NFT is one of the most discussed technologies, and therefore not only professionals rush to invest in it. However, experts warn people far from the industry against investing. They believe that the NFT market has entered a crypto winter. Should we wait for a thaw, and what can become a growth point for the industry? In this article we talk about the risks of investing in NFTs in 2022, as well as how to minimize them.
Million Dollar Pizza
In 2021, NFTs were discussed so much that the authors of the English dictionary named the acronym the word of the year. The popularity of NFTs grew at the expense of crypto-artists and collectors: mainly works of art and art objects were sold in this format. Last year, according to The Block Research, the volume of NFT trading exceeded $13 billion.
In March of this year, the market collapsed amid a crisis in the cryptocurrency market. As NFT-art is bought and sold for digital money, the demand correlates with the overall capitalization of the cryptocurrency market. According to CryptoSlam, NFT trading volume fell by a third in the first month of spring.
Experts have once again talked about the bursting of the bubble. The Wall Street Journal expressed a pessimistic stance, suggesting that non-interchangeable tokens ended up “just pictures”. The publication cited data showing that the number of active NFT wallets fell 88%, from 119,000 in November 2021 to 14,000 at the end of April.
Fly like a bird
Despite gloomy predictions, the NFT industry has set new price records. In April 2022, weekly sales of non-interchangeable tokens reached $1 billion. The driver of the NFT market growth in the spring was the Moonbirds collection. Moonbirds included 10,000 images of pixel owls. In less than two weeks, it became the most expensive collection of the month.
In addition, the market was fueled by the sale of virtual lands in the Otherside meta-universe, which began in May.
New technological solutions also stimulated market growth. In April, the OpenSea marketplace announced the addition of support for Solana blockchain tokens, which features increased transaction processing speed and support for the Proof-of-History (PoH) protocol, which makes the platform a scalable tool.
Yet another fall
The short-lived rise was followed by another decline. Bloomberg reported on the decline of the NFT market at the end of June 2022. In June, the volume of sales on the NFT market was less than $1 billion for the first time since last June. The trading volume on the OpenSea Marketplace decreased by 75% during the first summer month as compared to May.
The collapse happened amid instability in the cryptocurrency market: Ethereum co-founder Vitalik Buterin said in an interview with Bloomberg in February 2022 that the digital asset market has entered crypto winter.
Some experts are sure that the situation in the NFT market can be considered a financial bubble, i.e. a situation where asset prices rapidly rise to unfair levels and then fall sharply.
Nassim Taleb, author of the bestseller “Black Swan,” who predicted the approaching financial crisis in 2007, also talked about the situation as about the bubble that is beginning to burst.
Main risks of 2022
So what are the main risks of investing in NFTs in 2022 and how they can be minimized.
NFT Price Inflation
Because the price of NFT is demand-driven, it can be inflated using illegal or unethical methods. Tokens can be sold and bought from multiple fake accounts, raising the price on each transaction.
How it works. An NFT is bought for $100 and sold to another account for $1k. It seems like it’s value became $1k. You buy such a token for $1k, but its value is essentially $100. This practice is called fictitious trading. Thus, it becomes difficult to find an NFT with a real value rather than an inflated value. You can check NFTs for markup by using the addresses of past owners and the dates of token purchases.
How to check NFT in the OpenSea Marketplace. Under “Trading History,” select the “Sales” filter so that only sales are displayed. It is highly likely that NFT is artificially overpriced if:
- buyers have not previously taken action. This information is visible in the “Activity” tab of the account page;
- transactions were made in a short period of time;
- the same buyer is encountered several times.
Disappearance of content from NFT
Buying a popular NFT can bring profit in the future. But there is a possibility that the content inside the token won’t stay in it forever. The images or videos you buy as NFTs can be stored anywhere, since there is no work itself inside the token, only a link to it. This can lead to the loss of the NFT itself later on.
Therefor. it is important too look into the NFT code to see the link and find out where the file is stored. This is important because security – the likelihood that an image or video can be deleted or changed – depends on where it is stored.
Fake Accounts.
NFTs are available on many marketplaces such as Binance NFT, OpenSea and others. When a person buys an NFT, he or she can purchase a fake or copy of the digital art from a seller who may pose as a legitimate owner or artist.
For example, on OpenSea, anyone can issue a token in the name of Elon Musk. The account would be called “Elon Musk,” and the link would lead to the official Twitter page. It is easy to see that this is not the real Elon Musk if you go to his Twitter. You won’t find any tweets that talk about the release of NFT or links to the account on OpenSea.
To make sure the NFT is original and not created by a fraudster, check the links provided. Even if they lead to verified pages, look for NFT release reports or links to marketplaces. If you don’t find such information on the mentioned pages, most likely the creator is a scammer.
Volatility and liquidity
The NFT market is very volatile, as prices change almost every minute. Buyers can buy NFTs for $100, hoping for a price increase, but in the end it can fall very much. Also, NFTs can go up in value a lot and buyers can make a lot of money compared to their original investment. But this is only a possibility, not a guarantee.
NFT illiquidity is also a significant risk. An investor can’t sell a token if there isn’t a buyer willing to buy it. This makes the process of selling NFTs much more difficult than cryptocurrencies.
A mix of casino, reseller and stock market
Experts caution against investing in NFTs, especially people far from the industry, because of the volatility of the market at this stage. Crypto winter has begun a natural selection that will rid the market of low-quality projects. It was the perfect time to rethink the startups that were in development, to cleanse them of the husks and focus on real problem solving. Literally anyone can produce a collection of NFT pictures, but the market needs something else.
Systems where NFT technology will be justified, useful and at the same time connect offline with online by analogy with Stepn (a blockchain-based application that gives the opportunity to earn while walking and running) will be in demand. As well as utilitarian solutions that can help businesses adapt to Web3: these are the kinds of products that will be relevant and will bring in more than a billion dollars in the long run.
