If you are like me, prior to a few months ago you had never heard of “non-fungible tokens” (NFTs). Then, in a flash, the business sections of major media were all analyzing this latest investment craze. And now, it seems the furor may have died down, leaving many of us investors to scratch our heads and question whether the market for NFTs is here to stay or the newest fading trend.
For the unfamiliar, NFTs are unique cryptocurrency tokens that represent a digital asset, such as an online work of art, a song or a prominent Tweet, which can be purchased, sold, or traded. NFTs rely on decentralized blockchain technology to track authenticity and ownership.
NFTs captured the public’s attention in March of this year when Christie’s auctioned an NFT-based digital art collage from the artist known as “Beeple” for over $69 million. This sale also was significant as it constituted the first time that Christie’s accepted cryptocurrency as payment. Shortly afterward, Twitter CEO Jack Dorsey sold his first tweet (which reads “just setting up my twttr”) as a NFT for over $2.9 million, the proceeds of which were converted to bitcoin and donated to charity.
Following on these two prominent sales, market analysts and social media alike took to discussing and drawing attention to NFTs, which promptly led to elevated pricing for particular works of digital art.
As a result, the total sale value of NFTs in the first quarter of 2021 reached a shocking $2 billion.
Since then, however, the pricing and hype surrounding NFTs appears to be dropping. While total sales of NFTs reached a seven-day peak of $176 million on May 9, total weekly NFT sales have fallen to just $8.7 million as of June 15.
Since most NFTs were purchased in cryptocurrency, this drop in the nascent NFT market may be attributable (at least in part) to the recent loss in value of cryptocurrencies. Some analysts also see the lowering in NFT values as normal market stabilization coming off peak pricing. And with the earlier surge of interest in NFTs also came a fair amount of criticism over artist copyright and ownership issues.
In one of the first copyright lawsuits involving NFTs, rapper Jay-Z’s former label Roc-A-Fella Records Inc successfully obtained a temporary restraining order two weeks ago in federal court against one of the label’s co-founders. The order blocked a planned NFT auction of the co-founder’s claimed copyright interest in Jay-Z’s debut album “Reasonable Doubt.” In the meantime, to mark the 25th anniversary of “Reasonable Doubt,” Jay-Z himself has commissioned a one-of-a-kind animated digital artwork based on the album’s cover, which soon will be auctioned off by Sotheby’s as an NFT.
Aside from copyright and ownership issues, NFTs also have drawn criticism over their carbon impact, which is a similar problem facing most cryptocurrencies. Validating the myriad transactions on the blockchains in which most NFTs are recorded in order to prove ownership requires a significant amount of electricity.
Indeed, one artist was surprised to learn that creating 300 pieces of digital art to be sold as NFTs would have used the same amount of electricity that an average European would use in two decades.
Yet, many analysts presently agree that it may be too soon to write-off the recent NFT phenomenon. In addition to Jay-Z, media giant Marvel Entertainment just announced that it will be launching a new line of NFT products that will include digital comic books and collectibles. The crypto exchange Binance also just launched a new NFT marketplace that will kick off with an auction featuring NFTs of artworks by Andy Warhol and Salvador Dalí.
As one former banker now investing in digital assets noted: “NFTs are here to stay and will … become a fundamental building block in the new infrastructure of financial markets … they will also revolutionize the gaming world, the ways fans interact with artists and potentially even how we buy our first home.”
If this analysis is correct, then the $69 million sale at Christie’s may turn out to be a bargain.
Danilo Diazgranados is an investor, collector, and lover of fine wines and a member of the prestigious Confrérie des Chevaliers du Tastevin, a fraternity of Burgundy wine enthusiasts.