Investors often overlook NFTs because they’re still in the early stages of development and growth. But investors shouldn’t let the market’s infancy scare them away from investing in these emerging digital assets. NFT stands for Non-Fungible Token, which means you cannot divide them into smaller units like fungible tokens (e.g., Bitcoin or Ethereum). NFTs can represent any tradeable item, such as artwork, rare collectibles, and in-game items like virtual and in a metaverse game.
But some savvy investors have embraced the NFT sector to capitalize on their growing popularity. “I got an NFT for free that’s now worth six figures just by following the right social media accounts,” investor Tom Harri says. Tom’s cousin, Mike Harri, also got into NFTs and has seen 10X returns on many of his 2021 investments. The Michigan-raised cousins published a book, The NFT Bible, and launched Pit Crew, a dog-inspired NFT collection, with their combined expertise.
But their tale is just a small sample of the enormous earnings people are making from trading NFTs. It’s not unusual to hear stories like this next one. In June 2021, Kevin Rose bought a Fidenzas NFT for 1 ETH ($2,400 then). Two months later, he listed it for a staggering 777 ETH ($2.5M). He didn’t think he’d sell it for that much or as quickly as he did.
When he checked his OpenSea account the next day, someone purchased the collectible without a counteroffer. Kevin Rose became an instant millionaire overnight.
Hedge Funds Stepping In
Hedge funds pose the biggest threat to investors who get in too late. Once hedge funds enter this emerging space, they’ll use their extensive knowledge, resources, and market analysis to take advantage of novice investors. Experts in the financial sector believe hedge funds will influence the NFT market by purchasing entire collections and then re-listing them for a large markup to generate hype. As a result, more investors will flock to the collections, anxious about missing out on the moneymaking opportunity.
But this isn’t the only tactic they could use. Another trading method, although unethical, is wash trading. Wash trading is the practice of moving an asset secretly between the same individual or financial institution. It appears as if a new owner gained control of the item when, in reality, it never left their portfolio. This technique gets repeated numerous times to boost trade volume and value. All while keeping the NFTs in the hedge fund’s portfolio until they sell it to fresh buyers for maximum profit. There are 2,100x more Bitcoins than there are Bored Apes
Scarcity and NFT Art
A tradable asset’s scarcity makes it more valuable. And NFTs are some of the scarcest assets in history, because of their limited supply and liquidity. “Scarcity is what drives up an NFT’s value. Many collections have ten thousand pieces. Sometimes much less,” Mike Harri, The NFT Bible co-author explains. Compare this to Bitcoin. Only 21 million bitcoins will ever exist. People don’t care which bitcoin they own. Because one bitcoin still holds the same value as any other. But the NFT marketplace is the opposite because each NFT has unique attributes that set it apart from another.
And when hedge funds leverage this scarcity and their skilled trading practices, they can manipulate NFT market prices. To avoid this misfortune, investors should get into NFTs before the hedge funds do.
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