Nearly Half of Americans Deem NFTs ‘Good and Safe’ Investments — But Why?
Non-fungible token (NFT) sales soared to new heights this year, reaching $2.5 billion in the first half of 2021, according to DappRadar. They’ve become so popular, in fact, that heavy hitters like Coca-Cola, Nike and Taco Bell all entered the playing field, causing excitement in what was — at least until 2020 — a relatively new and largely unrecognized asset category.
Though most Americans still have no clue what a NFT is or how they work, the digital blockchain technology is gaining steam. The global consumer research platform Pipslay recently polled more than 30,000 Americans, finding that 48% deem NFTs a “good and safe investment.” But why do they think this, and can the momentum last?
Americans Are Buying Into Media Hype
“There is a phenomenon in advertising that if you expose people to something enough times to a certain message or product, they will begin to believe the message,” said David Peters, CPA, a financial advisor. “They will begin to think that they know and understand the idea, simply because they have repeated exposure to it.”
Peters likens the phenomenon to one he observed when working in the auto insurance industry. “The consumer would see a company’s advertisements on their TV all the time — and they would start to believe that that particular company had a superior auto insurance policy,” Peters said. “In reality, auto insurance policies are governed by state law: There really is no difference in the content of the policy itself from one company to another, only in the coverage limits, claims service, etc.”
Likewise, Peters sees a similar trend fueling the success of NFTs, stating, “People just feel like they know about NFT’s, because they hear about them all the time through TV and media in the United States — even if in reality, they still may not know that much.”
Long-Term View Is Spotty
Media hype doesn’t sound like the best reason to make an investment, which prompts the question: Are NFTs really as “good and safe” as many Americans think? More specifically, are they viable for the long haul?
“I personally think the jury is still out on NFTs and their long-term viability,” Peters said. “Generally, before we invest in any singular investment, we want to think about how it will interact with the rest of the portfolio. Also, we want to think about the risks that are involved.”
Peters explained that every investment has two basic sources of risk: systematic risk (the risk that every investment has just by being in the market) and unsystematic risk (the unique risks that a particular company or product has). “When a product or company does not have a long track record, the part that is more difficult to quantify is the unsystematic risk,” he said. “In other words, what unique risks does the product have that we haven’t discovered yet?”
NFTs, which only emerged in 2014, haven’t been around long enough for their true risks to be known. As such, it’s impossible to say whether they are smart investments in the long-term.
While Interesting, NFTs Are Not Necessarily Sound Investments
What can be said about NFTs regardless of their potential volatility is that they are a source of significant intrigue in the financial community.
“Taking a long-term view, [NFTs] are a fascinating idea with plenty of room to grow,” said Eric Thompson, director and wealth advisor at Round Table Wealth Management. “While current NFT adoption is mostly in the space of digital art, highlighted by Beeple’s $69 million haul in early 2021, and sports memorabilia such as digital trading cards and NBA Top Shots, the idea of tokenizing tangible, irreplicable goods in the ‘real world’ opens up the door to NFTs and blockchain as tools of the future.”
Still, the perception that NFTs are a good and safe investment is, at this time, unrealistic.
“While NFTs are a useful tool that leverage the utility of blockchains, the idea that they’re a great or safe investment is flawed,” Thompson said. “Just as all individuals need to understand what’s under the hood of the mutual fund or exchange traded fund in their retirement account, having a deep understanding of their NFT and what its future prospects are for appreciation and income generation will determine its effectiveness as an investment.”
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Last updated: September 10, 2021