment of NFT from its fun part, because everyone is participating in the activity of NFT. The NFL gave away virtual souvenir ticket NFTs to Super Bowl LVI attendees, and AMC Entertainment gave away free Batman NFTs to select viewers. These types of NFTs show just those trendy parts of the NFT market, and fads come and go.

From an investment point of view, NFT investment also seems to be a fad, replacing meme stocks in the hands of active traders, and seems more like Beanie Babies than a new investment asset. After all, the Robinhood stock trading platform gamifies both stock and options trading, and NFTs take that goal one step further. This seems like a likely conclusion, since most NFTs are traded for their social media attention, like sentimental stocks. For all of these reasons and more, the outlook for NFTs as an alternative investment class is bleak.

Learn about NFTs

NFT is a special type of web currency token. Each NFT is unique and associated with a specific digital asset. This digital asset can be any digital file, such as a music file, video or picture file, and some also claim that it can be a physical asset, such as tennis shoes.

The blockchain, the core software of any web currency, stores NFT data in its system, and any user using the blockchain can trade this data. A blockchain records in its digital ledger all transactions that occur on that blockchain, including NFT transactions. The blockchain does not store actual digital assets, only proof of ownership; NFT copyright owners or initiators can store digital assets anywhere.

NFTs are considered records of ownership of unique digital assets and are therefore non-fungible — meaning they cannot be exchanged for each other because they are not identical. All you have to do is exchange the NFT for an online currency. NFTs can be bought and sold like any cryptocurrency. The difference, however, is that while NFTs are unique and non-fungible, cryptocurrencies like Bitcoin are fungible — you can exchange one Bitcoin for another because they are identical. For speculators, this is why cryptocurrencies are superior to NFTs; with fungibility, you know what you’re getting. Due to their uniqueness, NFT transactions are more difficult than web currencies.

NFT transaction process

NFTs are traded on NFT marketplaces with structured platforms like eBay. Most NFTs are sold through auctions, and some are sold at a fixed price. Some marketplaces specialize in selling one type of NFT, such as art, games, sports, etc., while others sell everything. If you wish to create a new NFT (a process known as minting), you can do so through any of the marketplaces. Currently, the largest NFT trading market is OpenSea, which has about 90% of the market in 2021 in terms of USD trading volume in each market.

There are fees involved in both creating and trading NFTs, ranging from upfront account setup fees, minting fees to selling fees. If you plan to create or trade NFTs, always make sure you understand the fee structure of the market. To get an idea of ​​fees, know these numbers: OpenSea collected about 8% of its sales in transaction fees in January. The original creator of the NFT may also receive a royalty fee (typically 10-30% of the sale price) each time an NFT transaction occurs.

NFT series is the vitality of the market

Speculators must be aware that NFT trading in the marketplace is concentrated in a small number of collections of NFTs called “series.” These collections are groups of NFTs that are different from each other but have similarities. The same creator made the entire series and intentionally made these NFTs similar yet different.

As of now, the Bored Ape Yacht Club is the most popular NFT series, with an estimated total historical sales of about $2.5 billion, accounting for 12% of the entire NFT market, although their creators said last April They were launched on the 20th. The collection includes 10,000 unique Boring Ape NFTs, each with a different style. The most expensive Boring Ape NFT sold at a Sotheby’s auction for $3.4 million.

By 2021, the cumulative transaction volume of the top ten NFT collectibles will exceed US$15 billion, accounting for about 60% of the total market for NFT collectibles. The market dominance of a small number of collectibles is likely due to the tendency of NFT speculators to trade within NFT collections. Assessing the value of an NFT within a series is easier because comparisons can be made with other NFTs of the same series. It can be seen that most of the funds speculated by a small number of traders in NFT come from transactions within the series. Clearly, informed traders know which NFTs are worth money, but it’s hard to believe that the NFT market can absorb as many collectibles as it does today: 3,264, up from 193 a year ago. In a way, having so many series defeats their original purpose.

Few Can Make Money Buying and Selling NFTs

Most discussions of NFTs fail to mention how to make money by trading them. The author is only aware of one study that attempts to understand this, the Chainalysis 2021 NFT Market Report. This data analysis shows that only 44% of NFT transactions can make money, and only a small number of NFT traders can make this money.

The researchers separately surveyed people who bought freshly minted NFTs and sold them, and those who bought NFTs on the secondary market and sold them. Most traders who buy newly minted NFTs and then sell them lose money, and only 29% of these trades are profitable. Of those that made money, most buyers got a discount on the listing price when they made their purchase. Of those few who made money, more than 50% gained more than 200% on their investment, and of all those trades, 60% lost more than 50%.

Of those traders who bought NFTs in the secondary market and resold them, 65% made money, but only 5% made 80% of the profits. These traders, the researchers found, tended to be the most sophisticated, traded with the most capital, bought and sold the most expensive NFTs, traded the most, and held larger NFT portfolios.

Investing in NFTs is bad for wealth

The evidence from previous studies is already clear: most NFT speculative traders do not earn positive returns. From an investment standpoint, the results are unfortunate but not surprising. Another aspect of NFT trading is that fraud is said to be rampant within the NFT ecosystem. The CEO of an NFT platform has described the possibility of “bad actors” engaging in the illegal sale and trading of NFTs, including counterfeit tokens or assets they don’t actually own, as an “infection.” As a result, the NFT you buy may end up worthless. Combined with the difficulty of earning positive returns and the inherent risks, NFT trading is not a good proposition, so it’s best to stay away from it. All indications are that this is an investment fad that is likely to pass away.

The author of this article is a Forbes contributor, and the content of the article only represents the author’s own views.