How is the NFT craze disrupting the collectibles and investment market?

This article is sourced from FT Chinese Network.

The NFT craze has swept through the art world and is also disrupting sports, music, gaming, and even things that traditionally have no collectible value. What kind of storm will this create in the investment market?

After two weeks of frenzied online bidding, on March 11, the artist known as Beeple sold his non-fungible token (NFT) artwork "Everydays: The First 5000 Days" at Christie's auction house for a staggering $60 million. The final total, including buyer's premium and other auction fees, could exceed $69 million, making it the most expensive digital artwork ever sold at auction and the 19th most expensive of all auctioned works (including physical ones).

In the first hour of the online auction, bids for this purely digital artwork jumped sharply from $100 to $1 million. Another piece by Beeple sold for $6.6 million on the NFT platform Nifty Gateway in late February.

As the prices of blockchain-based digital images begin to dwarf those of Picasso and Monet hanging on museum walls, does this mean NFTs will disrupt the art collection market? But the NFT craze has not only swept through the art world; it is also disrupting sports, music, gaming, and even things that traditionally have no collectible value. What kind of storm will this create in the investment market?

Twitter CEO Jack Dorsey auctioned his first tweet from 15 years ago as an NFT token on March 5, with the auction ending on March 21. As of March 9, the highest bid had reached $2.5 million. Dorsey stated that he would convert the proceeds into Bitcoin and donate them to an African relief fund.

On February 28, Canadian singer Grimes launched a set of NFT artworks that sold out in 20 minutes for $5.8 million through Nifty Gateway.

The pioneer driving the NFT frenzy is NBA Top Shot, which captures classic basketball moments from NBA games and presents them as short videos from multiple angles, turning them into NFT products. Billionaire investor and TV personality Mark Cuban is one of the proponents of NFTs, asserting that Top Shot could become one of the top three revenue sources for the NBA in the next decade.

As a branch of cryptocurrency, NFTs are currently the hottest area of blockchain, bar none. But what exactly are NFTs? What qualities attract investors? Will they drive a "value restructuring" in the entire collection and investment world?

What are NFTs?

NFT (Non-fungible Token) is a direct translation of "non-fungible token," an application that combines blockchain and cryptocurrency.

NFTs exist on the blockchain, and each NFT token is a unique digital asset whose ownership is managed and verified through blockchain technology. No two NFTs are the same, and unlike Bitcoin, each token has no substitutes and cannot be divided.

Digital ownership means that any collector can access their items at any time; digital items can not only be owned but also confer value through ownership.

Almost anything can be virtualized, from collectibles, game items, artworks, event tickets, domain names, music, to ownership records of physical assets.

Cuban believes that the driving force behind the NFT phenomenon is the newly emerging "value-storing generation": Generation Z, who grew up in the digital age, are native "digital citizens" who do not collect physical baseball cards or basketball memorabilia but view NFTs as digital assets for value storage.

Digital assets that support smart contracts possess unique, verifiable, transferable, and tradable characteristics. NFTs essentially convert data into liquid intellectual property, empowering creators and collectors. The value of NFTs comes from their liquidity, scarcity, and authenticity.

NBA Top Shot allows buyers to accumulate a series of digitized highlight dunks, which they can then showcase to others. Each NBA Top Shot is a non-fungible cryptocurrency, as each Top Shot serial number allows only one holder. The purchased highlights are added to the buyer's secure digital wallet.

Since its launch in October 2020, NBA Top Shot has generated over $338 million in sales through more than 1 million transactions by early March. An NFT of a LeBron James dunk sold for a record $208,000 on February 22.

The appeal of the NBA Top Shot series also lies in the fact that the official website has a secondary market exchange, providing buyers with instant liquidity for buying and selling. The NBA can also earn a cut from all secondary sales.

Traditional "value-storing" collectibles are tangible entities that can be touched, seen, or heard, such as trading cards, artworks, cars, and stamps. One reason they can "store value" is that physical ownership is needed as evidence of existence and confirmation of scarcity, but their value is always threatened by counterfeits and fraud.

However, for the new generation that grew up in the digital world, the greatest value lies in digitization. They believe that smart contracts and the digital goods or crypto assets they reflect are better investments than traditional tangible assets.

This is because traditional collectors must periodically assess the condition of physical items when collecting stamps or cards: Is the item still in perfect condition? Does it need repairs? Collectors have many considerations for storage and security, and when selling collectibles, they must physically deliver them for buyers to inspect, bearing significant risks during transportation. Since many collecting industries involve person-to-person transactions, there are various other risks and costs in the system. Insurance and storage also add extra expenses.

