The good, bad and ugly of investing in NFTs

NFT


The good, the bad and the ugly of investing in NFTs. (PHOTO: Getty Creative)

SINGAPORE – Non-Fungible Tokens, or NFTs for short, are digital assets that everyone seems to want to own these days. But are they really a good thing or is it just a fad?

This is part of a series where Yahoo Finance Singaporeore will focus on different aspects of millennials and their finances. In this second part, we find out if it is good for millennials to invest in NFTs.

What are NFTs?

For the uninitiated, NFTs are basically digital property certificates that have gained massive popularity in recent years. Certificates have a unique record that is written to the fixed (unchangeable) code of a blockchain at the time of its creation or minting, making it a crypto asset. This can take the form of anything from digital art pieces, in-game items, music, fashion items, and even virtual terrain.

In a nutshell, NFTs are crypto assets that record ownership of a digital file, such as an image, video, or text. Anyone can create, or “mint,” an NFT, and ownership of the token does not typically confer ownership of the underlying item.

Profits are generated when one sells the NFT to someone else who wants it more and is willing to pay a higher price, usually paid with cryptocurrencies. Since it is based on the hope of selling it at a higher price to a willing buyer, the value of NFTs is heavily driven by sentiment and hype. This exposes sellers to the risk of price manipulation.

For example, Twitter CEO Jack Dorsey created an NFT from his first tweet and sold it for $2.9 million in early 2021. Digital artist Beeple sold an NFT of his work for $69 million. dollars, making him one of the most valuable living artists.

The usefulness of NFTs also varies greatly around the world. For example, there can be security tokens (to prove your identity) and even government tokens (to indicate the right to vote). One can buy an NFT with crypto currencies and NFTs can also represent a store of value, with some tokens being worth more than others.

In fact, NFT sales volume totaled US$24.9 billion in 2021, compared to just US$94.9 million the year before, according to market tracker DappRadar.

Speculative and volatile

Despite the large number of people turning to NFTs, financial experts warn that, unlike traditional financial assets, there is little or no basis for valuing NFTs.

This is because NFT asset prices are determined by supply and demand. Meanwhile, traditional financial assets have some form of return or value creation. For example, if you invest in the stock of a company and it has a business model that is growing, the value of your investment will also grow along with it.

“NFTs do not have an underlying economic performance based on the economic activity of companies or countries. Their payout structure is speculative and volatile: you can win astronomically but you can also lose everything,” said Chuin Ting Weber, CEO of MoneyOwl, a bionic financial advisor.

As such, Weber recommends that millennials look to buy NFTs primarily as a gamble or business. This means keeping the amount invested small and only putting in what you are willing to lose.

Providing a similar analogy, Gavin Chia, head of managed investments and investment advisory at Standard Chartered Bank Singapore, said: “NFTs are a bit more like buying a luxury car or watch, which is something you seek out but not actually create value or produce a return.”

Financial experts caution that because NFTs are speculative in nature, the hope of achieving financial freedom through investing in NFTs is not a blueprint for financial success.

“Regardless of one’s age, speculative investment products should not dominate one’s investment portfolio,” said Gregory Van, CEO of Endowus, a Singapore-based fintech company.

“It is crucial to build your core wealth through an investment strategy that is strategic to your goals and passive in asset allocation while being globally diversified and low cost,” he added.

Van also advised millennials to research and verify information they find online before taking action, especially when it comes to riskier investments like NFTs.

Lack of regulation

While the Monetary Authority of Singapore does not currently regulate NFT-related activities, it has reminded consumers that investments in digital tokens, including NFTs, are not suitable for retail investors, Chief Minister Tharman Shanmugaratnam said in a response. written to a parliamentary question on February 15.

“For NFTs in particular, their perceived uniqueness, combined with speculative demand, has served to inflate prices. This potentially puts investors at risk of outsized losses if speculative fervor wanes,” said Tharman, who is also president of NFTs. the Monetary Authority of Singapore. He noted that there are significant legal complexities and risks involved in NFTs.

Despite the lack of regulation, some Singapore companies are quick to jump on the bandwagon.

Singaporean ride-sharing app Ryde launched its first NFT project in April this year. Called “RydePals,” the NFTs will provide owners with exclusive in-app rewards and benefits, such as discounted rides and rebates. RydePals NFTs can also be traded on secondary NFT exchanges like OpenSea.

“We want to implement NFT in a way that creates more real-world value, especially for the fast-growing market segment of Singaporeans who own crypto,” says Terence Zou, founder and CEO of Ryde.

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