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Long-term value of NFTs is hard to assess

By Indrabati Lahiri

18:00, 24 January 2022

Image of NFT token
Long-term picture for NFTs is cloudy – Credit: Shutterstock

Non-fungible tokens, or as they are more commonly known, NFTs, have taken the investing world by storm lately, as the latest advance in digital assets.

Although often confused for a type of cryptocurrency, due to their using similar programming as popular cryptocurrencies such as ethereum and bitcoin, NFTs are very different.

Each NFT is unique and has a different value, hence they cannot be exchanged with equivalency like cryptocurrencies can. This gives investors the opportunity to own fully or partially their own unique piece of art, music or other type of NFT.

NFTs due for crash?

Although there is a lot of anticipation and buoyancy around the NFT sector at the moment, there is also significant anxiety about whether this sector could turn out to be overvalued and may be due for a crash in the near future. This has caused NFTs to sometimes be likened to the dot.com bubble, or the likes of pyramid schemes by more skeptical investors.

Gareth Randle, Managing Director of Authentix Management has a generally positive view of NFTs.

NFTs serve a very important purpose as they are trustworthy proof of one’s ownership of any virtual property,” Randle said.

This is the opinion shared by a number of NFT owners, who view them as being safe, unique, convenient and likely to keep appreciating in value, along with giving them an option to invest in an upcoming asset class.

“It’s too early on to say if NFT’s are in a bubble, as they have so many different use cases and can represent both real world items and digital items," Raindle said. "This is backed by the fact that there are a number of new NFT types being introduced on a daily basis, making this a highly dynamic and exciting space for investors to explore. With items such as digital artwork, luxury watches, wine and more being only some of the options available, NFTs are currently attracting a widely varied clientele."

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Explosive growth

Randle also explains that “NFTs are still so early. The first NFT was only created in 2015 so in 6 years the industry has already grown exponentially. NFT trading volume back in 2020 was $100m compared to 2021’s trading volume of just over $22bn.

Coming to whether NFTs may be overvalued and heading towards a crash sooner rather than later, Petro Levchenko, Managing Partner, Ascension Capital believes that “it’s hard to substantiate the “valuation” of NFTs using any traditional metrics, so I tend to think of the asset class as being priced as some kind of function of the overall risk sentiment, ie the extent of the risk seeking nature/force of the current market environment.”

The fear that NFTs may often be overvalued often also arises from their rareity, which can lead to overpricing, along with supply and demand side metrics," Levchenko said. "This leads to market imbalances often playing a major role in how much market value an NFT is being able to fetch at any given point of time, regardless of its intrinsic value. However, as sooner or later, markets correct themselves, this often leads to a crash in value for an overpriced NFT."

Liquidity bubble

Levchenko goes on to highlight, “Overall, we are living in a liquidity bubble, and I think that as soon as we have any correction to the current trend, NFTs as an asset class are likely to be materially adversely impacted. I think one has to get very selective to find good “value” in this market, and one has to be willing to hold through material drawdowns in the near future to have an adequate chance of profiting from any potential long-term growth. I am currently not entertaining any positions on the long side in NFT tokens or NFTs.”

Although analyst and investor opinions surrounding the pricing and future of NFTs may vary, they all do seem to agree that it is still too early to predict much about where the sector is heading for. This is the case for a number of digital assets, which develop and boom at incredibly rapid rates, becoming overnight sensations, in some cases.

Yuya Hasegawa, cryptocurrency market analyst, Bitbank notes “It is difficult to judge whether NFTs are overvalued or not since the industry itself is quite new. But as can be said to any technology bubble - assuming that it is - the current NFT boom is providing investors and venture capitalists alike to leverage its future potential. That is why some, if not all, of the NFTs seem overvalued.”

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