While the value of digital transactions on NBA Top Shot is still determined by the same laws of supply and demand, it significantly reduces many risks compared to tangible assets. Even if others can view the same video online at any time or print the same shot image, this does not change the value of the digital NFT itself.

When a buyer wants to sell their owned NFT, they can view the serial number, price, and related information of each NFT for sale on the secondary marketplace provided by NBA Top Shot, forming an efficient community market with like-minded individuals.

The Era Factors Reflected by NFTs

Currently, the four largest use cases for NFTs include:

1. Commemorative collectibles: sports trading cards, videos, images, etc. Like the aforementioned NBA Top Shot.

2. Digital art: The global art market is estimated to have an annual circulation of $70 billion, with sales of counterfeit artworks accounting for 20%-50% of that. Digitizing ownership of artworks through NFTs may reduce the chances of counterfeits, as the tokens reside on the blockchain, ensuring their authenticity.

3. Gaming: The total addressable market (TAM) in this field could exceed $200 billion. Players can profit from their creations without intermediaries, paying directly for everything from entire alternate universes, new weapons, to cute little pets.

4. DeFi (Decentralized Finance): Real-world assets can be converted into NFTs and used for financial purposes. For example, selling partial ownership of a Porsche through NFTs and earning interest from it.

5. Entertainment products: NFTs are also redefining traditional forms of entertainment product releases. The latest album "When You See Yourself" by Kings of Leon was also released as NFT tokens through the blockchain-based music platform YellowHeart. Fans can choose from three types of tokens: the first offers special album packages; the second provides virtual live performance bonuses, such as "front-row seats"; the third includes exclusive audiovisual art.

Each NFT token starts at $50, including digital downloads, limited edition vinyl records, and "enhanced media" like mobile album covers. According to data from the Open Sea platform, the tokenized album and NFT transactions that began selling on March 5 reached at least $1.45 million (equivalent to 820 Ether) in sales within five days.

The band's representatives estimate revenue exceeding $2 million, with $600,000 to be donated to the National Team Foundation to support live music groups affected by COVID-19.

NFTs appeared in 2017/2018; why did they explode in 2020/2021? In short, several background factors have provided strong momentum for this frenzy:

1. Under the COVID-19 pandemic, most people were stuck at home, creating a psychological framework that embraced the virtual and digital world.

2. With central banks printing large amounts of money, the market is flooded with liquidity, pursuing the next hot spot for overnight wealth.

3. The bull market in cryptocurrencies has fueled investors' enthusiasm for the entire crypto market.

4. The celebrity effect involving the entertainment and sports industries.

5. After years of brewing, NFT platforms and markets like Mintbase, NiftyGateway, OpenSea, Sorare, and SuperRare have continuously improved, making it more intuitive and easier for newcomers to get started.

6. The increase in NFT categories attracts a broader audience.

7. Returns are beginning to compare with or even surpass those of physical collectibles.

Another attraction of the NFT market is transparency; buyers can see the history of each past buyer and bidder, what prices they paid, and the current market status of any digital goods.

More importantly, buyers can complete transactions in minutes or less. Once the transaction is completed, there is no need to wait for the shipping process to enter their collection (wallet). When they want to sell, the secondary market not only provides liquidity but also fulfills the overall market's quick satisfaction.

In the context of the COVID-19 pandemic, transactions that can be completed without contact between people are, of course, particularly appealing. The digital generation is also more easily immersed in the pleasure of "instant gratification."

NFTs have created an open platform that creators can control. Artists are actively jumping into the NFT space, believing that digitization can protect their rights and provide them with opportunities for self-empowerment. Paris street artist Pascal Boyart painted a mural in a blue-collar neighborhood in January 2019, inspired by Eugène Delacroix's famous work "Liberty Leading the People," but with reflections of contemporary reality.

Boyart replaced the 19th-century French rebels who overthrew Charles X with protesters from the "Yellow Vest Movement." The French authorities were unhappy and covered Boyart's mural with a layer of gray paint. However, although the physical mural no longer exists, Boyart minted an NFT version of the mural, dividing it into 100 pieces, each sold for 0.5 Ether.

In other words, NFTs not only revive street art suppressed by the government but also allow artists to sell their works directly to fans. This has made it very profitable for artists who previously found it difficult to make a living. Boyart sold his NFT work "Meditation of the Red Clown" for 75 Ether on February 26, which at the time was worth $112,000, marking his largest transaction to date.

