Non-Fungible Tokens as Investment Objects

Non-fungible tokens (NFTs) are digital certificates with encryption and blockchain verification. The technology first became popular among investors in 2021, then the market slowed down a bit and now it is picking up again. The prospects look promising. Currency, the number of ‘NFT’ queries exceeds the number of ‘Bitcoin’ and ‘Ethereum’ queries and besides, the value of NFTs is more stable than the value of digital coins.

Many companies around the world see NFTs as a fund-raising instrument. The tokens can have any format; they can be digital pictures, articles, songs, etc. Their key advantage is adaptability and the opportunity to transfer property rights via blockchains. 

Are NFTs considered securities?

The Securities and Exchange Commission (SEC) is a regulatory authority and it wants company assets registered before they can be publicly traded. The SEC determines if investment objects should qualify as securities.

Speaking about NFTs, if this kind of asset is a work of art or a result of some other kind of creative activities, it should be considered a collectable item rather than a security. NFTs fall under the SEC’s control if the item has a price tag and it is used as an investment object.

For example, Nike puts out a collection of NFTs containing 100 items. Then the company informs the customers that no new items are going to be added to the collection, which will make the price of each item grow with time. Now the items look like investment objects rather than collectable items. In this situation, the company could hardly avoid registering the NFTs as securities.

Another popular trend is trade in fractionated NFTs (F-NFT) and NFT baskets. An investor can buy a portion of an NFT and he/ she can buy portions of several NFTs. Fractional, Neftex and other platforms help common people buy and sell F-NFTs. The process is similar to trade in securities or stamps between collectors.

It follows that if a company is planning to create NFTs, it has to find out if they are going to qualify as securities or not. Trouble with the SEC should definitely be avoided.

What is an NFT?

In 2021, the mass media informed the audience that certain NFT pictures had been sold for millions or thousands of dollars. People were paying crazy money for such digital products as pictures, cards, songs, and so on. The investment opportunities in the NFT market looked great and they still do. In 2021, the market was valued at 40 billion dollars, then the popularity of NFTs as investment objects fell, and now it is growing again. Digital products are volatile investment objects by definition, but a lucky investor could make a fortune by trading in NFTs. 

The key characteristic of an NFT is that it is unique: one NFT cannot be replaced by another NFT. An NFT also cannot be split into parts. You can exchange one Bitcoin for another Bitcoin and you can split a dollar into 100 cents. You cannot do that with an NFT.

An NFT is a certificate confirming the property rights for a certain digital object. The object can be of any nature: the defining characteristic that it has is that it’s a digital object. 

Because the demand for tokens was growing, marketplaces started to appear where people could buy and sell NFTs. The largest and the most popular platform – OpenSea – was started in 2017. In early 2022, its trade volume reached a record-breaking 3.5 billion dollars.

Besides OpenSea, you can buy and sell NFTs on the following platforms:

●     Niftygateway;

●     Rarible;

●     SuperRare.

All payments are made in ETH and the marketplace charges a commission for each operation. In addition, any of the platforms mentioned above allows creating your own NFTs. Moreover, you could not do without such a platform if you wanted to create an NFT.

It is expected that the NFT market is going to grow to more than 100 billion dollars by 2026 and the average growth rate is going to be 40-50% per year. These forecasts should set one thinking about entering a new promising market.

Notwithstanding the statistics, many people see digital tokens as something alien and overly complicated. Some other people and companies (including large ones) have an opposite attitude: they invest in NFTs. The situation was similar when the first cryptocurrency appeared: people did not believe in it at first and now cryptocurrencies are popular investment objects especially in some countries. 

The future of NFTs can hardly be predicted with certainty but experts believe that the tokens are going to turn into a widely used means of payment soon. Moreover, they have good reasons to believe that because NFTs have important objective advantages.

Advantages of NFTs

The main advantages of NFTs include the following ones:

1. Property rights for a token cannot be disputed: an NFT can belong to one person only and only as a whole.
2. With the help of smart contracts, the property right transfer is easy.
3. Blockchain technologies are employed when NFTs are created, which makes them highly secure digital objects.

Many users think of NFTs as objects of digital art that can be sold at a high price. How long is the tendency going to last? There can hardly be a definite answer to this question. There is some evidence, however, that the tendency won’t go away in the near future: large foundations, brands, and influential individuals are becoming more active in the NFT market.

The future of NFTs and the trends

The popularity of digital products is growing in many parts of the world. An increasing number of software developers are figuring out how cryptocurrencies, blockchains, and digital tokens work. The NFT market is developing thanks to collectors at the moment. In the future, however, NFTs may start to be used in everyday life as a means of payment. Chances are that debit and credit cards may appear in the NFT sector too.

The world is digitizing and many well-known processes are transferred to the digital universe. Not only private individuals but also government authorities are using blockchains these days. With the help of NFTs, goods and services can be tokenized, that is, all operations can be made via blockchains.

Previously, people could not imagine being able to pay with a plastic card or with a cell phone. Today, these things are common. The same is probably going to happen with NFTs: the technology is starting to be widely used. In the future, digital wallets will be able to contain not only money but also documents of various kinds.

Main tendencies in 2023-2024

The NFT technology can be used in the following areas:

●     Decentralized finance;

●     Art;

●     Games;

●     Smart contracts;

●     Fundraising.

Each of these areas is promising and the popularity of NFTs has been growing. Is the tendency going to continue? We’ll have to wait and see.