In this article, I’ll explain some widely accepted reasons why are NFTs bad and what the bearish case looks like.
Non-fungible tokens or NFTS are nothing more than fancy JPEGs. You can simply right-click, hit “Save as,” and take the image with you for free. And yet, some collectors are paying five, six, and seven figures for these overpriced pictures.
Are they insane? Many NFTS will fail, despite all the hype about digital art and collectibles. In short, don’t leap into an expensive NFT. You might regret it.
I made a video to accompany this post which you can watch below, or read on!
I’m not a financial advisor, and NFTS are incredibly risky. I published this content is for informational purposes only. Always do your own research.
1. Buying NFTs Isn’t Easy
Buying your first NFT isn’t easy. When I explained to a family friend how they could buy one, I spent 20-minutes describing all of the steps and answering their questions.
You can’t log on to Coinbase (at least not yet)) find an NFT and click “Buy.” Here are the steps summarized:
- Set up an account on a cryptocurrency exchange like Coinbase, Binance, or Kraken.
- Buy Ethereum on your cryptocurrency exchange of choice with FIAT or a credit card.
- Set up a MetaMask software wallet (or an alternative) for your cryptocurrency and NFTs
- Secure your MetaMask wallet’s seed phrase
- Transfer Ethereum from an exchange to your MetaMask wallet
- Navigate to OpenSea or another NFT marketplace like Rarible
- Approve your software wallet for transactions by signing a transaction and paying a small Gas or Gwei fee
- Browse the marketplace, figure out which NFTs are legit and affordable
- Bid for or buy an NFT
If you’ve been in the space for a while, it’s relatively easy to follow these steps. But the challenge of onboarding is off-putting for those unfamiliar with NFTS. It’s hardly a purchase made on a whim.
Until on-ramping to the NFT space gets more accessible, it’s hard to see how everyday users will end up purchasing non-fungible tokens.
2. Gas Fees Are Insane
Smart contracts on the Ethereum blockchain underpin the NFT space. However, if you want to use that blockchain, expect to pay gas or Gwei fees. Over the past few months, Ethereum gas fees have been extortionate.
Need to transfer Ethereum to your MetaMask wallet? Pay gas.
Want to connect your MetaMask wallet to OpenSea? Pay more gas.
Ready to purchase an NFT? That’ll cost you even more gas.
Then, if you want to transfer your NFT to a hardware waller or stake it, expect to pay again… and again.
In other words, if you interact with NFTs using Ethereum, it’ll cost you. This is because gas fees for NFT transactions add up fast, and you can burn through hundreds if not thousands of dollars, and exceed the purchase price of an NFT, relatively easily.
If you’re a big budget for NFTs, you’re probably not worried as much about Gas because you’re either bullish on a project or the space as a whole. An NFT could rise in value over the coming weeks, months, or years.
But if you’re getting involved in NFTs for the first time and these expenses are off-putting and will eat into an NFT investor’s budget.
You can avoid gas fees by using another blockchain like Solana or Polygon or a wallet like Phantom. Some projects are also launching via Layer 2 solutions like Immutable X.
However, the selection of valuable NFTS is sparse. Until we’ve solved the onboarding fees for buying NFTs, it’s hard to see casual digital art collectors buying one on a whim.
3. Prices Fluctuate Wildly
Big spenders aside, most people are unlikely to invest money into a risky asset class that could potentially drop to zero a months, weeks, or even days later.
I first purchased Bitcoin back in 2016 around the $14,000 mark. I watched it drop to $3,000 before going up to $60,000.
Cryptocurrencies are famous for price fluctuations, but NFTs are to cryptocurrency what crack cocaine is to marijuana.
Consider the Anonymice NFT project (I hold one of these). They were free to mint in early 2021. Then, the NFT space experienced a bull-run, and the floor price of an Anonymice exceeded 10 Eth. Then, due to increasing gas fees and a bitcoin bull run in the Autumn of 2021, the NFT market plummeted in price.
Anonymice dropped back below two ETHs, along with the rest of the market. That’s nearly an 80% drop in value for those who picked one up at the peak.
(At the time of writing, ETH is trading for approximately $4,700.)
Other NFTs dropped 60-80% from their original price. Of course, that excludes bluechip NFT projects, like the CryptoPunks, which are all but impossible to buy unless you’re a millionaire.
Until prices stabilize, it’s hard to see how people will justify spending money on an NFT that will more than likely drop to near zero.
4. The Floor Price Is Too High
The floor price is the lowest you can purchase an NFT for. It’s usually a good idea to buy cryptoart near the floor as these have the most liquidity, i.e., they’re the easiest to sell. They’re also supposed to be affordable.
Unfortunately, the floor price for many popular NFT projects is outside the price bracket for aspiring collectors.
For example, the Bored Ape Yacht Club NFT project has a floor price in excess of 42 Eth (in part because Jimmy Fallon bought one). At the time of writing, that’s over $100,000. Good luck buying that one.
Go further down the top 20 projects on OpenSea, and you’ll discover the floor price is still pricey, usually well over $1000.
