Are NFTs Really The Next Big Thing?

For many, non-fungible tokens (NFTs) look very much like the next big thing. Most importantly, there are many similarities to the many cryptocurrencies that rose exponentially in value and posted life-changing returns for early day entrants to the market.

Crypto and NFTs – Same, same, but different?

For starters, both markets are based on blockchain technology, and both involve trading assets that are hard to value using traditional metrics. The virtual nature of cryptos and NFTs can’t be explained away, but if a buyer is willing to step in at a future date and offer a higher price, that results in a profit even if the strategy behind the trade was based on pure speculation.

The NFT market may not be somewhere anyone wants to place a significant proportion of their capital; however, the temptation to get involved is very real and promoted by celebrities and online influencers. Any strategy based on that publicity creating a groundswell of new buyers can’t be dismissed.

What happens if regulators reign in NFTs?

The major red flag being raised is that it does look like regulators are stepping into the NFT market sooner than they did with cryptos. Bitcoin and Ethereum have both come under pressure recently as a clampdown by regulators is being blamed for weaker crypto prices.

In the same way that speculators are using the crypto market as a yardstick for potential NFT gains, so too are regulators. They are intervening in the NFT market earlier and harder than they did with cryptos. This is the biggest threat to the NFT market as restricting trading in a market takes away that buyer who is expected to step in at a later date. At that point, the holder of the NFT is left applying the traditional valuation techniques to their holding, and as pointed out, they can price NFT assets as low as zero.

The problem with the NFT target market

NFTs and fan tokens have been promoted by a range of high-profile individuals and entities, including sports clubs. The UK’s Advertising Standards Authority recently rebuked Arsenal FC for promoting fan tokens which are said to be a way for supporters to gain a stake in the club. That scheme targeted a broad demographic, including children, to buy a product with few concrete benefits. The value of many of the fan tokens has also been falling.

For many years cryptocurrencies were the domain of the tech-savvy. That group was the first to explore the potential for digital currencies to replace fiat currencies. Anecdotal evidence points to those early-day crypto pioneers being older than the markets being targeted by NFTs, so the chance of the ‘next buyer’ being removed from the market appears a lot more likely.

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About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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