The NFT sector has been hit hard by the crypto market’s crash and economic uncertainty. Traditional assets are also becoming less reliable. The convergence of NFT and safe assets like gold could resolve this global issue.
NFTs: Promising but volatile
When the market as a whole went down, blue chip NFT collections lost up to 80% of their worth. Everyone talked about the obvious reasons, like Terra’s crash and Celsius’ bankruptcy, but these were only the tip of the iceberg.
The main cause, in my opinion, is the scarcity of projects and collections with solid fundamentals and real value at their core. Some investors may be interested in tokenized memes and tweets, as well as digital merch and art. But these applications are not enough to move the whole sector forward. So, in just a few weeks in May, the average number of non-fungible tokens sold each day dropped to about 19,000. According to the Wall Street Journal, which cited nonfungible.com, this was a 92% drop from September, when about 225,000 non-fungible tokens were sold each day. After the economic boom ended, it became clear that there were far too many projects that were nearly identical and only provided a quick return.
NFTs Aren’t the Only Bubble
People commonly associate non-fungible tokens with art, but this is either untrue or partially true. NFTs function as digital certificates of authenticity and can represent a range of things from IP or property rights to legal agreements and membership access. They can only have one holder at a time. Ownership is managed by a unique identifier other tokens cannot replicate. Fractional digital ownership, in particular, offers nearly limitless opportunities, ranging from owning a portion of a sports team to owning a portion of a content creator’s revenue on social media platforms.
On average, 80% of NFT projects fail and shut down within 18 months of entering the market. It means that a user should be careful, when deciding to invest in a project, to determine a good one from a bad one. Even experienced investors can’t be sure they are putting money into the right thing. We can only rely on solid fundamentals, such as the project’s team, a unique solution (such as eco-friendly NFTs or tokenizing historic coins), credible funding sources, reliable partnerships, and the value of a real-world underlying asset.
That is not to say that speculative NFTs will vanish. Opportunities for quick buys and sells will always exist in any market. But after the purge, it will be easier to tell the difference between long-term and short-term assets, which will help users make better decisions.
Gold: A scarce commodity with a proven track record
Gold has always been seen as a sign of wealth and power. It has been used to support governments since the beginning of time.
Gold’s resistance to economic uncertainty has been demonstrated over decades. When the value of the dollar, which remains one of the most important reserve currencies, falls against other currencies, people flock to the security of gold, driving up metal prices. Thus, the gold price nearly tripled between 1998 and 2008, during a period marked by several financial crises.
So, when inflation causes fiat currency to lose its buying power, people rely on gold to save money. When prices drop due to deflation, investors look to this asset class as well.
Another factor working in gold’s favor is its scarcity. It can take from five to ten years to bring a new mine into production. The amount of gold available for mining decreases year after year.
Gold’s role, however, is not limited to hedging against inflation or deflation. It is used in computers, communications equipment, spacecraft, and jet aircraft engines. According to World Gold Council data, demand in all of the aforementioned industries remains strong, contributing to scarcity.
Still, there is an issue with this precious metal that must be resolved: the widespread circulation of fake gold.
Tokenized gold: Lower risk, higher potential
One of the most important things that NFTs could do for gold is the verification of scarcity. There is more gold in circulation today than actually exists in the world. This is because of how hard it can be to verify the physical gold when trading promissory notes. When on the blockchain, the scarcity is immutable and transparent. As a result, investors gain access to a safe asset that is as simple to purchase as an NFT.
Gold is a safe asset that has played a significant role in human society for centuries. It is rare, durable, and often used as a store of value. In times of economic uncertainty, gold prices tend to go up. Sometimes this increase simply matches inflation but is a great currency hedge and a stable asset class in the long run. NFTs are still relatively new to the world, but they are gaining popularity. They are digital assets that are unique and can be used in a variety of ways. NFTs represent ownership. Together, the two assets can create a more robust investment portfolio.
NFTs and gold: Using smart contracts
One approach is implementing a smart contract that enables users to trade NFTs for gold. This would let investors profit from the price movements of non-fungible tokens and gold, diversifying their portfolios and potentially lowering risk.
The possibilities for such integration aren’t limited to gold. This mechanism is equally applicable to other metals. There are already use cases that demonstrate the viability of the concept.
A set of historic 1892 ZAR (Zuid-Afrikaansche Republiek) gold coins worth $1.2 million was recently tokenized. This was in order to make investing in gold and historic assets more accessible to a broader range of South Africans and people worldwide.
Furthermore, VNX, a Liechtenstein-based exchange, has made tokenized precious metals available for investment. The company owns physical gold bullion that has been certified by the London Bullion Market Association (LBMA). Another example is SilverBacked, which tokenizes physical silver on the blockchain and then pools it for use with NFTs.
The price of this type of NFT isn’t much different from the price of a regular one, but it’s a lot less than the price of a gold bar or coin. Hybrid NFTs can also be more affordable because of fractional ownership.
Perspectives on the NFT-Gold Duet
Several factors can contribute to the success of an NFT. The first is the project’s team. To prosper, the company needs people with relevant experience and a proven track record.
Another critical factor is the technology employed. The blockchain that underpins NFTs must be robust and scalable.
Finally, having a clear and concise vision for the project is essential. Investors and users need to know what the company is trying to do and why it is using NFTs. Without a detailed plan, it is hard to get people excited about the project.
The popularity of hybrid NFTs could significantly impact the future price of gold. If more investors begin to purchase hybrid tokens as a haven asset, demand for gold may rise, driving up its price. However, it is also possible that the popularity of NFTs will cause the price of gold to fall. Only time will tell what the future of this asset class holds.
Non-fungible tokens and gold, in my opinion, are complementary. Because they do not always provide high returns, hybrid NFTs will not compete with standard NFTs. Almost certainly, new NFTs will become a popular option, but they won’t replace other digital assets.
About the author
Ahren Posthumus is the CEO of NFT marketplace Momint. Ahren is a seasoned entrepreneur who has been active in the cryptocurrency market since 2016, around the same time he was awarded the Investec Entrepreneur Leader of the Year award. He was also selected to present at the JSE (Johannesburg Stock Exchange) on breaking the walls of code and poverty in Africa. In 2020, Ahren was voted in the Mail & Guardian’s top 200 Young South Africans as the Editor’s Choice for Innovation. In 2021, he was awarded the GQ man of the year award and is now focusing his efforts on launching global impact projects using blockchain and Web3.