Deciphering the NFT Craze

Author:  Suraj Sunkara

The BRB Bottomline

$69m painting? $2.9m tweet? NFTs, or non-fungible tokens, took the spotlight in March when individuals started shelling out millions of dollars for them. Continue reading to learn more about what NFTs are, how they have fared since, and what the future has in store for them!

Above is Jack Dorsey’s first tweet from about a decade and a half ago. If I asked you how much you would pay for this tweet, you would probably say “nothing” because “who would want to buy a tweet” (direct quotes from a friend I asked the same question). A few months ago, I would have thought the same thing: “how could something like a tweet ever have an underlying value?”

Well, it turns out the underlying value of this tweet is $2.9 million — or at least that’s what Malaysia-based businessman Sina Estavi shelled out in March when he bought Dorsey’s tweet for the equivalent of $2.9 million in the ether cryptocurrency.

The Craze about NFTs

The sale of Dorsey’s tweet is part of a larger craze that rose to the headlines in March: NFTs, or non-fungible tokens. While NFTs are associated with fancy buzzwords like “blockchain” and “digital ledgers”, the concept behind them is actually pretty straightforward. To demonstrate this, let’s take a look at a popular analogy for NFTs: trading cards!

Trading Cards and NFTs?

When I was a kid, my brother was an avid collector of baseball cards. I never really understood why he kept them — they just seemed like faces on pieces of paper. That was until I started collecting Pokémon cards, despite not even playing the TCG (trading card game). A random Tauros card I got from my 3rd grade teacher for answering a math problem quickly became one of my most prized possessions, one I still keep in my room today. Collecting Pokémon cards was just fun, and besides, there is always the off-chance that one of your cards can become incredibly valuable. For example, a 1952 Mickey Mantle card sold for 5.2 million dollars earlier this year. Unfortunately, all of mine and my brother’s cards are worth pennies, but you never know!. 

The concept behind NFTs is similar to trading cards but instead the card is a digital asset. When you buy an NFT, you are buying a unique token on the blockchain that signifies your ownership of a digital item. This can include anything from a tweet (like Dorsey’s) to digital art to even an album. While the creator of the work still retains the copyright and redistribution rights, your name is connected to the work through the token on the blockchain.

Why Have They Become Popular?

NFTs have been around for almost a decade but only took off recently. The quickly growing popularity of cryptocurrency is a key driver for NFT’s burst into the headlines. Investments into cryptocurrency have skyrocketed this year from individual investors to large corporations like Tesla. The value of Bitcoin has risen by over 800% since around this time last year (as of April 21). Even the meme cryptocurrency “Dogecoin” has risen by over 15,000% since last year (as of April 21) . To put this into perspective, if you bought $5 worth of Dogecoin last year (basically the price of a Starbucks drink), you would now be sitting on ~$780!

Even large companies are joining in on the crypto trend. Visa and PayPal, two very prominent financial companies, even announced that they would allow users to pay with cryptocurrencies on their platforms. The increasing “mainstreamness” of cryptocurrency and blockchain has played an instrumental role in helping establish NFTs.

Finally, the pandemic-induced digital environment we live in has further pushed NFTs into the spotlight. NFTs takes art collecting to the next level by bringing it online. NFTs enable artists to reach a wider audience through digital platforms and marketplaces. On the other side, collectors are able to acquire art easily from a wider range of artists. In the next section, we will take a closer look at how NFTs have affected artists and buyers.

The Impact of NFTs

NFTs and Artists

With museums, galleries, and performance spaces all shut down, most artists suffered quite a bit during the pandemic. A survey of 11,000 artists revealed that 95% of them had experienced income loss attributable to the pandemic. NFTs offer a path back to financial stability for many artists who either already create or have been able to adapt to making digital artwork. On top of that, NFTs enable non-traditional artwork to be sold as well. We’ve seen JPEGs, GIFs, and digital stickers trade hands on NFT marketplaces. Smaller digital artists have been able to tap into a market that was previously inaccessible to them. If you want to check out some of these for yourself, visit OpenSea where you’ll be able to find thousands of listings for artworks.

NFTs and Buyers

When it comes to buying NFTs, there are two main types of people: people who buy them solely to collect them and people who buy them in the hopes that they can sell them for a profit down the road. On the collecting side, NFTs have allowed for more unique collections. Why have a sneaker collection when you can have a virtual sneaker collection?  For the other group, investors have found a new speculative asset that they can ride in the hopes of making money.

NFTs after the Pandemic

While NFTs thrived during March, the craze has more or less disappeared. As a result, it’s pretty hard to tell how NFTs will perform after the pandemic. On one hand, blockchain and cryptocurrency are likely here to stay, but on the other hand, people might return to collecting physical paintings and artworks. To answer this question, it’s important to look at what NFTs are: speculative investments.

Speculative Investments

Speculative investments are assets with a higher level of risk associated with them. SPACs, or special purpose acquisition companies, are an example of speculative investments that also became a craze in the financial markets earlier this year. SPACs start off as public shell corporations with no real commercial operations. Their goal is to acquire and take a private company public using the funds they earn off their IPO.

Investing in a SPAC presents a sizable risk simply because you don’t know what company it’s going to acquire. Similar to NFTs, however, the popularity of SPACs have died down in recent times. Caused by a combination of an SEC crackdown and generally less interest in them, SPAC activity has heavily slowed down since it’s peak.

As vaccines roll out and people are more optimistic about moving past COVID-19, people have shifted away from speculative investments to cyclical industries tied to the economy like energy. These are industries that were hit the hardest by the pandemic and thus are expected to perform the best coming out.

Possibilities for the Future of NFTs

Just because the NFT craze has died down does not mean it’s dead. There is still a realm of possibilities for the future of NFTs. Imagine a virtual world where you can showcase the NFTs you’ve collected — sound cool? Well, you can already do this on Decentraland where you can display any certified 2D NFT you own. As blockchain, cryptocurrency, and virtual reality become more developed and intertwined, NFTs coud re-take off.

Buying NFTs

If you want to collect NFTs, no one’s stopping you! If you think that NFTs have a huge future in front of them, go ahead and invest in them. Just because NFTs haven’t been as popular in the last month doesn’t mean you can’t make a profit. If cryptocurrency becomes even more popular or AR/VR technology becomes amazing, the value of the NFT you buy could increase dramatically. Check out sites like OpenSea or Mintable for tons of awesome creations.

You can also just collect them for the sake of collecting them. Just like many collectibles, you don’t always need to be thinking about how to make a profit off them. Just collect them because they give you personal satisfaction — that’s why I have a playing cards collection from various places I’ve visited.

Regardless of your reason for purchase, make sure you are buying NFTs responsibly. Don’t allocate money to NFTs that would be better spent elsewhere like basic necessities or planning for the future.

Take-Home Points

NFTs emerged as a huge trend in early 2021. Powered by the growing popularity of cryptocurrency and speculative investments, some NFTs were selling for millions of dollars. NFTs, however, have taken a backseat as the economy quickly reopens from the pandemic. Whether NFTs re-emerge as a huge trend or fade away, only time will tell.

1 Comment

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