Non-fungible tokens (NFTs) have blown up in 2021, taking the digital asset market by surprise. From rare artwork and musical products to GIFs and memes, these digital assets are flying off the digital shelves like the proverbial hotcakes – with tens of millions of dollars changing hands.
NFTs are making a big splash in the investment world – but are they worth the money? Or is this new trend a flash-in-the-pan that will eventually bottom out and fizzle into thin air? A number of observers are saying NFTs are a bubble ready to burst, like the dot-com crash in the late 1990s. Others believe NFTs are a serious asset class that has long-term viability.
What are NFTs?
An NFT is a digital asset representing real-world objects such as artworks, music, videos, sports paraphernalia; and also computer-world objects, such as in-game items. These assets are bought and sold online, frequently through cryptocurrencies. NFTs are generally encoded using similar fundamental software as many cryptos.
While they function similarly to a cryptocurrency, what makes NFTs unique is they are non-interchangeable and non-replicable. Unlike fungible assets that can be swapped for items or money with similar value, NFTs are digital representations of one-of-a-kind assets.
Each NFT has its unique set of identifying codes. This makes them ideal for buying and selling collectible items, rare art pieces, and even limited sports cards. In practical terms, NFTs function as certificates of ownership for digital assets.
A Booming Market
Many experts believed NFT activity from between the “before” ( September to December 2020) and “Pre-Boom” (January to February 2021) periods was a fad. During this span, there were only 3,107 active crypto wallets involved in at least one NFT transaction.
But between the “Pre-Boom” and “Boom” (March to April 2021) periods, the number of crypto wallets engaging in NFTs rose to 6,418, representing an increase of 106.5%. Then in the "Post-Boom" period (May to the first week of June 2021), active wallets soared to 15,000, meaning a massive growth rate of 133.7%.
As of August 2021, Statista showed that there are over 280,000 active crypto wallets that have bought or sold at least one NFT—a stunning increase which certainly qualifies as exponential growthDespite a few cryptocurrency observers declaring NFTs as dead, recent developments indicate otherwise.
CryptoKitties and Other Hot Property
When gaming studio Axiom Zen launched CryptoKitties back in 2017, their purpose was to introduce users to blockchain technology in general, and the use of Ethereum cryptocurrency in particular. The game involved the buying, selling, and trading of digital cats with Ethereum as the designated currency.
Just weeks after the launch, CryptoKitties became a viral hit, gaining recognition as one of the first uses of NFTs. Among the game's most celebrated NFTs is a virtual kitten named Dragon, with the unique identifying number 896775. In November of 2018, someone paid an astonishing $172K for Dragon, with the average price for a CryptoKitty virtual feline being $60. CryptoKitties as a whole have now generated over $1.2M.
If one person is willing to pay thousands of dollars for a virtual cat, other people are ready to shell out substantial money to buy other types of NFTs that they believe will generate great value in the long run. Here are some of the biggest NFT deals so far:
- A tweet by outgoing Twitter CEO Jack Dorsey was sold for a hefty $2.5M.
- A sports collectible store selling NBA highlights as NFTs recently raked in an impressive $500M in sales.
- A single Lebron James highlight netted over $200K.
The Lebron James example is intriguing – for business mogul and NBA team owner Mark Cuban, who are astute as they come, NFTs are poised to become a major revenue generator for the sports industry "over the next 10 years".
Some of the biggest recent deals in the NFT space include:
- Candy Digital, developer of a sports NFT ecosystem, raised $100M of Series A venture funding in a deal led by Insight Partners and SoftBank Investment Advisers on October 21, 2021, putting the company's pre-money valuation at $1.45B
- Royal Markets, developer of an NFT-based music platform designed to allow purchasing ownership of songs, raised $55 M of Series A venture funding in a deal led by Andreessen Horowitz on November 22, 2021, putting the company's pre-money valuation at $280M.
The SandBox, developer of a gaming NFT platform where virtual worlds and games will be created collaboratively without a central authority, raised $93M of Series B venture funding in a deal led by SoftBank Investment Advisers on November 1, 2021. 21 other investors also participated in the round.
Headwinds and Tailwinds
Even if you have an NFT to indicate ownership of the Mona Lisa or a Lebron James highlight reel, there’s no stopping people from viewing the original piece, taking pictures of it, and sharing it to the rest of the world.
For many in the artwork market, the NFT concept makes no sense at all. Charles Allsopp, former auctioneer for renowned auction house Christie's, said the “idea of buying something which isn't there is just strange.”
Digital artist Mike Winklemann, the artist who created the digital artwork "Beeple" that sold for $69M,believes an NFT bubble already exists and is poised to pop.
It's worth noting that an NFT’s value is based entirely on the price someone else is willing to pay for it and thus, these asset prices are extremely volatile. Therefore, demand will drive the price, not the usual market indicators or economic performance. That can mean an NFT could decrease in value or lose resale value,absent demand.
The long-term success of NFTs depends on people getting comfortable with the concept of digital scarcity, in which replication of an NFT item is a forgery, even if it looks identical.
As there can only be one owner per NFT, sellers cultivate this sense of scarcity and exclusivity in potential buyers. Both elements play to the buyers' psyche, leading them to fixate on a particular artwork, tweet, meme, or sports highlight.
Another way of looking at NFTs are as trading cards for the super wealthy. These digital assets don't have any inherent value other than what the market places on them. However, their fluctuating value, collectability, and trading potential attracts people who can afford to play high-risk gambles.
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