How NFTs May Fit Into Your Portfolio Diversification Strategy?

As NFTs (Non-Fungible Tokens) become a chosen way of owning digital assets and joining tokenized communities, it’s clear that this use of the blockchain can do more than drive innovation in technology. Rumours have it that this novel way of creating and collecting art could also encourage diversity, equity, and inclusion in historically unjust places. And with new assets kept in a safer and more accessible format, NFTs are, for many people, the new way of becoming a millionaire. Not only are NFTs a good investment opportunity but also a chance that many people risk taking in order to watch their portfolio grow as quickly as possible.

One reason why most financial advisors highly recommend the diversification of your portfolio is that you can balance both your desire for growth and your need for stability. You can do that by combining stable investments with very little growth, some with a little more chance of growth, some riskier and some more aggressive types of investments that are both risky and profitable.

But diversity doesn’t just mean you should stick with assets relating to the same industry. It also means investing across multiple categories. You can hold stocks across different sectors like finance, tech, transportation, or medical. Or you may choose to invest in some less traditional items like NFTs if you desire to diversify your portfolio.

NFTs: Why do they matter?

The value of a Non-Fungible Token depends on how much art collectors or investors want it because it’s unique or memorable in some way. Open any NFT tracker, and you can see that a CryptoKitty might be worth more than a Cryptopunk simply because there are fewer Cryptokitties and ever more NFT collectors want them. It’s the rarity of these tokens that make them a desirable asset for people who wish to own a rare NFT in the world.

NFTs may be the right choice when you want to diversify your portfolio. They are easy to buy and sell on secondary markets, which means you can trade them quickly if a better opportunity comes along. What’s more, a number of tokens appreciate over, which means you can secure a significant portion in that NFT knowing that you can sell it anytime if it doesn’t do well. Believe or not, NFTs are an excellent choice if you’re considering a long-term investment.

NFTs as a diversification tool

While some investors were already predicting a bearish season, monthly NFT trading volumes tell a different story. We’ve seen reputable NFT marketplaces like OpenSea reaching an all-time high of $4.95 billion worth of Ethereum and floor prices for blue-chip collections, such as the Bored Ape Yacht Club scoring high trading volumes.

NFTs as a diversification tool could be comparable to investing in traditional art, the only difference being that NFTs are completely digital items that can only exist in digital wallets on multiple blockchains.

When it comes to investing in NFTs, it’s important to understand that every NFT will make a great investment. There’s no guarantee of the future value of your purchase as this is given by the next person that will pay for it. You can still improve your chance of making a significant investment in NFTs if you:

  • Research your next investment

No matter what you’ve decided to invest in, you need to nerd on the subject as much as you can. If you buy stocks, you need to unearth every important detail about that company, its stock market history as well as any signs of potential future performance. If you’re a digital or physical collector, you will need to pay even greater attention to what you buy. For instance, if you are about to invest a serious amount into fine art, it would be useful to either ask for the expertise of an art specialist or learn as much as possible about the artists and the art market.

The same goes if you want to purchase NFTs. The market for digital tokens is relatively new, but there’s a lot of intelligence available at your fingertips about their value. For example, nowadays, you can even follow your chosen collection of NFTs and its progress in the current market from the comfort of your home with any reputable Crypto tracker app.

  • Diversify

If you’re investing in NFTs to diversify your portfolio, you should also consider diversifying your NFT assets. If you step into a higher-risk market with the hope of finding the next big thing, the chance is that holding a variety of NFT types may be paying well enough in the end. Perhaps diversifying your portfolio with tokens coming from gaming, art, sports, and collectibles might lower your overall risk and give you an opportunity to see your venture paying off.

  • Enjoy the process

If you’re about to invest time and money in NFTs, you should at least enjoy the process. Most buyers see their purchases as investments, but they don’t forget to enjoy the art. The point is that you can find a marketplace for tokens that offer more than an investment. Whether you’re into gaming, sports, digital art, or some other pastime, you can still get the benefit of enjoying the process and the collectables.

The risks:

We understand the temptation that comes from the potential of large profits. But there are also some risks to consider before investing in collectables.

For example, because it is still a new and largely unregulated market, the risk for fraud and scams in the NFT space is pretty high. Investors are advised to do their own research before investing in projects.

Then there’s the risk of permanent loss where collectables are not backed by physical assets. If something ever happens to the project or the team behind it flees, your collectable could become worthless.

Overall, as blockchain adoption grows, so does the demand for NFTs. 2022 is an excellent time to learn more about this type of investment and decide whether NFTs are right for you.

Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.

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