What’s an NFT and Why Should You Care?
Mike Winkelmann, known to many as “Beeple,” just became the third most valuable living artist in the world (Kinsella 2021). In a sale totaling over sixty-nine million dollars, Winkelmann sold a single image – a collection of his everyday works for 5000 days at art auction house Christie’s. The craziest part? This image is accessible online at any point in time, to anyone, in full quality. So what drives a standard image file to be one of the most expensive works in the history of art?
To understand why one might buy a publicly accessible image file for sixty-nine million dollars, we need to understand NFTs, the so called “future of the art market” (Shaw 2021). NFTs, or non-fungible tokens, have taken both the digital art and art investment worlds by storm, growing from a small crypto-backed market to a network of booming digital auction houses, with massive sales being made daily. Separate from increasingly popular cryptocurrencies like Bitcoin and Dogecoin, the Ethereum-based market is run by “blockchain-based assets, distinguished from other blockchain-based assets...in that they cannot be substituted or exchanged for similar items” (Hackl 2021). Put simply, NFTs are a traditional art investment with a twist; you buy them using cryptocurrency, and you own a digital “token.” These tokens take many forms, including digital artworks, video game outfits, and even web addresses. Considering this, you’ve probably run into more NFTs than you may think.
NFTs are at the frontier of digital investment, and we could see the NFT market explode -- more than it has since its entrance in 2013 -- in the coming years. Data on the growth of the NFT market suggests this, and the NFT Report 2020, published by L’Atelier BNP Paribas and Nonfungible.com boasts that “the value of the NFT market grew by 299 percent in 2020, when it was valued at over $250 million” (ThaddeusJohns 2021). The recent growth of the NFT market can be owed partly to near-universal stimulus payments during the pandemic and an increase in alternative investments in the past year. Despite this recent growth, the NFT market has been and will continue to be volatile, and greater regulation of the NFT market has yet to be realized.
Similarly, the whole cryptocurrency market has seen massive gains over the past decade, with Bitcoin’s value, in particular, skyrocketing in the past several years. While NFTs run off of Ethereum (the secondlargest cryptocurrency by market cap), the Ether market continues to appreciate as well with major recent catalysts like a Visa partnership to settle payments on the Ethereum blockchain (Khatri 2021). Using trustworthy and encrypted platforms to trade Ether makes for a safe and secure system of engaging in cryptocurrency investment and the NFT market. Both Bitcoin and Ether blockchain transactions are safe and well protected if you use a trustworthy trading platform and cryptocurrency wallet.
While the NFT market has seen attractive returns recently, there is likely more momentum due to the novelty of these online financial instruments. The involvement of younger investors may pose as another catalyst to NFT market growth. Art analyst Jason Bailey of Artnome suggests “younger generations have views that are antithetical to boomer values, preferring brands built on inclusivity, decentralization, and a digitally native experience” (Shaw 2021). He warns that if these digital auction houses “treat blockchain and NFTs like a trend instead of the future of the art market, they will have missed their opportunity for relevance with future generations” (Shaw 2021). This puts the question of long-term market growth on the future marketing, understanding, and accessibility of NFTs. We will have to see how institutions – including auction houses and larger investors like banks – handle the NFT market as it enters the mainstream.
While the all-digital nature of NFTs may be their greatest strength, it could also be the market’s largest pitfall. Having digital NFT art markets means that hours need to go into the user interface, and digital comprehension may play a role in the accessibility of NFTs. Blockchain-focused venture capital firm founder Tel Elyashiv claims, “the whole user interface around [it] is very difficult and it’s built into the being of crypto” (Iyengar 2021). Also, various fees and crypto-wallets may be required for the transfer of currency, and the steps to get from USD to Ethereum that can pay for an NFT may be confusing or time-consuming (Iyengar 2021). Once you’ve bought the NFT, it’s not necessarily clear what you have bought. The New York Times notes that “The buyer of an NFT will not necessarily acquire a copyright, or even sole access to a work… But some people are willing to pay, handsomely, to be able to claim ownership of the ‘verifiably real thing.’” (Thaddeus-Johns 2021). For some, this may deficiently cap the value of some works and may be a sign of the NFT market being no more than just a boom. Just as it’s unclear what you are purchasing, its permanence is unclear as well.