NFTs have also provided a new outlet for performance art: a group of tech-savvy artists first bought a piece by the British political graffiti artist known as Banksy for $100,000, then burned the artwork in a park in Brooklyn on March 7, with the burning moment recorded and sold as an NFT for 228.69 Ether, approximately $380,000.

Another function of NFTs is the mechanism for continuously incentivizing artists. In Europe, there is a droit de suite (French for "follow-up right") or "artist resale right" mechanism that grants artists or their heirs the right to collect resale royalties for artworks in certain jurisdictions. This differs from U.S. copyright law, which is based on the principle of first sale, where artists have no rights to control subsequent sales or profit from them.

According to U.S. copyright law, a young artist who sells a painting for $1,000 today may become famous, and the work could sell for $30 million 30 years later. Galleries and collectors will share the profits from the appreciation, while the artist and their heirs will receive nothing.

The concept of the artist resale right originated in France, where in 1889, the auction house Hôtel Drouot sold Jean-François Millet's 1858 painting "The Angelus" at a high price, allowing the collector to reap huge profits while Millet's family lived in poverty.

Once artists use the NFT format, they can program royalties through smart contracts, allowing them to earn a portion of income each time their work is sold. Whenever Boyart's "Meditation of the Red Clown" changes hands from one art collector to another, he can continue to take a 5% cut.

Value Restructuring and Future NFT Trends

As of early March this year, the market has sold nearly $375 million worth of NFTs, with nearly $178 million (47%) coming from the last month alone. Assuming this trend continues, total sales for 2021 will exceed $2 billion. However, with the speed continuously climbing, industry players expect this year's market transaction volume could exceed $20 billion.

Since its inception until early March, NBA Top Shot has sold over $230 million, but the high demand has caused site crashes, technically limiting growth capacity. Other sports leagues are expected to jump into this wealth wave soon.

If NFTs are securitized digital IPs, then trading markets play a role similar to investment banks. These platforms can perform asset securitization, manage market rules, and collect data on collections and transactions at any time during asset production, trading, or adjustment.

The future NFT space may delve into the following scenarios:

Digital art market and collectibles: In 2019, approximately $64 billion worth of artworks changed hands, with only a small portion being digital art, but this market is growing rapidly. For example, an AI-generated nude portrait sold for about $14,000 this year.

Gaming: NFTs can be used as pets, weapon props, clothing, and other items in games. The popular CryptoKitties from 2018 used NFT technology, giving each cat a unique identification number, making it one of a kind.

Meme lotteries: In the future, some social platforms will issue meme lotteries, where content that reaches a certain threshold can be automatically packaged as NFTs, initiating a viral effect through GIFs, allowing users to purchase like a lottery, with economic benefits distributed between the platform and the original creators.

Collateral NFTs: Traditional artworks lack liquidity and cash flow channels. Although they have gradually gained popularity as collateral for loans and securitization over the past few decades, the authentication, insurance, and valuation processes involved remain cumbersome. Once entering the virtual realm, the financialization of NFTs should bring another form of liquidity to the market.

In addition to assets in the virtual world, NFTs may also be applied to scenarios in real life:

Intellectual property: NFTs can represent a song, a video, a painting, a sculpture, a photo, a patent, or other intellectual property, serving a role similar to a patent office, helping each unique item register copyright or patent rights and determine its copyright or patent identification.

Ticketing: Concert tickets, movie tickets, theater tickets, etc., can all be marked with NFTs. Although all tickets of the same level have the same rights, the seat numbers differ.

Records and identification: NFTs can also be used to verify identity and documents such as birth certificates, driver's licenses, and diplomas. These can be securely stored in digital form to prevent misuse or tampering.

Financial documents: Invoices, orders, insurance, bills, etc., can all be transformed into NFTs for trading.

Physical assets: Real estate and other tangible assets can be represented by NFTs for tokenization, used for asset circulation in financial markets.

From this perspective, this article may soon automatically generate limited edition NFTs, waiting for readers to snatch them up…

The long-term potential of NFTs will increase as application scenarios expand, evolving into a new category of alternative investments alongside derivatives, giving rise to a trend of "cryptocurrency for everything," becoming a new arena for traditional collectors, crypto enthusiasts, investors, and speculators.

However, when the economy reopens and the market digests too many dollars, will the current asset bubble chasing hot spots burst? Essentially, the NFT market will likely move in sync with Bitcoin and cryptocurrencies, so holding both cryptocurrencies and NFTs may not achieve the desired risk diversification effect. These are all considerations that digital asset investors must ponder as they follow the "value restructuring" trend.