Have NFTs Made a Comeback? In January 2023, the total NFT trading volume was $946 million, which was up 38% from the previous month. The sales count of NFTs also increased by 42% from the previous month, to reach 9.2 million.

After remaining in bear trend for six months, the NFT market is slowly getting back on its feet with trading volumes up for the two consecutive months. In January 2023, the total NFT trading volume was $946 million, which was up 38% from the previous month. The sales count of NFTs also increased by 42% from the previous month, to reach 9.2 million. In October, the trading volume of NFTs fell to a low of $662 million, but in November, the market halted the downtrend trend and stayed at $662 million. However, in December it rebounded and rose slightly to $683 million.

The NFT blockchain Ethereum was the winner with a trading volume of $659 million. Its sales count also increased by 7.37% from the previous month. Solana ranked second, with a 23.7% increase in its trading volume, reaching $86 million, but its sales count decreased by 5.79%. The third slot went to Polygon, which recorded a whopping 124% increase in its NFT trading volume, reaching $46 million. The sales count of Polygon NFTs increased by 157.39% from the previous month, reaching 4.5 million.

Why volumes are up

According to experts tracking this class, there are a number of factors responsible for the spike in the NFT market. Says Kameshwaran Elangovan, Co-founder and COO, GuardianLink. "The first is that people have started to understand the line of demarcation between NFTs and cryptocurrencies. The other is that the NFT market has matured a lot, creating more metaverses with stories and NFTs with utility rather than confining themselves to simple images."

Says Vikram R Singh, Founder and CEO, Antier, "The rise in trading volumes of NFTs in the last two months can be attributed to the increased demand for digital assets, such as art, music, and videos. This has been in response to the digital transformation that has taken place in the entertainment industry, as well as the increasing popularity of blockchain technology."

What are NFTs

NFTs are short for "non-fungible token", and are used to indicate ownership or another usage right of a asset -- usually a digital asset such as a piece of art, musical composition, or an item within a video game. These tokens are built and managed on a blockchain, the same digital ledger technology system utilised by Bitcoin and other types of cryptocurrencies. They're a digital proof of ownership originally designed for digital assets and art. However, NFTs can also be used to guarantee ownership of unique physical assets for everything from property to collectibles to physical works of art. They are bought and sold on market places like OpenSea, Rarible, SuperRare, and Foundation. To bid on these digital asset tokens, you need to open and fund a crypto wallet on an NFT marketplace.

Should you invest?

The primary goal for investing in any asset is to generate a profit by selling it after its value appreciates. NFTs are speculative in nature and one cannot expect a fixed return on them unlike an asset class like fixed deposit. The return depends on various factors including asset's uniqueness, creators' popularity, ownership history and real-world association with an asset. However, in the end the decisions that buyers take are mostly based on emotion and the buzz around an NFT. In the past, some NFTs have fetched really good prices in a short span of time, while some fared badly after initially doing great. Take for instance, Amitabh Bachchan's collection 'Madhushala', autographed posters and collectibles received bids close to $1 million at the end of auction. Similarly, Twitter CEO Jack Dorsey's first tweet was sold as an NFT for $22.9 million in March 2021. However, the same tweet, a year later, couldn't command bids above $280.

Says Elangovan, "There are two sides to an NFT. One is the unique value of it and the other is the monetary value of it. Even if the price of the first tweet NFT has fallen, it still cannot be denied that the value remains. If some management decides to delete all the tweets that have existed, this one would increase in its value," says Elangovan. "Whether or not NFTs are a good investment option is dependent on an individual's risk tolerance, but they certainly have the potential to be lucrative investments," says Singh.

However, when compared to other asset classes, NFTs lag behind , specifically on the tax front. In the Union budget 2022, the finance minister proposed 30% tax on the gain made on digital assets like NFTs. Also, no other expenses or deductions are allowed. This is double of one pays when making short term gains on stocks (15%) and three times of what one gains on a fixed deposit. What further distinguishes NFTs from other asset classes is they operate in a non-regulatory space. They are not backed by government which makes them risky. However, unregulatory nature also offers some advantages to them according to experts. "The advantages are that the space can be explored with a greater degree of freedom, and the market remains fair by ensuring that the right projects are rewarded," says Elangovan.

"Crypto operated in an unregulated space until a few years ago, when the first licences started to appear and ever since then, multiple countries are still working on it to make it a safe and regulated space. Same thing will happen with NFTs in the near future," says Kumar Gaurav, Founder & CEO, Cashaa.

Right allocation

So if you decide to buy NFTs for investment, then how much should you allocate in your portfolio? Expert suggest decision should be based on your risk tolerance as it is not a currency, and in most cases, doesn't have any inherent value. They are, however, a great way to show proof of ownership and can be a great way to diversify your portfolio and gain exposure to the burgeoning NFT market.

"The amount one should allocate towards NFTs depends on the individual investor's risk tolerance. What today might be worth millions, tomorrow might be worth nothing. Same thing can happen vice versa," adds Kumar