NFT, a 40 billion dollar market

This free access article allows you to discover the relevance and usefulness of the Nouvel Economiste. Your registration for the 24-hour free trial will give you access to all articles on the site.

In early 2021, only a niche of cryptocurrency enthusiasts knew what non-fungible tokens, or NFTs, were. But by the end of the year, according to the latest data, nearly $ 41 billion had been spent on NFT, making the market for digital art and collectables nearly as valuable as the global art market.

Rise of NFTs in the secondary cryptocurrency market

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

“NFTs are essentially digital ownership certificates registered on a blockchain and can be traded on the secondary market for cryptocurrencies.”

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

Works of art, sports clubs, collections

Passion for NFTs hit the mainstream in March when a collage by artist Beeple sold for $ 69.3 million at Christie’s, the first such auction at the auction house. The artist, whose birth name is Mike Winkelmann, reacted with a tweet: “Holy fuck” [putain de merde, ndt].

Although initially popular in the art world, sports and music companies – and even former US First Lady Melania Trump – have also embraced the concept to capitalize on the craze and find new ways to interact with their fans.

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

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

Inflow of small investors and a handful of big players

A total of $ 40.9 billion was paid in ethereum’s blockchain contracts, which were generally used to create NFTs in the year ending December 15, according to Chainalysis, a cryptocurrency analysis research group. The total would be even higher if it included NFTs minted on other blockchains such as Solana. By comparison, the world art market was worth $ 50.1 billion last year, according to data from UBS and Art Basel.

“NFTs have introduced large numbers of retail investors to the cryptocurrency world, with small transactions under $ 10,000 accounting for over 75% of the market.”

Chainalysis found that NFTs have introduced large numbers of retail investors to the cryptocurrency world, with small trades under $ 10,000 accounting for over 75% of the market. But just like the cryptocurrency market, it remains dominated by some big players called “whales”. Between the end of February and November, 360,000 NFT owners held 2.7 million NFTs. Of these, about 9% – or 32,400 portfolios – held 80% of the market value, according to Chainalysis.

Dealers-collectors

Stephen Diehl, a skeptical crypto software engineer, said many whales are “sitting on hundreds of millions of dollars worth of cryptocurrencies” from the cryptocurrency price boom and “trying to turn their cryptocurrencies into more cryptocurrencies.”

“Pranksy started with an initial investment of $ 600 in 2017, now has an NFT portfolio worth over $ 20 million”

Others claim to approach the market as professional trader-collectors. A famous NFT investor, known as Pranksy on Twitter, who started with an initial investment of $ 600 in 2017, now has an NFT portfolio worth over $ 20 million, he said. He told the Financial Times that he invests in a mix of projects, “some of which have higher daily trading volume and others that have more niche appeal.” In addition to profiting from profitable projects, Pranksy claimed to have “specific coins that I intend to keep as long-term investments”.

So far, most new NFT collectors on the secondary market have yet to redeem their initial share, according to an analysis conducted for the “Financial Times” by the Nansen blockchain analytics platform, where early collectors benefited from a price increase. of NFTs as well as the cryptocurrency used to exchange them.

The fraudulent practices of NFTs

The unregulated space is also full of fraud, scams and market manipulation, not least because the real identities of buyers and sellers are difficult, if not impossible, to discover.

Nansen’s analysis revealed suspicious $ 2 million assets in CryptoPunk and Bored Ape collections between mid-November and mid-December. Some NFTs, for example, have been sold at a 95% discount compared to the average selling price, both for mistakes made by buyers and sellers, and for tax deductions or other scams to the detriment of inexperienced users. .

“You can buy and sell an NFT on a public platform and make it seem like there’s a lot of interest in the artwork when it’s just you raising the price.”

The researchers also warned that the market is likely inflated by “wash trading”, in which the same trader intervenes on both sides of a trade to give a false impression of demand.

“You can buy and sell an NFT on a public platform and make it seem like there is a lot of interest in the artwork when you are the only one raising the price,” said Rüdiger K Weng, CEO of Weng Fine Art, with based in Germany. “It also happens in the world of traditional art”, he added, while clarifying that if a manipulator entrusts a work of art to Sotheby’s and tries to make fictitious transactions, he will have to pay the auction house 25% of the sale, making this is an expensive undertaking.

“With NFTs, the costs are only a fraction of that amount,” he adds, referring to the transaction fees, called fuel fees, required to mint or purchase an NFT, which can vary depending on the requirement.

An economic model for artists?

However, many advocates believe the market is maturing and will eventually offer a number of features, such as allowing artists to earn royalties in perpetuity.

“What can you do, why is it software?” asked Benedict Evans, an independent technology analyst and former venture capitalist. “It could be, for example, that the artist gets a share and then the subsequent secondary sales,” he said, pointing in particular to the first innovations on music rights.

In some communities the so-called financialization of NFTs is already underway; for example, using NFTs as collateral for loans or dividing ownership of a single currency into smaller parts, known as a split.

“In one or more metaverses, NFTs could refer to ownership of virtual assets, be it clothing for digital avatars or artwork for the walls of their digital homes.”

Long-term, enthusiasts hope that one day tokens will fuel e-commerce in one or more metaverses, futuristic virtual worlds filled with digital avatars. There, NFTs could refer to ownership of virtual assets, be it clothing for digital avatars or artwork for the walls of their digital homes. Nike recently announced that it has bought a virtual shoe company for the production of virtual sneakers.

Titles or collectibles? Regulation envisaged

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

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

“The future of the NFT market will also depend on the position that regulators take during the development of this freewheeling market”

Meanwhile, tax services such as the US Internal Revenue Service have yet to deal directly with NFTs, but some experts argue that they could be considered “collectibles,” meaning they would be subject to capital gains tax.

“This is a looming existential question for the entire industry,” said Pratin Vallabhaneni, partner of White & Case, of the upcoming regulations.

Hannah Murphy and Joshua Oliver, FT

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

Leave a Comment