The news these days is dominated by gaudy numbers spent on NFTs and the massive gains early adopters are realising in them – but is this a bubble or the start of a new asset class?
Non-fungible tokens, as they’re also known, are the subject of breathless stories about a seemingly endless parade of celebrities, artists, musicians and others rushing to launch them. In an astonishing development, an NFT even sold for nearly $70 million earlier this week.
Let’s take a deeper look at what’s behind this novel asset and whether or not this fervour is sustainable.
NFTs can be issued by anyone, but they have scarcity because each token is unique, and shows ownership of a specific asset – virtual or tangible. This bubble started with musicians including Kings of Leon using the tokens to issue assets for their fans to buy that gave them access to music in exchange for special perks including front row seats at a future concert, or unique artwork designed by members of the band.
The musicians made two million dollars from sales of this crypto asset, called ‘NFT Yourself’, and other musicians rushed to make similar offerings. Kings of Leon weren’t the first to make this move, but they are by far the highest profile.
EDM artist 3lau also made major waves recently when he sold 33 NFTs for a total of $11.7 million by offering unique versions of his three-year-old album ‘Ultraviolet.’ Even he admitted “it will be very difficult to replicate again”.
Other musicians have gone so far as to share fractional ownership of the music included with the NFT, which means they are forsaking part of their future revenue in exchange for an upfront payment that could be used to help offset losses incurred due to a loss of touring revenue during the pandemic.
As valuable as a Picasso
Artists including Beeple and Banksy have created unique artwork that was auctioned off for millions, with the former selling a piece to Bitcoin ATM operator Vignesh Sundaresan for $69 million earlier this week at Christie’s. This is a staggering sum for artwork that can’t be hung on a wall, displayed in a gallery, or otherwise appreciated in a traditional sense, and is the third-highest ever sum paid for a work of art by a living artist.
For comparison’s sake, one of Pablo Picasso’s most famous paintings recently sold at auction for $69 million – the second-most expensive work of art ever in Europe at the time of it’s sale only three years ago.
Most notable about the Beeple auction, though, is that Christie’s was willing to take payment for the artwork in Ether – something to keep an eye on for future auctions.
An attractive aspect of NFTs is that they use blockchain technology to prove ownership and authenticity of artwork, which any art collector can tell you becomes tricky with older paintings. Any doubt you might have about this will be instantly proven wrong by watching this exposé on a world-class painter-turned-con-artist who made millions with forged paintings before he was caught, imprisoned and forced to give up his earnings through fines.
Going forward, it would make sense to see more artwork end up on the blockchain as a means to prove authenticity, and it only makes further sense that more art will be digital, like the collage made by Beeple. And it also makes even more sense that musicians will want to diversify their revenue and offer fans access to unique experiences, something research has shown millennials care far more about than physical possessions.
It would also be logical for sports teams to capitalise on the growing trend of soccer clubs issuing fan tokens on the Chiliz platform, where AC Milan recently raised more than $6 million in only 30 minutes, and other teams including Barcelona, Manchester City and more are also jumping on the bandwagon to offer tokens that enable voting rights, access to tickets and more. Separately sold NFTs from teams could soon enable on-field access, player meet and greets, and other unique experiences available only to holders.
Classic bubbles have been marked by a period of rapid rise with a mad fervor to buy up as much of a given asset as possible, at the highest possible price, with the narrative around the given asset being ‘numbers go up’ no matter what.
People rightly called the 2017 ICO mania a bubble – when was the last time you heard about an ICO, or saw coverage of one in the media?
But they were wrong to call Bitcoin a bubble, as we’re now at prices three times higher than the 2017 high, and the fundamentals support significantly higher prices on the back of institutional adoption, increased use in the developing world, and publicly traded companies even holding BTC on their balance sheets. We also may only be weeks or months from a Bitcoin ETF being approved by US regulators, if recent news reports are to be believed.
This feels like a bubble… but it isn’t
Yes, digital assets are here to stay – but are NFTs setting people up for ruin?
Enjin, a platform where many of these assets are being issued, has seen it’s ENJ token rise nearly 4,800 per cent since this time last year, when literally no one was talking about it. Now, everyone is talking about it and long-term sentiment is bullish, as it also is for other NFT platforms including Decentraland (MANA).
This is an incredible rise mirrored by only one asset in history – yes, the Dutch tulip bulb.
Before you shoot the messenger, hear me out. At the height of the bubble, bulbs were selling for as much as the equivalent of $750,000 each, according to Investopedia’s maths. People FOMOd into the trade thinking they could buy bulbs at a high price only to sell them for an even higher price (the greater fool theory) right before the market crashed about 90 per cent, and many otherwise prosperous people, especially those in the middle class, were financially devastated and left holding empty bags at the expense of wealthier speculators who took advantage of futures markets opened around Europe as demand for exposure to the bulbs grew.
Tulip bubbles are found in nature and there are plenty to go around, but NFTs are actually scarce and provide unique benefits, bragging rights, or access to experiences non-holders just can’t have.
Whether or not that means artwork will continue to sell for the same price as a Picasso remains to be seen, but these tokens do provide real value, and people can sell them for a higher price just like they do sports tickets on secondary markets like StubHub and ViaGoGo. Just like with sports tickets, NFT prices are being driven by market demand, and the market says they’re worth far more than they’re selling for, and they provide access to something unique and memorable.
The more time that passes, the more it looks like this is more of a precipice – the start of something bigger than all of us, as Market Rebellion Crypto analyst CJ Reichel said on a recent episode of Trade the Chain, rather than a bubble that will spectacularly burst and leave many people broke.
Ryan Gorman is the co-founder of Trade the Chain, a global 24/7 community of traders using AI-driven sentiment indicators and real time, actionable alerts to make more informed trading decisions.
To learn more about Trade the Chain, please visit tradethechain.com
Nothing shared in this article or on Trade the Chain is investment advice, nor should it be construed as such.