In 2021 there were NFTs everywhere: artists, luxury brands or even celebrities launched their own NFT. But many of us are still wondering: what are exactly these NFTs about and do we have to invest in them?
What is an NFT?
NFTs are a big hype. The trading volume of non-fungible tokens (NFTs) surpassed $13 billion in the year 2021. The well-known Collins Dictionary even proclaimed "NFT" the "word of the year" (after "lockdown" in 2020). An NFT, is a unique digital certificate of ownership. It is attached to a digital object (such as a jpeg image, movie or piece of music), registered on a blockchain and linked to your own digital wallet. The registration on the blockchain contains all the information about the transaction history of the object. An NFT is also a "smart contract" in which all kinds of properties can be programmed - for example, the contract can award an automatic royalty fee of 10 percent to the artist upon resale. In short, when a person purchases an NFT, it is not the object itself that he or she is acquiring, but the data that proves ownership. In the NFT market, payment is primarily made with crypto currencies, especially Ethereum. To do that, you need to take three steps. First, you buy the coins through a platform like Coinbase or Binance. Secondly, you set up a wallet, such as Metamask or the Coinbase Wallet. And then you transfer the purchased Ethereum to the wallet. With that digital wallet you can then buy an NFT on platforms like OpenSea, Rarible or Nifty Gateway. On the last ones you can also pay with your credit card or regular bank card. In this way they are making the market more accessible for beginners.
For collectors and exclusive events communities
The uniqueness of the NFT introduces the notion of scarcity, which is likely to produce value. The NFT hype of the last few months is mainly playing out in two areas: art and collectibles, together accounting for 85 percent of the value of the entire market. For instance, in art making, we see digital artists like Beeple and Fewocious, as well as established figures such as Damien Hirst. The category of collectibles is dominated by a number of very successful projects, such as the 10,000 unique algorithmically generated "Cryptopunks" with a minimum price (floor value) of 300,000 euros and growing up to millions, or the "Bored Ape Yacht Club", the exclusive collection of 10,000 unique apes dressed with trendy outfits. A second category of NFTs are digital properties, such as in-game items, luxury goods or virtual land. As absurd as this may seem to baby boomers, younger "digital natives" seem to find it normal to buy goods that only exist in the Metaverse. Luxury brand Gucci operates a successful digital store on the South Korean platform Zepeto, a virtual world with 2 million active daily users, the majority of whom are young women aged 13 to 24. Nike recently opened a virtual zone in Roblox, a platform with 40 million daily active users, on which mostly young people create their own virtual games and worlds. Tech giant Facebook even changed its name to Meta. The third and final category are the so-called fan Tokens. These made the headlines when soccer club Paris Saint Germain paid out part of Lionel Messi's welcome bonus in PSG tokens, its own crypto currency on the Socio platform. The club took advantage of his transfer to raise 30 million euros. The platform Socios is now working with more than forty soccer clubs. There is also interest in the music world. Rock band Kings of Leon sold a limited edition of its latest album "When you see yourself" as an NFT. Buyers of the NFT get access to exclusive merchandise, and priority sales for concert tickets.
Are NFT’s interesting to buy ?
The crucial question is whether NFTs are an interesting purchase today. At the moment there are only 400,000 active portfolios, but that is already twice as many as a few months ago. So there is a lot of growth potential. By comparison, the Internet had the same number of users in December 2000. But there is also a downside. The influx of new NFT projects could be so great in the short term that it could overwhelm demand, and that could lead to sharp corrections or even a crash. Even in the long term, the increase in interest does not mean that sustainable value will be created.
We will have to wait and see if a market is growing. A purchase of a virtual product is, for now, best perceived as a “shopping” activity rather than an investment. Although fan tokens are tradable – for example, PSG saw volumes of over a billion euros around the transfer of Messi – you can hardly consider them an investment if they do not give a share or royalties.
Art and collectibles, on the other hand, could have more potential but it looks at the moment like an overblown speculative bubble. Still, we don’t want to draw any hasty conclusions. The history of the post-war art market taught us that snobbery and conservationism can lead to mistakes. The collectors, who preferred the “established values” of the Belgian “Latem School” to Pop Art, Graffiti Art like Keith Haring and Basquiat or Banksy’s street art, could tell you about it.
Despite the idea that crypto art would democratize the contemporary art market reserved for elites, the digital art market does look suspiciously like the traditional market. The top-32 artists represent more than 50 percent of the entire market. In addition, the possibility of direct resale on NFT marketplaces, known as “flipping”, creates volatility, something never seen before in the traditional art market.
Digital art is a market where the “winner takes it all”, which makes no difference with the traditional art market. So, in the physical or virtual world, collectors who manage to pick out the next Warhol or Luc Tuymans make big bucks and the cultural cachet that comes with showing great artists.
Prudence is the watchword
The stories of the most expensive NFTs are calling for prudence.
“Everydays”, the Beeple’s digital mosaïc, was bought by crypto-entrepreneur Vinesh Sundaresan at Christie’s in March 2021 for 42,329 ETH (70 million USD).
Sunderasan’s B20 token, a virtual currency was sold as a share in Beeple’s work, from 6.33 USD before the auction at Christie’s to a peak of 28.43 USD. Today, B20 is quoting at 0.93 USD.
And the “Virtual Superyacht” has been recently sold for for 650,000 USD in The Sandbox metaverse .
Taking these observations, it can be said that with NFTs, as with art, things mostly happen by chance. The top 5 percent will generate perhaps 80 percent of the capital gain. It is like a lottery, except that the real connoisseurs will pick out the winning tickets. The rest will gather (virtual) dust.
Macro-economist and founder of Econopolis