At the beginning of 2021, only a niche group of crypto enthusiasts knew what non-fungible tokens (NFT) were.
By the end of the year, however, nearly $ 41 billion had been spent on NFTs, according to the latest data, making the market for digital artwork and collectibles almost as valuable as the global art market.
“This year witnessed the NFT market explode from a sub-billion dollar market to a multi-billion dollar industry,” said Mason Nystrom, research analyst at cryptocurrency firm Messari, adding that buyers were in a hurry to art uncover that matches their “digital identities”. ”.
NFT mania hit the mainstream in March when a collage by artist Beeple sold for $ 69.3 million at Christie’s, in the first auction of its kind at the auction house. The artist, whose first name is Mike Winkelmann, responded with a tweet: “holy fuck.”
Arts, sports and music corporate players – even Melania Trump – quickly started making NFTs, essentially digital ownership certificates registered on a blockchain, to capitalize on the hype and find new ways to connect with fans .
Other hits included numbered collections of NFTs that went viral, including CryptoPunks and Bored Ape Sailing Club, and which indicated the club status of their owners and are used as avatars on social media profiles.
“The core value is still exclusivity,” Nystrom said, noting that expensive collections also give buyers access to enclosed channels on the Discord chat platform, and to meetings and parties.
“They are Country Club-like: there is a high barrier to entry – a capital cost – and you are around high net worth and other individuals,” he added.
A total of $ 40.9 billion has been poured into the ethereum blockchain contracts typically used to create NFTs in the year to December 15, Chainalysis, a crypto-analytics group, said. The total will be even higher if it includes NFTs targeted at other blockchains, such as Solana.
By comparison, last year the global art market was worth $ 50.1 billion numbers of UBS and Art Basel.
Chainalysis has found that NFTs have introduced a large number of retail investors to the crypto world, with small transactions of less than $ 10,000 representing more than 75 percent of the market.
But much like the market for cryptocurrencies, it continues to be dominated by some big players, or “whales”.
Between the end of February and November, there were 360,000 NFT owners holding 2.7 million NFTs between them. Of that, about 9 percent – or 32,400 wallets – held 80 percent of the market value, Chainalysis found.
Stephen Diehl, a crypto-skeptical software engineer, said many whales are “people sitting on hundreds of millions of dollars worth of crypto” from the rise in cryptocurrencies, “looking to turn their crypto into more crypto”.
Others say they approach the market as professional traders-cum-collectors. A well-known NFT investor, known as Pranksy on Twitter, which started in 2017 with an initial investment of $ 600, now has an NFT portfolio worth more than $ 20 million, they said.
They told the Financial Times they are investing in a mix of projects, “some of which have a higher daily trading volume and others that have a more niche appeal”. Aside from profitable projects “turning around”, Pranksy said they have “specific pieces that I plan to keep as long-term investments”.
So far, most new NFT collectors in the secondary market have not yet recovered the cost of their purchases, according to an analysis for the FT by blockchain analytics platform Nansen, where early collectors also benefited from a price increase of the NFTs. as in the cryptocurrency used to trade in them.
The unregulated space is also plagued by fraud, scams and market manipulation, especially as the real world identities of buyers and sellers are difficult, if not impossible, to discover.
Analysis by Nansen found $ 2 million worth of suspicious activity in the CryptoPunk and Bored Ape collections in the 30 days to mid-December. For example, some NFTs were sold at a 95 percent discount on the average selling price, whether due to errors by buyers and sellers, tax write-offs, or another scam exploiting unskilled users.
Researchers have also warned that the market is likely to be inflated by wax trading – when a trader takes both sides of a trade to give the false impression of demand.
“You can buy and sell an NFT on a public platform and it seems like there’s a lot of interest in the piece when it’s just you pushing up the price,” said Rüdiger K Weng, CEO of Weng Fine Art in Germany , said.
“It also happens in the traditional art world,” he said, but added that if a manipulator hands over a work of art to Sothebys and attempts to trade, they will have to pay the auction house 25 percent of the sale, which makes it a make expensive business. . “With NFTs, the cost is a fraction of that,” he said, referring to the transaction fees known as gas fees, which are required to hit or buy an NFT, which can vary depending on demand.
Nevertheless, there are many fans who believe that the market is maturing, and will eventually offer a myriad of features, such as allowing artists to collect royalties forever.
“What can you do because it’s software?” asked Benedict Evans, an independent technology analyst and former venture capitalist. “It could be things like the artist getting a share and subsequent secondary sales,” he said, referring to early innovations in especially the space around music rights.
The so-called ‘financing’ of NFTs is already taking place in some communities – for example by using NFTs as collateral for loans, or breaking down the ownership of a single piece into smaller parts, known as fractionalization.
In the longer term, enthusiasts hope that signs will one day drive e-commerce in any metaverse or metaverse, futuristic digital avatar-filled virtual worlds. Here, NFTs can designate ownership of virtual goods, whether it be clothing for digital avatars or art for the walls of their digital homes. Nike recently announced that it has acquired a virtual shoe company to make virtual sneakers.
Either way, the future of the NFT market will also depend on the attitude of regulators as the freewheel market develops.
There is concern, even among corporate issuers, that NFTs share characteristics with certain digital investment vehicles and therefore may be considered securities by regulators. Devika Kornbacher, partner at Vinson and Elkins, said companies that want to issue NFTs often ask, “Will this NFT be considered a financial instrument? Will it be considered a security of our company?”
Meanwhile, tax agencies such as the Internal Revenue Service have yet to address NFTs directly, but some experts argue that they could be considered “collectibles”, which means that they will be subject to capital gains tax.
“This is a looming existential issue for the entire industry,” said Pratin Vallabhaneni, partner at White & Case, about impending regulation.
Additional Reporting By Eva Szalay & Siddharth Venkataramakrishnan