Since NFTs, or non-fungible tokens, screamed into public consciousness in 2020 with millions of digital artefacts sold, the debate surrounding them has gone more or less like this: NFTs are the future of art and commerce! No, NFTs are a worthless scam! No, NFTs have a useful if limited future doing something that isn’t quite clear yet! In the world of digital currencies, there are familiar arguments. So is the boom NFTs have been through, with big money made and lost along the way. For example, the price of joining the Bored Apes Yacht Club by buying an NFT of a picture of a bored monkey rose to $420,430 before falling nearly 79% in June, while the JPG NFT Index, which tracks a handful of blue-chip NFT -projects, in June was down by more than 70% since the start in April.
What you should know about NFTs and the “Bored Ape” Boom and Bust cycle
1. What are non-fungible tokens?
Think of them as digital certificates of authenticity. An NFT is a unique, irreplaceable identifier created by an algorithm: a distinct barcode for a digital artwork or collectible. It helps solve a problem digital artists have long faced: how to create scarcity for an object that can be reproduced endlessly. Uniqueness is the reason (okay, one reason) why the Mona Lisa is priceless, while a signed and numbered Peter Max print of his version of the painting costs $4,900 and Mona Lisa posters cost $7.95.
When an artist wants to sell their digital work, they create, or “coin”, an NFT which is then linked to the ownership of the specific work. NFTs are recorded on open blockchain ledgers, making it possible to track ownership (or as they say in the physical world, “provenance”), past sale prices and the number of copies in existence. The security offered by blockchain technology makes selling fake tokens more difficult than selling fake physical artwork, although it is not impossible. The price of NFTs is determined by its rarity and popularity. The Merge, for example, is an NFT created by artist PAK that shows three moon-like masses against a black background. It sold for $91.8 million in December 2021.
3. Are NFTs a kind of cryptocurrency?
No, although there are some similarities. NFTs and cryptocurrency are both digital assets and are powered by the same kind of decentralized blockchains. But in theory, the point of a cryptocurrency is that it can be used in transactions just like dollar bills – and what makes dollar bills useful is that they are identical and have little intrinsic value. An NFT, on the other hand, is a unique creation whose purpose is to protect the ownership of a particular object.
4. What happened during the boom?
Before the pandemic, people had started to find new uses for NFTs as ways to sell sports memorabilia or special event passes. Then NFTs gathered steam among chained collectors during 2020 and took off the following year. Artists, celebrities and financial investors bought NFTs, a boom that coincided with the rising prices of Bitcoin and other cryptocurrencies. In March 2021, Jack Dorsey made an NFT of his first tweet and sold it for $2.9 million, and a digital artist named Beeple sold a piece of art for $69.3 million. Bored Apes, which are (literally) bored animated monkeys, became the celebrity avatar of choice on Twitter, with the likes of Gwyneth Paltrow and Serena Williams sharing their customized monkeys on social media. Owning NFTs became a statement and a golden ticket to access an intimate network or community – be it to a Discord server for fellow Bored Apes (Bored Apes Yacht Club) or entry to a French film festival.
When NFTs became a popular investment choice for those looking to diversify their portfolio ahead of inflation warnings, some critics saw the trend as mere hype. What buyers got, they argued, were just bragging rights for images that anyone could equally see, copy or enjoy. Questions were raised about whether those benefiting from the parallel boom in cryptocurrencies used some of their new wealth to pump up a market whose growth they would benefit from. Others argued that for any work of art, the original hand of the master is what makes it valuable. And then there was the segment of Americans who just didn’t understand what the craze was all about or why NFT sellers were receiving millions of dollars.
6. Why did the market reverse?
NFTs were caught up in a major fall in cryptocurrency prices that accelerated after the collapse of Terra blockchain’s stablecoin shook investor confidence. The world’s largest NFT marketplace, OpenSea, saw sales volume in June drop by more than 70% month-on-month, according to Dune Analytics. OpenSea began laying off employees in July after the crypto collapse to cut costs and prepare for a prolonged downturn. A staggering number of frauds wiping out hundreds of millions of dollars and cases of alleged insider trading have further challenged the industry.
7. What would be left if the NFT bubble has burst?
There is a chance that the current downturn will bring an end to the NFT frenzy from 2021. But the urge to mint money, whether through crypto, NFTs or otherwise, is not going away. NFTs have also proven useful in unexpected ways, such as raising $600,000 for the war in Ukraine through an NFT museum. The uses expand to cars, games and of course the metaverse as it appeals to more buyers. Yuga Labs, the company that developed Bored Apes Yacht Club, launched plots in the metaverse as NFTs called Otherdeeds, which recorded a transaction of $320 million in late April.
More stories like this are available at bloomberg.com
