What Advisors Need to Know About NFT Investing

Every day seemingly brings a new scam to the crypto world, and yet the growth of the industry is by no means slowing down.

The popularity of non-fungible tokens (NFTs), at least for now, continues to eclipse news of scams such as “rug pulls,” where creators of NFTs increase the value of a new digital asset and then cash in once people have subscribed to it. Consider the recent Frosties rug raffle, where more than 2,000 people bought $1.3 million in digital cartoon ice cream collectibles before the anonymous creators shut down their social media pages and disappeared. The collection of 8,888 NFTs remains, but the digital assets are only as strong as their leaders; with no one leading the Frosties community, all of these works of art are nothing more than cute cartoons.


The general guideline within the crypto community is DYOR – “do your own research” – when purchasing an NFT project of any size. But in an industry that’s changing so rapidly that the feds can’t keep up and hackers get away with billions, what constitutes “research” may be more like Google searches, Twitter discussions Spaces and unstable ground.

NFT collectors suggest befriending others in space before investing money in new projects or communities. An easy way with a low barrier to entry is to start by joining the free Twitter Spaces chats and Discord communities, where you’ll learn about the additional benefits that NFT projects offer buyers (known as utility), industry news and more.

From a financial planning perspective, NFTs are likened to rare collectibles like comic books, authentic art, doll collections, sneakers, and other alternative investments: enjoy them, but don’t expect them to fund your entire retirement. (NFTs also involve special tax considerations.)

Except, in some cases, NFTs can drastically change someone’s financial situation — or at least they have. Consider the World of Women NFT collection, which dropped in July 2021 and had an initial average price of 0.1 ETH (about $300). The collection now ranks on OpenSea, where each NFT is valued at 7-8 ETH on average (between $21,000 and $24,000 at the time of writing). Or sold out Women ride NFT collection, which reached 1,900 ETH in trading volume (approximately $5.9 million at the time of writing) in just a few months.

Purchasing an NFT creates an indelible record of digital ownership on the blockchain, so the tokens can therefore act as a membership ticket of sorts. It’s not every community’s recipe for success, but many NFT creators have added value to their projects through the utility of NFT purchases, giving investors exclusive access to online clubs, games, Discord chat rooms, and interactive experiences, all on top of the art itself.

The risks and benefits of NFTs

All this fast money has divided the NFT world. On the one hand, the potential of NFTs is undeniable, but on the other hand, the risks and rewards are a bit dizzying.

“This NFT thing is like when a dog gets a new toy and they keep tearing the toy apart. And then now they don’t have a toy,” said Nelson Merchan Jr., co-founder and CEO of blockchain PR firm Light Node Media. “It’s kind of like we’re doing almost the same thing, and we realize, ‘OK, maybe we shouldn’t do it this way.'”

A crypto investor since 2017, Merchan owns NFTs from the popular Pudgy Penguins collection shortly after its fall in June 2021. The Pudgy Penguin founders were recently ousted by frustrated collectors who were tired of waiting for the project to hold its grand promises. But Merchan, surprisingly, isn’t too concerned about the state of his Pudgy Penguin NFTs, noting the inherent promise in what the situation demonstrates.

“It was definitely not a rug pull,” Merchan said, noting that rug pulls happen with speed and anonymity. During the alleged Bored Bunny rug draw on January 5, for example, scammers apparently stole 2,000 ETH in just hours before having their social media accounts silenced.

The Pudgy Penguins project has a chance, Merchan argues, because the leadership replacement process was community-based, public, and more or less democratic.

“Some of these failed projects are actually very good,” he said. “The community, through failure, has to figure out how to build something out of this really cool NFT and say, ‘Let’s make it work. It’s the NFT projects that I think have significant growth potential because it’s the community saying we’re going to do something about it. Ultimately, with NFTs and really crypto in general, it’s all about the community. If the community is strong, the project will be strong.

When it comes to sustainable value, investors should consider ways in the future to integrate NFTs with existing infrastructure, Merchan argues. Through smart contracts and QR codes, NFTs have the potential to unlock greater value both in the metaverse and in the “real” world through ticketing, VIP memberships, and sales.

Consider the club scene. “People are going to the club party, they’re ordering bottles, the promoters are there,” Merchan said. “The club is always looking for ways to keep people coming back and excited about their brand. This is where NFTs will be perfect. Suppose you go to the club several times during this month; you get a specific amount of NFT each time you go there. Maybe the level of NFT increases in rarity if you go there, say, three or four times in that month.

Rare NFTs will theoretically determine whether a person receives rare perks. And all of those transactions will exist on the blockchain, a sort of digital ticket stub that definitely beats the shoebox most of us kept collectibles in as kids.

Decentralized Value Investing

It’s almost as if investing in an NFT community could be considered a form of decentralized value investing.

“I’m really investing in the community, or at least the potential for the community to come out of these NFTs,” Merchan told CoinDesk. “If you look at it from the outside, they are failures – almost all of them. But the energy is really very strong.

The trick is not to buy the hype, no matter how appealing. “It’s just a very crazy industry. Instead, keep a long-term perspective. If you buy an NFT to return it, well, that’s just trading. There are a lot of risks involved,” Merchan said.

“But if you’re buying it because you really like the community, or because something intuitively makes you feel like it’s going somewhere, I think that’s a lot more appealing,” he said. note.

About Elaine Morales

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