(Bloomberg) -- Since NFTs, or nonfungible tokens, screamed into public consciousness in 2020 with million-dollar sales of digital artifacts, 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’s not quite clear yet! In the world of digital currencies, those are familiar arguments. So is the boom and bust cycle NFTs have been through, with big bucks made and lost along the way. For instance, the price to join the Bored Apes Yacht Club by purchasing an NFT of an image of a bored ape soared to $420,430 before falling almost 79% in June, while the JPG NFT Index, which tracks a handful of blue-chip NFT projects, by June was down by more than 70% since its inception in April.
1. What are nonfungible 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 piece of art or collectible. It helps to address a problem that’s long faced digital artists: how to create scarcity for an item that can be infinitely reproduced. Uniqueness is the reason (ok, one reason) that the Mona Lisa is priceless, while a signed and numbered Peter Max print of his version of the painting is $4,900 and Mona Lisa posters are $7.95.
2. How do they work?
When an artist wants to sell their digital work, they create, or “mint,” an NFT that then becomes attached to the ownership of that specific piece of work. NFTs are registered on open blockchain ledgers, making it possible to track ownership (or as they say in the physical world, “provenance”), prior sales prices and the number of copies in existence. The security provided by blockchain technology makes it harder to sell fake tokens than selling fake physical artwork, although not impossible. The price of NFTs is determined by its rarity and popularity. The Merge, for instance, is an NFT made by artist PAK depicting 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 resemblances. NFTs and cryptocurrency are both digital assets and are powered by the same sorts 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 one-of-a-kind creation whose purpose is to protect ownership of a specific item.
4. What happened during the boom?
Before the pandemic, people had begun finding new uses for NFTs as ways of selling sports memorabilia or special access passes to events. Then NFTs gathered steam among bored collectors during 2020 and took off the following year. Artists, celebrities and financial investors were buying NFTs, a boom that coincided with the rising prices in 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 by the name of Beeple sold a piece of art for $69.3 million. Bored Apes, which are (quite literally) bored-looking animated apes, became celebrities’ avatar of choice on Twitter, with the likes Gwyneth Paltrow and Serena Williams sharing their customized apes on social media. Owning NFTs became a statement and a golden ticket to access an intimate network or community -- whether that’s to a Discord server for fellow Bored Apes (the Bored Apes Yacht Club) or entry to a French film festival.
5. What did critics say?
When NFTs became a popular investment choice for those looking to diversify their portfolio ahead of inflationary warnings, some critics saw the trend as mere hype. What buyers were getting, they argued, were mere bragging rights for images that anyone could equally well view, copy or enjoy. Questions were raised about whether those benefiting from the parallel boom in cryptocurrencies were using some of their new wealth to pump up a market whose rise they would benefit from. Others argued that for any artwork, the master’s original hand is what makes it valuable. And then there was that segment of Americans who just didn’t get what the craze was about or why NFT sellers were receiving millions of dollars.
6. Why did the market turn?
NFTs were caught up in a broad plunge in cryptocurrency prices that accelerated after the collapse of the Terra blockchain’s stablecoin shook investor confidence. The world’s biggest NFT marketplace, OpenSea, saw sales volumes in June fall by more than 70% month over month, according to Dune Analytics. OpenSea began laying off staff in July following the crypto collapse to cut costs and prepare for a long-drawn downturn. A dizzying number of frauds wiping away 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’s a chance the current downturn brings an end to the NFT frenzy from 2021. But the urge to mint money, whether through crypto, NFTs or otherwise, isn’t going away. NFTs have also proved useful in unexpected ways, such as in fundraising $600,000 for the war in Ukraine through an NFT museum. Its uses are expanding into automobiles, gaming and of course, the metaverse, as it appeals to more buyers. Yuga Labs, the company that developed the Bored Apes Yacht Club, launched plots of land in the metaverse as NFTs called Otherdeeds, which recorded a $320 million transaction in late April.
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
