Risks involved when considering NFTs as alternative investment asset

May 08, 2022 02:02 PM AEST | By Ankit Sethi
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  • In the wake of inflation, some may want to pick high-risk alternative investment assets
  • Digital assets like NFTs with blockchain tech underpinning are seemingly rising in popularity
  • Recently, in a re-sale, an NFT linked to Jack Dorsey’s first tweet failed to attract high bids

For a retail investor, it is important to understand that investments in variable return assets come with downside risks as well, which may not often be highlighted by fund managers that stress more on upside rewards.

Today, inflation is high, and investors may be hunting for assets that can help offset high prices of goods like groceries and gasoline. The hunt may take some toward a risky space that comprises of assets based on emerging blockchain technology. These assets, including Bitcoin, altcoins like Ether and SHIB, and NFTs like Beeple’s digital work and CryptoPunks, have both upside and downside risks.

Risks due to illiquid nature

The risks are even more in alternative investments because, more often than not, the underlying assets are relatively illiquid. For example, an investor can liquidate Tesla stock holding at virtually any time, but if the same investor holds alternative investment assets like digital collectibles popularly known as NFTs, the number of buyers can be very limited.

Also read: As another CryptoPunk NFT sells for high price, what to expect?

A number of assets associated with projects like BAYC and CryptoPunks has reportedly sold for quite high prices. This may become a lure for some investors to pick the presently low-priced NFTs of either these two or hundreds of other projects in anticipation of steep price rally.

Most trades in NFTs are done in Ethereum’s ETH token. This may require the investor to first purchase ETH from a crypto exchange and then make the payment to the NFT provider. 

Also read: Top 3 NFTs by market cap other than BAYC and CryptoPunks

Jack Dorsey’s first tweet NFT

An example of how risky digital assets as alternative investment may be is the recent lack of interest of people in buying Jack Dorsey’s tweet NFT.

Reportedly, an enthusiast, Sina Estavi, acquired the tweet as NFT by paying a whopping US$2.9 million in 2021. When he listed it this year for a re-sale to some new buyer, the highest bid the NFT could invite was nearly US$280 as per reports. This made news headlines, pitching crypto critics against enthusiasts. A single incident like this, however, is enough to underscore the risks prevent in digital assets.

Bitcoin price drop in 2022

Data provided by CoinMarketCap.com

Bottom line

Today, aside from hedge funds, which usually call for high fund commitment, digital assets are growing in status as a form of alternative investing. But the assets come with volatility risks, no matter how large the market cap is or how popular the project is over social media. At a time when the market of variable return assets is undergoing volatility, it may be better to stick to relatively stabler investment options like blue-chip stocks.

Also read: 3 most expensive cryptos in cryptoverse by per token price

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