NFTs, a $40 billion market

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At the beginning of 2021, only a handful of crypto enthusiasts knew what non-fungible tokens, or NFTs, were. But by the end of the year, nearly $41 billion was spent on NFT, according to the latest data, making the digital art and collectibles market nearly as large in value as the global art market.

Rise of NFT in the secondary cryptocurrency market

“This year, the NFT market has mushroomed from a sub-billion-dollar market to a tens of billions-dollar industry,” said Mason Nystrom, research analyst at crypto data group Messari, adding that buyers are rushing to discover works of art aligned with their “digital identity.”

“NFTs are essentially digital certificates of ownership registered on the blockchain and can be traded on the cryptocurrency secondary market.”

NFTs are essentially digital certificates of ownership registered on the blockchain – an immutable record that cannot be altered or altered. Tokens are typically created or minted using smart contracts — self-executing contracts written in blockchain code — and can be exchanged in the secondary market for cryptocurrencies.

Artistic works, sports clubs and groups

The passion for NFTs hit the mainstream in March, when a collectible painting by artist Beeple sold for $69.3 million at Christie’s, the auction house’s first such sale at auction. The artist, whose birth name is Mike Winkelman, responded with a tweet: “Holy damn” [putain de merde, ndt].

Although initially popular in the art world, the sports and music companies – and even the former first lady of the United States Melania Trump – have also embraced the concept to take advantage of the frenzy and find new ways to interact with their fans.

The NBA created its own NFT marketplace for buying, selling and exchanging video footage of players, under the name NBA Top Shot.

Other successes include numbered groups of NFTs that have gone viral, including CryptoPunks and Bored Ape Yacht Club, which designate private club status for their owners and are used as avatars on social media profiles. “The core value is always exclusivity,” Nystrom said, noting that expensive groups also provide buyers with access to closed channels on the Discord chat platform, as well as get-togethers and parties. “These groups are very close to the country club model: the entry barrier is high – it’s an investment cost – and you’re surrounded by the rich and the like,” he added.

The influx of small investors and a handful of big players

A total of $40.9 billion was paid out in Ethereum blockchain contracts, which were typically used to create NFTs, in the year ending December 15, according to Chainalysis, a research group that analyzes cryptocurrencies. The total would be even higher if it included NFTs minted on other blockchains like Solana. By comparison, last year the global art market was worth $50.1 billion, according to figures from UBS and Art Basel.

“NFT has brought a large number of retail investors into the crypto world, with micro-transactions under $10,000 representing more than 75% of the market.”

Chainalysis found that NFTs have introduced a large number of retail investors to the crypto world, with small trades under $10,000 representing more than 75% of the market. But just like the cryptocurrency market, it is still dominated by a few big players called “whales”. Between late February and November, 360,000 NFT owners owned 2.7 million NFTs. Of those, about 9% — or 32,400 portfolios — account for 80% of the market value, according to Chainalysis.

collectors traders

Crypto-skeptic software engineer Stephen Dell said that many whales are “earning hundreds of millions of dollars in cryptocurrency” from the crypto-price boom, and are “looking to convert their crypto into more crypto.”

Pranksy started with an initial investment of $600 in 2017, and now has an NFT portfolio of over $20 million.

Others say they approach the market like professional traders. He said that a popular investor in NFT, known as Pranksy on Twitter, who started with an initial investment of $600 in 2017, now has an NFT portfolio worth more than $20 million. He explained to the Financial Times that he is investing in a mix of projects, “some with higher daily turnover and others with more niche appeal.” In addition to capitalizing on profitable projects, Branki said they have “specific pieces that I plan to keep as long-term investments.”

So far, most of the new collectors of NFTs in the secondary market have not recovered their initial share, according to a “Financial Times” analysis by blockchain analytics platform Nansen, as early adopters have benefited from the high price of NFTs. As well as the cryptocurrency used to trade it.

Fraudulent practices of NFTs

The unregulated space is also riddled with fraud, fraud, and market manipulation, not least because it is difficult, if not impossible, to reveal the true identities of buyers and sellers.

Nansen’s analysis revealed $2 million worth of suspicious activity in the CryptoPunk and Bored Ape pools between mid-November and mid-December. Some NFTs, for example, were sold at a discount of 95% of the average selling price, either because of mistakes made by buyers and sellers, or because of tax deductions or other fraud at the expense of inexperienced users.

“You can buy and sell NFT on a public platform and make it look like there is a lot of interest in the artwork when only you are raising the price”

The researchers also warned of the potential for market inflation due to “trade laundering,” in which the same trader intervenes on both sides of a trade in order to give a false impression of demand.

“You can buy and sell NFTs on a public platform and make it look like there is a lot of interest in the artwork when it’s just raising the price,” said Rüdiger K Weng, CEO of Germany-based Weng Fine Art. “This also happens in the world of traditional art,” he added, explaining that if a manipulator entrusted an artwork to Sotheby’s and attempted to carry out fake transactions, he would have to pay 25% of the sale value to the auction house. This is an expensive task.

“Avec les NFT, les coûts ne sont qu’une fraction de ce montant”, ajoute-t-il, faisant référence aux frais de transaction, appelés frais de carburant, nécessaires pour frapper ou acheter un NFT, qui peuventon fluction de transaction the demand.

An economic model for artists?

However, many proponents believe that the market is maturing and will eventually offer a host of features, such as allowing artists to earn royalties forever.

“What can you do, because it’s a program?” asked Benedict Evans, an independent technical analyst and former venture capitalist. “An artist can, for example, get a stake and then secondary sales,” he said, referring to early innovations around music rights in particular.

The so-called financialization of NFTs is already underway in some societies; For example, the use of NFTs as collateral for loans, or the division of ownership of a single currency into smaller parts, known as splitting.

“In one or more metaverses, NFTs can indicate ownership of virtual goods, whether it is clothing for digital avatars or artwork for the walls of their digital homes.”

In the long term, enthusiasts hope that one day the tokens will boost e-commerce in one or more metaverses, futuristic virtual worlds filled with digital images. There, NFTs can refer to ownership of virtual goods, whether it’s clothing for digital photos or artwork for the walls of their digital homes. Nike recently announced that it has bought a virtual shoe company to make virtual sneakers.

Stock or collectibles? Expected organization

However, the future of the NFT market will also depend on the position regulators take as this free market develops. There are concerns, even among issuers, that NFTs share characteristics with some digital investment vehicles and are thus considered securities by regulators.

Devika Kornbacher, partner at Vinson and Elkins, says companies looking to issue NFTs regularly ask themselves the question: “Will this NFT be considered a financial instrument? Will it be considered a title for our company?”

“The future of the NFT market will also depend on the position regulators take as this free market develops.”

Meanwhile, tax services such as the US Internal Revenue Service have not directly dealt with NFTs, but some experts argue that they can be considered “collectibles,” meaning they will be subject to a capital gains tax.

“It’s an existential question that looms large for the entire industry,” Pratten Vallabanini, partner at White & Case, said of the upcoming regulations.

Hannah Murphy and Joshua Oliver, Financial Times

© The Financial Times Limited [2022]. All rights reserved. It cannot be redistributed, copied or modified in any way. Le Nouvel Economiste is solely responsible for providing this translated content and Financial Times Limited takes no responsibility for the accuracy or quality of the translation.

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