It’s important to be aware that NFTs are based on links on the internet, and “as anyone who has browsed the internet before should know, links can and do die” (Kastrenakes 2021). While the novelty of the digital NFT market may be attractive to newer and older art investors alike, the virtual framework of the NFT market means a compromise in the accessibility of artworks compared to physical art investment. On top of this, these digital art markets have a major detrimental impact on the environment, as these blockchain transactions and verifications – powered by incredibly complex computer calculations – are “extremely energy-hungry”, very costly, and require a large amount of electricity to complete (European Environment Agency 2021). In efforts to mitigate the environmental impacts of cryptocurrency transactions, Ethereum 2.0 aims to introduce a proof-of-stake system, where mining and transaction power are given to existing holders of Ether, taking the load off of the computers under the proof-of-work system (@qe 2021). Practices of sharding in Ethereum are near as well (a system where many computers share the energy load of transactions), and may work with proof-of-stake to bring down Ether’s emissions substantially (“Shard Chains” 2021).
The appearance of NFTs in the mainstream means a lot of attention to NFT works, but just like any art purchase, not every painting is the next Mona Lisa, and not every NFT is the next Beeple. On the one hand, NFTs are an exciting new way to invest in not only art but various other virtual commodities like NBA highlights (Samman 2021). The NFT market and crypto markets as a whole see a massive boom, and those who invested in Bitcoin early have seen over 500% profits. On the other hand, the environmental ramifications and the ambiguity of elements of NFT transactions could suggest an unsustainable scenario for long-term investors. Accordingly, an informed investment in the underlying currency Ethereum or a physical artwork over an NFT might better suit the risk-averse.
Sources
European Environment Agency. 2021. “Blockchain and the Environment.” European Environment Agency. European Union. March 25, 2021. https://www.eea.europa.eu/themes/sustainability-transitions/drivers-of-change/blockchain-and-the-environment.
Hackl, Cathy. 2021. “Non-Fungible Tokens 101: A Primer On NFTs For Brands And Business Professionals.” Forbes. Forbes Magazine. March 1, 2021. https://www.forbes.com/sites/cathyhackl/2021/02/28/non-fungible-tokens-101-a-primer-on-nfts-for-brands--business-professionals/?sh=16b8517b725f.
Iyengar, Rishi. 2021. “We Bought an NFT. Here's What We Learned.” CNN. Cable News Network. March 14, 2021. https://www.cnn.com/2021/03/14/tech/nft-art-buying/index.html.
Kastrenakes, Jacob. 2021. “Your Million-Dollar NFT Can Break Tomorrow If You're Not Careful.” The Verge. The Verge. March 25, 2021. https://www.theverge.com/2021/3/25/22349242/nft-metadata-explained-art-crypto-urls-links-ipf.
Khatri, Yogita. 2021. “Visa Now Settles Payments in USDC Stablecoin on Ethereum Blockchain.” The Block. The Block. March 29, 2021. https://www.theblockcrypto.com/post/99639/visa-now-settles-payments-in-usdc-stablecoin-ethereum.
Kinsella, Eileen. 2021. “An Nft Artwork BY Beeple Just Sold for $69 Million at CHRISTIE'S-MAKING Him the Third Most Expensive Living Artist at Auction.” March 11, 2021. https://news.artnet.com/market/christies-nft-beeple-69-million-1951036.
Samman, Shaker. 2021. “What's All the Fuss About Virtual NBA Trading Cards?” Sports Illustrated. Sports Illustrated. March 17, 2021. https://www.si.com/nba/2021/03/17/nba-top-shot-crypto-daily-cover.
“Shard Chains.” 2021. Ethereum.org. Ethereum. January 26, 2021. https://ethereum.org/en/eth2/shard-chains/.
Shaw, Anny. 2021. “'The Future of the Art Market': Christie's to Become First Major Auction House to Sell a Standalone NFT Work of Art.” The Art Newspaper. The Art Newspaper. February 16, 2021. https://www.theartnewspaper.com/news/the-future-of-the-art-market-christie-s-to-become-first-major-auction-house-to-sell-a-standalone-nft-work-of-art.
Thaddeus-Johns, Josie. 2021. “What Are NFTs, Anyway? One Just Sold for $69 Million.” The New York Times. The New York Times. March 11, 2021. https://www.nytimes.com/2021/03/11/arts/design/what-is-an-nft.html.
@qe. 2021. “Proof-of-Stake (Pos).” April 9, 2021. https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/.