One phenomenon in the 21st century has been the digitalization of people’s everyday lives. Substituting cash for Apple Pay, letter writing for emails, and vinyl for digital soundtracks, the convenience and rapidity of digitalizing offers have created a booming online marketplace. As we transfer more aspects of our lives online, ownership and piracy become a greater issue. The creation of non-fungible tokens (NFTs) aims to solve this problem by assigning unique identification codes and metadata to digital assets and tokenizing the asset in the process. These tokens can then be traded, based on the market’s perception of their worth, without the concern of digital asset piracy.
What is an NFT?
Built on the same blockchain technology as cryptocurrency, NFTs are different in that each token is irreplaceable. Unlike cryptocurrency, where one coin is always equivalent to another coin in value and can therefore be replaced, NFTs are non-fungible and have their own, unique digital signature. This property gives NFTs several advantages, including market efficiency, streamlining investing, and identity security.
By tokenizing a digital asset, buyers and sellers can connect directly, eliminating the need for an intermediary. In addition, investing can be streamlined. Assets like real estate can be tokenized and traded as NFTs instead of the currently rigorous, complex, and multi-step affair. NFTs also offer the idea of fractional ownership, where a token can be divided into parts allowing there to be multiple owners of a digital asset that would not be possible with its physical counterpart. Furthermore, NFTs can replace stock ledgers, facilitating automatic ownership transfer after a transaction. Finally, NFTs offer identity security. Personal information stored on the blockchain upon which NFTs are structured cannot be accessed, stolen, or used by anyone without a key.
A Bullish Trend
Because of the many benefits of NFTs, the NFT market has grown exponentially in recent years. NFT startups develop protocols, infrastructure, marketplaces, and applications necessary to facilitate the transaction of non-fungible tokens. Currently, in the NFT space, there are over 3000 companies with over 17.4 billion dollars of capital invested. The numbers are especially impressive taking into account that NFTs is a relatively new subcategory, with company age averaging merely 2.2 years.
As depicted in the charts above, there was exponential growth in the NFT space up until 2021, and a spike in deals in 2021 and 2022. What contributed to the sudden growth of the NFT space?
To begin, NFT growth was fueled by the digital art boom. Acclaimed artists such as Grimes and Beeple sold multimillion-dollar artwork through non-fungible tokens. In addition, NFTs, being a type of cryptocurrency, were strongly linked to the performance of Bitcoin. The spike in bitcoin prices in 2020 and 2021 gave investors confidence in other forms of cryptocurrency, including NFTs. From artwork to the spike in bitcoin to the world being under COVID lockdown, NFTs gained significant press attention. Not only were NFTs talked about in the mainstream media, but celebrities joined in on the NFT conversation, with prominent names like Snoop Dogg, Justin Bieber, Madonna, and Logan Paul purchasing NFTs. At its peak in January 2022, $17.2 billion was traded on the NFT market.
A Burst Bubble or Bearish Future?
However, in the past year, there has been a steep decline in NFT market activity. Year-over-year growth has declined by 52.89%, capital invested decreased by 53.83%, and median deal size decreased by 16%. Trading volume at the time of writing this article has dropped to $100 million a week. With a global NFT market cap of $5.12 billion, this is a steep decrease from the performance of NFTs a year prior. The drop could be attributed to a couple of factors.
For one, NFTs are closely tied to the performance of big-name cryptocurrencies like Bitcoin and Ethereum. The great historic volatility of cryptocurrency throughout the years may have hindered investor confidence in crypto assets like NFTs. This is potentially exacerbated by the recent drop in Bitcoin prices following its peak in 2021. Secondly, because NFTs are a relatively new technology, it has been a largely unregulated space. While practices like wash trading have long been forbidden in conventional securities like stocks and bonds, it remains yet to be outlawed for NFTs. Recently, however, the SEC has taken steps to begin regulating the NFT space. On August 23 of this year, the SEC charged Impact Theory, a media and entertainment company, with violating the Securities Act of 1933 by creating an unregistered security offering in the form of an NFT. This demonstrates a possible beginning of NFT enforcement, and with that, comes uncertainty and risk that turns away potential investors.
An Uncertain Future
As we continue integrating technology into our everyday lives, inventions like the NFT serve as valuable tools in an ever-digitalizing world. Despite the overblown media attention and speculative valuations, in the long run, NFTs have the potential to fundamentally change the safe storage and monetization of digital assets. As a result, I am optimistic that as the NFT space matures and becomes further integrated into our lives, it will stabilize in price and rise in value.
Sources:
- https://finance.yahoo.com/news/most-expensive-nfts-bought-celebs-212352639.html
- https://files.pitchbook.com/website/files/pdf/PitchBook_Analyst_Note_Emerging_Spaces_Nonfungible_Tokens.pdf#page=1
- https://www.investopedia.com/non-fungible-tokens-nft-5115211#:~:text=NFTs%20(non%2Dfungible%20tokens),like%20artwork%20and%20real%20estate.
- https://my.pitchbook.com/emerging-spaces/456
- https://www.forbes.com/digital-assets/nft-prices/?sh=131667406dfb
- https://www.axios.com/2023/09/01/nft-opensea-blur
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