That’s a significant investment for somebody to make in a risky asset class, and all before paying Gwei. So until the floor price of popular NFT art become more affordable (and free of crazy transaction charges), it’s hard to see end-users jumping onto OpenSea and buying a popular NFT, near the floor, on a whim.
After all, if I wanted to learn about NFTS, I’d feel more comfortable spending a hundred dollars buying a budget-friendly project that I can track rather than putting all my chips into a risky bet.
5. Vetting NFT Projects Is Hard
Vetting NFT projects for the first time isn’t easy or fast. The first time I went on to OpenSea, I didn’t know which projects were bluechip, credible, or affordable.
So, I spent hours reading project roadmaps on Discord and on NFT Twitter. I discovered that some NFT projects are nothing more than scams, while others are rug pulls. The latter describes when a project launches to great fanfare, and creators collect Eth from early minters. Then, they promptly cease development and runs off with the funds.
To date, investors have lost over $30 million on rug pulls from the likes of Baller Ape Club.
Will casual NFT buyers have the time or the inclination to vet new projects and weed out the bluechip from the chaff? Are they prepared to spend hours in Discord, Twitter, and Reddit?
Sure, they can use NFT websites like NextDrop.is to track new NFT projects launching on the Ethereum blockchain by release date.
(These sites are also helpful for visiting an NFT’s official website, Discord, Twitter, and OpenSea profile. And you can see the dates on new launches.)
Unfortunately, the sheer volume of projects featured on these sites, let alone in private Discords, takes time and patience to navigate. The space is kind of like the initial coin offering (ICO) craze from 2016-2017. Most new projects will fail, as did most ICOs.
Until there’s a way for casual users to figure out what safe projects they can afford to invest in, it’s hard to see how NFTs will gain mainstream adoption.
6. Most NFT Projects Are Cheap KnockOffs
Does the world really need another pixellated picture-for-profile avatar project? Do we really need another type of animal turned into an overpriced JPEG with no real-world NFT use case?
Many new NFT projects are derivatives or knock-offs of bluechip NFT projects like Larvalab’s CryptoPunks and Cyberkongz. Or they’re cash-grabs for developers, taking advantage of a trend. Of course, it doesn’t help that anyone can create and launch an NFT project on OpenSea, even if it’s all but identical to previously launched projects.
The CryptoPhunks project is one example. It’s all but identical to the popular CyptoPunks project by LarvaLabs. Except for the spelling and the disclaimer, they’re “not LarvaLabs.” Oh, and they’re worthless. Cue: DMCA-takedown request.
7. The NFT Space Is Rife With Scammers
The NFT space is rife with scammers looking to squeeze some Eth out of the NFT craze.
The quickest way to find out about a project is by joining Discord. It’s an instant messaging platform for gamers, now popular with NFT communities and holders.
I’m in a few NFT communities, including CyberKongz. That one is an excellent NFT community for learning more about upcoming projects, and I can also chat with like-minded NFT holders.
Unfortunately, anyone can join the most popular NFT Discords for free, including scammers. When I joined Discord, I was shocked by the number of scam messages and social engineering hacks I received.
Scammers contacted me with direct messages about Airdrops, free tokens, new NFTS, and supposed support issues. They wanted me to click on links, connect my wallet or get on a call with them and hopefully share my screen (so they could get my MetaMask details).
Many messages from scammers look legit. They claim to represent support for a particular project. They’re also hijacking some Discord communities, Twitter, and social media accounts. They even create bots to trick investors.
If you’re using Discord, I recommend turning off “Allow Direct Messages” in the settings section to vastly improve your experience.
If casual users or new users want to get involved in NFTs, keeping up with scammers and navigating the space safely is a part-time job.
Perhaps new offerings like the Coinbase NFT Marketplace will protect end-users. But due to the nature of NFTs and the ingenuity of scammers, it’s hard to see how casual users will avoid getting robbed, let alone trust buying what looks like a fancy JPEG.
8. NFTS Are Bad For The Environment
Most NFTs are bought and sold using the Ethereum blockchain, which operates via proof of work. Essentially, a small army of computers validates each transaction, including NFT purchases and sales, through sheer processing power.
The energy consumption of a single NFT equates to approximately $5,000, while the Ethereum blockchain reportedly has a carbon footprint the size of Hong Kong.
Environmentally-friendly solutions exist. For example, the NBA Top Shots NFTS are bought and sold on the Flow blockchain. It operates via proof of stake. Users lock up their cryptoart purchases on the Flow blockchain to prove they’ve got a stake. It consumes far less energy, as a result.
The rollout of Ethereum 2.0 includes a transition to the more environmentally friendly proof-of-stake that could see carbon emissions drop to near zero. However, rollout is is months away.
Why Are NFTs Bad? The Final Word
Apart from a few notable exceptions like CryptoPunks and digital art by Beeple, many NFTs are nothing more than overpriced JPEG, memes, or GIF images that day traders are buying and selling to each other.
They’re trying to make a quick buck while scammers wait to take advantage of newer and unsuspecting collectors. Until the space becomes dramatically safer, transparent, and easier to navigate, the case for NFTS is bearish.
Or is it…?
I’ve also published a companion article exploring the bullish case for NFTs.