Non-fungible tokens (NFTs) are becoming more popular lately due to their diverse offerings and applications. For those who are considering investing in NFTs, you’ll find the information, concepts, and advice shared here useful when you begin to embark on an investment journey with NFTs. Keep reading as there’s plenty of helpful information ahead.
What is an NFT?
NFT stands for Non-Fungible Token. It’s, in simple terms, a token that can’t be exchanged or traded with others of the same kind; each one owns something unique.
They’re becoming more common these days due to platforms like Ethereum facilitating their creation and exchange. This asset class has been called “the next megatrend” by Forbes, and it’s not hard to see why – if even 10% of video game players made virtual purchases only every 6 months (for example), there would already exist more than $1 billion worth of digital assets on current blockchain gaming platforms alone (think about how huge the number would be with players that make virtual purchases even more frequently).
NFTs are valuable because they’re scarce, and when scarcity exists in a digital world, monetary value can be assigned to it. This is what makes Jungle among the many emerging NFT marketplaces nowadays. Assigning monetary value to unique and rare digital art, music, collectibles, and virtually any marketable item help promote growth in the venture. When you add the fact that some NFTs actually own an underlying asset (such as tokens from popular cryptocurrency exchanges), their value increases even further.
Manage your time horizon
The time horizon is “the length of time over which an investor is committed to a security”. In simple terms, it’s how long you’ll be keeping your investment until you either take profit or consider selling.
It’s one of the most important factors that determine whether or not an NFT investment may have a high return and prove profitable – since this asset class doesn’t seem to have any signs of stopping anytime soon (if we look at current data on growing userbase and increasing number of platforms facilitating the trading of NFTs), it’s a good idea to think about this one very carefully.
In general, more volatility is associated with shorter time horizons, which means that if you plan on holding an asset for only a few months or even a year, its price might change drastically in either direction. In some cases, such fluctuations might cause you to lose money – so be sure to have a strong stomach when investing short-term.
Manage your risk tolerance
One of the most important factors that separate novice investors from pros, is how well they’re able to manage their emotions when thinking about potential losses while planning for potential gains.
It’s true – there’s no such thing as a successful investor who has never taken any losses – even if we ignore all the failed investments throughout history and take Warren Buffet out of the picture, it would be hard to find people who didn’t lose money at least once after making an investment decision. This implies that all successful investors have one thing in common – they’ve learned how to deal with the loss, use it as a learning experience and make better decisions in the future.
Of course, this doesn’t mean that taking losses is always bad – depending on individual circumstances, even small losses might be beneficial to some people since they can help them learn more about their own risk tolerance. This too affects NFT investments, since there are many virtual assets out there that are fairly volatile (especially when compared to other types of investment) – meaning that price fluctuations are fairly common for most of them. If you’re planning on investing in something like Cryptokitties, CryptoPunks, or Axie Infinity, make sure you do your research and consider how much risk you’re willing to take before committing your funds.
Keep in mind that most NFTs are non-fungible
Another key factor to keep in mind when planning an investment strategy is whether or not a virtual asset you’re interested in is actually fungible. In simple terms, fungibility means that every unit of that asset is equal to another – since fiat currencies like USD and EUR are obviously fungible, their value doesn’t change depending on which specific banknote we trade them for. Of course, there’s more than one way of defining this term, so it isn’t always clear if some digital assets are actually fungible or not.
However, when it comes to the majority of cryptocurrencies out there (irrespective of whether they’re actively traded or just used as some kind of utility token) fungibility means that every unit of the same cryptocurrency has the same value since these digital assets are usually divisible.
For example, you can either spend 0.0001 BTC (the lowest possible transaction fee on the Bitcoin network at this time) or split that particular amount into smaller parts – like 0.00001 BTC for example – giving you even more options to work with.
Scarcity vs liquidity
Another important factor to keep in mind is how liquid an asset is – if we try to define it simply, this term refers to how easy it is to put an asset up for sale. This implies that scarce assets tend to be less liquid than those which aren’t as limited in supply. course, cryptocurrencies are by their very nature very scarce, so it’s easy to think of them as non-liquid.
However, this doesn’t apply to all NFTs – some virtual assets can be both extremely limited in supply and easily traded at the same time.
Of course, not all digital items are created equal when it comes to liquidity – some of them are extremely hard to trade or even impossible to sell altogether since their supply is static.
This is why it’s important to keep in mind that all virtual assets might not be fungible – many of them are limited in supply and virtually impossible to sell on secondary markets (like for example CryptoKitties ). If you’re looking into investing in NFTs, make sure you know what type of asset they are before committing your funds
It’s crucial to do your research before making any investment decision, regardless of the asset class you’re interested in. That being said, there are several things worth keeping in mind when planning an NFT investment strategy – whether the particular digital asset is actually fungible, how liquid it is, what type of supply it has, how easily it can be traded, and how scarce it is. Knowing the above information doing diligent research of your own will help you invest in NFTs securely and with confidence.