5 Major Disadvantages of Non-Fungible Tokens

Lately, Non-Fungible Tokens (NFTs) have been all the rage in the crypto world. But just because they’re popular doesn’t mean they’re perfect. In fact, there are several drawbacks to NFT investing that you should be aware of before diving in headfirst and putting your hard-earned crypto into NFTs. We’ll discuss five major disadvantages of NFT investing below.

They are not an asset class

NFTs are commonly—and erroneously—regarded as an asset class rather than a technological way to indicate ownership. But they are really neither. In fact, if you’re using non-fungible tokens (NFTs) in a business context, there’s a decent chance that you need them to replace one or more elements of an asset class, or create something akin to an asset class altogether. They aren’t digital commodities: Just because these tokens represent ownership doesn’t mean that they can be treated as commodities.

They do not bring liquidity

When a person invests in an NFT, they do not own anything tangible. The token doesn’t exist as an asset that can be traded on exchanges. So, whenever they want to cash out or sell, there is no market for buyers to turn to. In short, non-fungible tokens don’t bring liquidity to real estate investing because it doesn’t provide liquidity for sellers either. They are more like limited partnerships than true investments.

There is no secondary market

One of NFTs major disadvantages is that there is no secondary market. In other words, if you want to sell or trade your digital asset, you’ll need to find someone willing to buy it from you. That could be hard because there aren’t many sites for exchanging crypto collectibles like CryptoKitties. There are some online marketplaces such as RareBits and OpenSea but they lack liquidity and professionalism that makes trading on an exchange more attractive. The lack of an active secondary market will make traders reluctant to start investing in cryptocollectibles unless they see it as a longer term investment. Thus, one major disadvantage of NFTs is that they don’t have a liquid secondary market.

They cannot be held in tax-deferred accounts such as IRAs or 401(k) plans

NFTs cannot be held in tax-deferred accounts such as IRAs or 401(k) plans because they are not considered a recognized asset class. The Internal Revenue Service (IRS) currently recognizes only five types of assets that can be held in tax-deferred accounts: stocks, bonds, mutual funds, ETFs and real estate investment trusts (REITs). The IRS does not recognize NFTs as any type of these, so NFT owners have to pay taxes on any increase in value at each tax season. However, there may be hope for NFT investors yet. As discussed below in the Future Outlook section, experts believe that NFTs will eventually gain recognition as an asset class.

They can be used for ill means

The disadvantage here is more societal than technical. If a certain type of NFT starts to be used for fraud or other nefarious activities, then it could be deemed untrustworthy and even blacklisted. This is why it’s critical that digital asset issuers do their due diligence when creating tokens, especially those with ill uses in mind. NFTs, by their very nature, can be used to carry out nefarious activities; they are, after all, designed to verify ownership without having to show any identification or other credentials. However, just because someone could use an NFT for evil doesn’t mean they will—and that doesn’t make it any less valid as a new form of asset ownership.

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