A virtual work of art entitled “Everydays: The First 5000 Days.” Created by digital artist Beeple, it is the first NFT-based artwork to be auctioned at Christie’s.
Christie’s
From art to sports trading cards, people spend millions of dollars on digital collectibles.
These crypto collectibles, known as NFTs, have become extremely popular in recent times. A music video created by digital artist Beeple, whose real name is Mike Winkelmann, was flipped last week for a record $ 6.6 million. It was originally bought for about $ 67,000.
Meanwhile, one of thousands of computer-generated avatars called CryptoPunks recently sold for $ 2 million. And a crypto-art rendition of the 2011 Nyan Cat meme sold for about $ 590,000 at an online auction.
At the same time, critics see the NFT craze as another potential speculative frenzy in crypto that is sure to go away eventually.
So what are NFTs? And why are they suddenly sold for millions? CNBC takes you through what you need to know.
What are NFTs?
NFTs, or non-replaceable tokens, are a new type of digital asset. Ownership of these assets is recorded on a blockchain – a digital ledger similar to the networks that support bitcoin and other cryptocurrencies.
But unlike most virtual currencies, you cannot exchange one NFT for another in the same way you would with dollars or gold bars. Each NFT is unique and acts as a collector’s item that cannot be duplicated, making them rare in design.
Think of them as the crypto alternative to rare Pokémon or baseball cards.
The rise of the Internet allowed everyone to view pictures, videos and songs online for free. People buy NFTs believing that blockchain allows them to prove ownership of a virtual item.
NBA Top Shot, an NFT platform based on the US basketball league, allows users to buy and sell short clips featuring star player match highlights. The NBA licenses the reels to Dapper Labs, a start-up that digitizes the images and makes a limited amount to create scarcity. According to the website CryptoSlam, NBA Top Shot has enabled more than $ 277 million in sales to date. Dapper Labs earns a discount on every transaction, while the NBA receives royalty payments.
Basketball isn’t the only sport involved in crypto. French start-up Sorare lets users collect and play officially licensed football cards in fantasy games. According to NFT data tracker NonFungible, Sorare’s market has generated more than $ 21 million in sales to date. Sorare announced last week that it had raised $ 50 million from investors including Benchmark, Accel and Reddit co-founder Alexis Ohanion.
“It’s an obvious industry application for NFTs,” said Lars Rensing, CEO of blockchain firm Protokol. “Trading cards and collectibles have always been a profitable income stream for clubs.”
In the meantime, art dealers are also taking part in the promotion, in which auction house Christie is organizing an auction for a virtual work of art by Beeple. The auction has yet to close, but bids of up to $ 3 million have already been made.
NFTs are not a new phenomenon. CryptoKitties, one of the earliest examples, were once so popular that they clogged the network of digital currency ether. According to NonFungible, CryptoKitties have generated sales of more than $ 40 million to date.
Why are they so popular?
The coronavirus pandemic played a major role in the rise of the NFT. Last year, the total value of NFT transactions quadrupled to $ 250 million, according to a study by NonFungible and BNP Paribas-affiliated research firm L’Atelier.
This is not least because of the restrictions on staying at home, which resulted in people spending much more time on the Internet and saving money due to a lack of commuting. It’s similar to the rise of retailers betting GameStop on other historically unloved stocks promoted on the Reddit board WallStreetBets.
Meanwhile, it also arrives at a time when bitcoin, ether and other digital currencies have risen in value, with bitcoin briefly hitting $ 1 trillion in market value last month.
“Right now we live at a point in the world where the majority of the population spend 50% of their time online and a significant portion of their time on a PC,” Whale Shark, a pseudonymous NFT collector who claims to have collected a collection worth more than $ 2.7 million, CNBC told CNBC.
Skepticism
Many investors buy NFTs as a speculative investment in the hope that they can turn them over at a much higher price than what they originally paid. But a growing number of people also keep them as a collector’s item for the long term.
“Like any technology hype cycle, we start with speculative activity and that usually gives way to more fundamental value,” Nadya Ivanova, L’Atelier’s chief operating officer, told CNBC.
“NFTs started in 2017. A lot was about speculation. What we saw in 2020 is that the market is maturing.”
NFTs have attracted celebrities like Mark Cuban, Lindsay Lohan, and Gary Vaynerchuk, while big brands are also on the go. And people are finding other use cases for NFTs, such as virtual real estate and gaming.
Nonetheless, the NFT space has met with skepticism from some artists and investors. Critics consider it a new crypto craze resembling the first coin offering of 2017 that will eventually fall into irrelevance. Unsurprisingly, the companies behind such tokens disagree.
“I think 99% of the projects currently in space may not exist two or three years later, very similar to the ICO boom,” WhaleShark said.
Many NFTs are priced in ether, the Ethereum blockchain’s digital token. The digital asset briefly hit a record price of over $ 2,000 last month, before dropping about $ 600 in a matter of days, reminding investors of the wild volatility of cryptocurrencies.