"Digital shell". Why NFTs Will Not Protect Against Cryptocurrency Market Crashes
The drop of Bitcoin to $30,000 had almost no effect on the non-fungible token market. Yet, this does not mean that NFT can be used as a protective tool in the development of an investment portfolio.
The non-fungible token market did not pay too much attention to the collapse of cryptocurrency quotes which occurred in May, when the price of Bitcoin fell to $30,000 for the first time since January. According to the Nonfungible service, the volume of primary sales of NFT has been growing since mid-May, as well as the number of token buyers. For example, sports non-fungible tokens experienced a surge in both primary and secondary sales in the second half of May.
The growth in popularity of NFTs was recorded last March. This happened after the sale by Christie's auction house of a painting by Beeple in the form of NFT for $69.3 mil. In March, the sales of non-fungible tokens reached a record $200 mil, which exceeded their sales for the whole year of 2020.
High Risk InvestmentsÂ
The lack of correlation between the NFT market and cryptocurrency quotes indicates that these two sectors are subject to different laws and that non-fungible tokens are not a cryptocurrency in the usual sense.
"The NFT is only a digital shell, a blockchain that primarily solves the issue of copyright."
When it comes to art, the value of an NFT is determined based on how much the audience is willing to pay for a particular painting, music track, etc. The NFT is a high-risk investment, even though it has proved to be resilient during the crypto market crash. It is risky to devote more than 10% of your investment portfolio to such assets.
Unclear Outlook
The NFT market should not be considered as a protective tool against fluctuations in cryptocurrency quotes, since non-fungible tokens are one of the young and high-risk sectors of the cryptocurrency market. It is not worth relying on NFTs when developing an investment portfolio, since the prospect of the secondary market for many expensive tokens, especially those related to art, remains unclear.
"This is an interesting area, it is worth looking into, but we would not recommend investing all your funds in such assets."
The most promising NFTs relate to art objects, but rather than into the collections like CryptoPunks you should look into the works of young artists who already have a name in the art world, such as Banksy. We also recommend considering sports NFTs.
In March, one of Banksy's paintings was burned to be turned into an NFT. The destruction of the painting took place at an unknown location in Brooklyn and was broadcast on YouTube and Twitter. After the painting had been burned, a blockchain company created a non-fungible token tied to the "digital image of the art object." This was the first known case of the transformation of a physical work of art into a virtual asset.