The Downside of NFTs
In spite of the advantages and benefits of NFTs which clearly promise a bright future, NFT markets face a wide variety of challenges and risks that should be considered prior to entering the market.
Market risk is the first thing to consider before diving into the NFT verse. NFTs such as digital arts and collectibles are growing substantially — but this does not mean that they are a safe investment. NFT investments are ripe for risk. Their future is uncertain, and we don’t yet have a great deal of historical data to gauge their performance. When investing in NFTs, investors should be aware of volatility, illiquidity, and fraud.
Even though investing in art is often a subjective act, there is still a risk of losing its value. The NFT market is incredibly volatile, because we don’t have mechanisms yet that help people price these digital assets.
In terms of liquidity, every seller needs to find a buyer willing to pay a certain price for a one-of-a-kind item he or she has curated. That can put collectors in an uncomfortable position if they have spent a lot of money on a ‘Top Shot’ moment and after which the market depreciates.
Another risk is the difficulty in determining the value of NFTs. The value of NFTs is greatly affected by the authenticity, creativity, and perception of their owners and buyers. Since the value of an NFT is largely determined by what others will pay for it, it will fluctuate. This means that demand will drive price rather than fundamental, technical, or economic indicators.
And there is the risk related to intellectual property issues. Someone who buys an NFT, only gets the right to use the NFT rather than intellectual property rights. It is therefore important to consider the ownership rights of an individual to a particular NFT in the metadata of the underlying smart contract, such as copyrights, trademarks, patents, moral rights, and the right to publicity.
It is also important to consider the ownership rights of an individual to a particular NFT in the metadata of the underlying smart contract, such as copyrights, trademarks, patents, moral rights, and the right to publicity. Someone who purchases an NFT only gets the right to use the NFT, not the ownership rights.
Cybercrime is also booming in the NFT market, resulting in various risks of fraud, cyber security, and hacks. There have been a few cases of fake websites, where NFTs hosted on the platform have disappeared and been subject to copyright and trade infringements.
Some artists have also fallen victim to impersonators who have listed and sold their work without their permission. And those who own an NFT do not necessarily own the original version of the digital content.
The NFT markets are booming. And every day new use case are entering the NFT market attracted by the various benefits and the incredible profits that can be made.
It is apparent that there is a need for regulatory intervention in this market given the risks and challenges it faces. The importance of reflecting on the legal and regulatory risks associated with NFTs cannot be overstated. It is imperative that we have an international body to regulate and legalize non-fungible tokens as they continue to grow and expand into different uses cases. The outcome is likely to have a profound impact and will be decisive for the future of the cryptocurrency industry.