How and why did NFTs survive the crypto downturn?
Non-fungible tokens (NFTs) are still a relatively new kid on the block in the world of digital assets, but their popularity has sky-rocketed. In recent months, while the rest of the cryptocurrency market was brought to its knees, NFTs enjoyed a surge of demand beyond anyone’s wildest dreams, recording $2.5 billion in sales in the six months to July 30, 2021.
NFTs are units of data stored on a digital ledger which certify a digital asset to be unique and not interchangeable. This allows NFTs to represent one-of-a-kind digital items such as digital art, including photos and videos, and even tweets. And the prices that some of these items have been sold for are testament to their success. For example, Jack Dorsey, CEO of Twitter, sold his first tweet ever as an NFT earlier this year for a whopping $2.9 million!
But if an NFT is a digital item, surely it can be replicated? One might be forgiven for struggling to see how digital art relates to art collecting. With a painting by a famous artist, for example, it is easy to determine which version is the original as there is only one copy of it. With digital art, in theory, there can be an endless number of copies. So why would a collector want to buy a digital asset, often at a higher price than a real-life one?
Matt Hall, co-founder of Larva Labs, a creative studio and an early innovator in blockchain art, explained that “the digital world is the real world for a lot of people now”. Increasingly, the online world is becoming at least as important, if not more so, than the real-life world where we can hang a painting on a wall. The way we view ownership is also ultimately changing. Today, owning a digital art asset is seen by many to be no different from owning a painting.
Store of value
That’s all well and good, but why did NFTs continue booming at a time when the rest of the digital asset world was suffering a huge downturn? Ran Neuner, co-founder and CEO of Onchain Capital, tweeted a few months ago that NFTs are “the ultimate store of value and inflation hedge.”
He used the example of EtherRocks, digital pet rocks with a limited supply that have been in circulation since 2017. EtherRocks display a still image of a stone, identical in shape and size but each sporting a unique color. The most expensive EtherRock up for resale is priced at $1.9 million.
As Neuner points out, a key advantage of NFTs is their finite supply, which allows for their price to be hugely inflated. Like any other art, a collectible NFT price isn’t linked to inflation and economic cycles — it’s simply whatever people are willing to pay for it. And that’s often big bucks: New York auction house Christie’s reports selling an NFT by digital artist Beeple for $69 million in a groundbreaking auction in March and then an Andy Warhol NFT in May for $3.3 million, for example.
The auction house revealed that 71% of NFT sales registrants are new to Christie’s, with an average age of 38 years old. This suggests that NFTs are a new way for millennials and digital natives to interact with art collecting, a form of investing that one might expect to be the realm of older high net worth individuals in the world of traditional finance.
A world of opportunity
NFTs are not just about art or tweets, though. A growing number of assets are being digitized using the NFT format, and big businesses across the world are entering the fray. For example, last month, Alibaba-owned South China Morning Post (SCMP) announced the launch of its ARTIFACT Litepaper which aims to make history discoverable. This has seen the paper tokenize its 118-year-old collection of media assets as NFTs.
NFTs are also a new way to interact with favorite celebrities and capture iconic moments, and there are some big names behind the hype. For example, seven-time Super Bowl champion Tom Brady announced in April that he was launching an NFT platform called Autograph. The aim is to bring together some of the biggest names from the sports, entertainment, fashion, and pop culture industries to create unique digital collectibles. As we know, putting a brand name on anything can set prices soaring, so it is no wonder that putting a famous name on an NFT is proving to be a winning strategy.
Naturally, there have been suggestions that NFTs are simply a craze and that the bubble will eventually burst. One could argue, however, that with large tech and entertainment corporations looking to get a piece of the pie, it is unlikely NFTs will die out anytime soon. There are simply too many opportunities to utilize this technology to make items that are collectible and desirable by a generation that is looking to put money into something different and unique. Having survived one crypto downturn already, it looks like NFTs are here to stay.