Why NFTs can’t substitute Bitcoin and Ethereum on your portfolio
The nonfungible token (NFT) space has been a rather popular, pop-culture driven part of the crypto verse, and undoubtedly a hot topic for the last couple of weeks. NFT sales in August had already hit a record high of around $900 million, at the time of writing. That is more than triple the previous highest recorded value in May.
NFTs, after enjoying a lot of market attention, from their hype cycle in the first quarter of this year lost their charm and many claimed that NFTs were dead. Yet they made a strong comeback. Additionally, with Bitcoin and Ethereum seeing range-bound price movements, and with BTC’s dominance at a two-monthly low, narratives and comparisons to NFTs as a better investment option floated around in the market. But did they hold any truth?
This article looks at NFTs alongside the top two coins, and what they have to offer as an asset class.
Are Bitcoin and Ethereum incomparable to NFTs
Bitcoin has long been an all-time favorite of institutions and Ethereum followed suit too. The argument that NFTs could compete with these top coins stemmed from the fact that major brands were also acquiring popular NFTs. The news of payments giant Visa buying its first NFT for $150K was received with tremendous enthusiasm in the space. The surge in NFTs’ popularity was also evident after CryptoPunks breached the $1 billion mark in all-time sales on August 28.
However, when talking about returns and investment, holding an NFT isn’t similar to holding Bitcoin or Ethereum. Both Bitcoin and Ethereum are liquid stores of value and token respectively. Plus, BTC’s current scale made it a relatively low-risk asset. Ethereum being entirely tied to the decentralized applications makes it a larger, credible ecosystem.
On the other hand, NFTs are illiquid, while that makes them highly profitable if there is demand, it also poses an extreme risk of low to no demand depending on the market. As noted by Ecoinometrics, an ideal barbell strategy is balancing the risk vs. reward of the assets in the portfolio between safe bets and risky bets with massive potential for returns.
The ideal crypto-barbell strategy
While NFTs can be used as part of a barbell investment strategy for crypto, it’s most ideal to Hodl Bitcoin and Ethereum as safe bets, and investing in NFTs or moonshot projects as high risk, high reward options.
The reason why Bitcoin and Ethereum are seen as safe strategy options is not just because of their high returns but also their market monopoly. In fact, Bitcoin has been able to gain strength against gold and has been holding its ground firmly in this market cycle.
Additionally, Bitcoin’s limited supply generates market demand because of scarcity. Ethereum after EIP-1559 has also taken a step towards the same. Plus their market-wide acceptance, growing institutional interest, and known trading features make them a low-risk wealth preservation choice.
Thus, while NFTs can make a good high-risk investment, both BTC and ETH due to their functionality and market-wide relevance are incomparable to NFTs as an investment option.