Benefits and Risks of Investing in Fractional NFTs

Fractional NFTs are shaking up the world of Non-Fungible Tokens (NFTs). These unique tokens allow multiple owners to share in the ownership of a single asset. 

Unlike a traditional NFT, a fractional NFT can be divided into smaller shares that many different investors can own. This means that people who may not have been able to afford an entire NFT themselves now have the opportunity to invest and benefit from the rising popularity of this exciting new asset class in the NFT space.

Why are Fractional NFTs important?

Fractional NFTs offer a number of benefits for both investors, NFT holders, and creators alike. For investors, the increased liquidity provided by F-NFTs means that it’s much easier to buy and sell shares on the open market. This opens up new opportunities for investment in blue chip NFTs where NFT ownership was previously impossible due to how high the floor price as seen on several NFT marketplaces. 

Meanwhile, creators can benefit from F-NFTs by creating multiple revenue streams from their work. By dividing their creations into fractions, they can monetize them beyond just one-time sales.

Benefits of Fractional NFTs

Fractional NFTs benefit NFT original holders, fractional NFT owners, NFT creators, and the market as a whole. These benefits are:

Greater Liquidity

As explained, liquidity is a crucial issue in the NFT industry. As the name implies, NFTs are not fungible, making it difficult to commercialize them. The fractionalization of NFTs allows NFT holders to trade their NFTs more easily by dividing them into fungible pieces. Then, once they are sold, NFT holders can use this liquidity on other investments, while the buyers of these fractions can also trade them with less difficulty.

Democratizes Investment Potential

NFT fractionalization is especially ideal for blue chip NFTs that can cost hundreds of thousands of dollars. By fractionalizing them, more investors can co-own these expensive assets without needing to invest exorbitant amounts of money. In addition, with greater accessibility, a larger range of NFT enthusiasts can engage with the industry, thus further democratizing the NFT industry.

Pushing NFT to the Mainstream

By providing more accessibility to NFTs, fractional NFTs also increase participation in the overall NFT market. This is because investors with less capital can now engage with the industry and own their fractions of NFTs. With time, rationalization can contribute to pushing the NFT market to mainstream.

Price definition

Pricing NFTs can be tricky, especially when it comes to more valuable assets with limited to no transaction history. Fractionalizing the NFT and putting its portions on sale can assist in discovering the original asset’s value. Then, depending on how the fractional tokens perform in the market, you can have an idea of the value of the whole NFT. However, this is not always the case due to the disproportional valuation derived from fractionalization.

Better market valuations

While NFT fractionalization can assist with price definition, this means that, for NFT owners, it can increase the valuation of their non-fungible tokens. For instance, if an NFT owner plans to sell their asset, but their valuation is low or unclear, they can fractionalize a small share of the NFT and sell it. If the fractions sell well, the original NFT value can increase. Then, the NFT owner can sell the rest of their asset for a better valuation.

Visibility for creators

From the creators’ point of view, NFT fractionalization can be a powerful tool for expanding the exposure of their work. What could before only be owned by one person can belong to many NFT enthusiasts. On top of that, greater liquidity and accessibility might entice more investors to engage with a creator’s NFT collection. Thus, creators can reach a broader audience in a more liquid market.

What Could Be Bad About Fractional NFTs

While Fractional NFTs brings many advantages, there are some risks any investor should be aware of:

Highly speculative

Like the rest of the NFT market, Fractional NFTs are highly speculative. While blue-chip NFTs tend to be more stable, even they are susceptible to the speculative nature of NFT trading. Thus, there is a risk involved in trading NFTs since they fluctuate depending on the state of the market. Hyped collections can easily lose the interest of investors and quickly drop in prices. When you add fractionalization, the price speculation factor becomes even more significant, with more people engaging in it. So, invest wisely and research the NFTs and their projects you wish to invest in.

Crypto volatility

Fractional NFT transactions are held in crypto, which can also be very volatile. Thus, if an NFT holder sells a fraction of its asset for a given cryptocurrency and the value of that coin drops, they can lose money in the trade. Thus, researching and performing due diligence on which crypto you wish to trade your fractional NFTs for is essential.

Fractionalization and valuation

As explained, the fractionalization of NFTs can generate a disproportional valuation for the non-fungible tokens. If their parts are traded at a price that does not correspond to the asset’s demand, it can create a disproportional valuation.

There are two issues with that. The first is for the NFT owner. If their fractional tokens are traded for too little, the valuation of their NFT can drop. The other is when buyers pay the price for the fractions that do not correspond to their actual market value. Thus, they can have a hard time regaining their original value in the future. Therefore, make sure you do your research NFT valuation research when trading fractional NFTs and be aware of the risks. 

Depends on the smart contracts they are built on

While a simple concept, this is an important one since NFT fractions are only as good as the code there are built on. As with any NFT protocol, ensuring that you are investing in an active and transparent team is essential.

Buyout auctions

This is a specific phenomenon that can happen in a not-well-coded smart contract. For example, buyout auctions can be triggered by a potential buyer or a part-owner of an NFT transferring the entire value of all fractionalized pieces to the smart contract.

When this happens, the other fraction holders need to outbid the individual who triggered the auction to keep their NFT part. However, even if they win to keep their fraction, it will be at a higher price. In contrast, if the individual who triggered the auction outbids everyone, their payment will be distributed to the fraction owners based on their share of the NFT. While all parts involved will eventually get paid, buyout auctions can cause you to sell an NFT fraction that you didn’t intend to. 

Conclusion

Fractional NFTs have the potential to revolutionize the NFT market by making it more accessible to a wider audience. Ultimately, they offer investors access to high-value assets while allowing creators to diversify their revenue streams and increase their liquidity. However, investors should be aware of the associated risks before investing in fractional NFTs. Be sure to utilize trusted platforms or secure marketplace when dealing with F-NFTs and conduct extensive research on each asset before you invest in them. With careful consideration, fractional NFTs can help take your NFT investments to a whole new level!