he year was 1636, and in the Netherlands, the market was in a panic. The culprit? Exotic tulip bulbs, which had become a hot trading commodity among the Dutch upper class. According to one historian, the most expensive bulbs sold for as much as a nice house.
Today, in 2021, the luxury goods market is being dominated by something equally puzzling and much less tangible. Non-fungible tokens, or NFTs, have become somewhat of a market craze recently, with prices soaring into the multi-million-dollar range. NFTs “can really be anything digital,” but they’re often video clips or albums, and many are stored in the Ethereum blockchain. However, while other items stored in the blockchain are fungible—a bitcoin, for example, can be traded for another identical bitcoin—NFTs are one-of-a-kind, more akin to limited edition baseball cards than cryptocurrency.
Currently, much of the speculation surrounding NFTs exists in the art world, where the blockchain technology has become a mode for selling digital art. Last week, a 10-second video clip by the digital artist Beeple sold for $6.6 million, and Grimes sold her digital art collection as NFTs for $7,500 a piece. NFTs offer a complicated kind of worth, one that can be compared to valuable assets in the physical art world. Owning a video clip saved in the blockchain as an NFT gives you an opportunity to own the only original copy of that video clip, in the same way that only one museum can own a masterpiece like The Mona Lisa, even though many people can buy reproduction prints.
What some have found confusing about NFTs, however, is that digital art is markedly different from physical art. Specifically, while there are obvious differences between a physical masterpiece like The Mona Lisa and its printed reproductions, a copy of a video clip is exactly the same as the original video clip. However, NFTs have unique properties that benefit both artists and buyers. NFTs have a feature which allows artists to receive a percentage of the piece every time it is sold in the blockchain and issued to a different cryptocurrency wallet. With some pieces selling in the millions, this sales cut could result in substantial revenue for artists. Additionally, buyers can treat the assets much like they might physical art, buying NFTs and selling them when their value increases. Buyers can also post a picture of the digital art online or even set it as their profile picture on a social media account. After all, as one expert described it, buying an NFT is more about “buying the property rights to the picture” than buying the picture itself.
Unfortunately, much like the 17th century tulip craze, the NFT obsession might represent a price bubble as digital art continues to sell for ever-increasing prices. At OpenSea, a marketplace for NFTs, monthly sales increased $78.3 million between January and February this year. Last year, monthly sales for the assets only totaled $1.5 million a month. If the bubble bursts, the market collapse could hold major losses for investors who continue to bank on NFT prices rising.
Popping the burgeoning NFT bubble, however, likely only holds real financial risk for a privileged few. Much like the tulips 400 years ago, NFT investment is primarily populated by luxury investors, buyers who have big bucks to spend on blockchain-based art. Though a market crash would be devastating to NFT investors who have sometimes placed millions on digital kittens or ghost GIFs, such an event isn’t likely to have market-wide reach. A 2019 report from the Financial Stability Oversight Commission exploring “challenges to financial stability” found that bitcoin holds “very limited” implications for financial stability, perhaps because the cryptocurrency ecosystem is relatively small. NFTs, representing an even smaller sector of the cryptocurrency market, would likely have a similarly limited impact on the larger economy if the bubble burst. However, many can rest assured that if the NFT market collapses, it likely won’t cost those who chose to stay away from $6 million video clips and invested their earnings elsewhere.
a global affairs media network
From Video Clips to Multi-Million Dollar Assets: Understanding the NFT Craze
March 12, 2021
T
he year was 1636, and in the Netherlands, the market was in a panic. The culprit? Exotic tulip bulbs, which had become a hot trading commodity among the Dutch upper class. According to one historian, the most expensive bulbs sold for as much as a nice house.
Today, in 2021, the luxury goods market is being dominated by something equally puzzling and much less tangible. Non-fungible tokens, or NFTs, have become somewhat of a market craze recently, with prices soaring into the multi-million-dollar range. NFTs “can really be anything digital,” but they’re often video clips or albums, and many are stored in the Ethereum blockchain. However, while other items stored in the blockchain are fungible—a bitcoin, for example, can be traded for another identical bitcoin—NFTs are one-of-a-kind, more akin to limited edition baseball cards than cryptocurrency.
Currently, much of the speculation surrounding NFTs exists in the art world, where the blockchain technology has become a mode for selling digital art. Last week, a 10-second video clip by the digital artist Beeple sold for $6.6 million, and Grimes sold her digital art collection as NFTs for $7,500 a piece. NFTs offer a complicated kind of worth, one that can be compared to valuable assets in the physical art world. Owning a video clip saved in the blockchain as an NFT gives you an opportunity to own the only original copy of that video clip, in the same way that only one museum can own a masterpiece like The Mona Lisa, even though many people can buy reproduction prints.
What some have found confusing about NFTs, however, is that digital art is markedly different from physical art. Specifically, while there are obvious differences between a physical masterpiece like The Mona Lisa and its printed reproductions, a copy of a video clip is exactly the same as the original video clip. However, NFTs have unique properties that benefit both artists and buyers. NFTs have a feature which allows artists to receive a percentage of the piece every time it is sold in the blockchain and issued to a different cryptocurrency wallet. With some pieces selling in the millions, this sales cut could result in substantial revenue for artists. Additionally, buyers can treat the assets much like they might physical art, buying NFTs and selling them when their value increases. Buyers can also post a picture of the digital art online or even set it as their profile picture on a social media account. After all, as one expert described it, buying an NFT is more about “buying the property rights to the picture” than buying the picture itself.
Unfortunately, much like the 17th century tulip craze, the NFT obsession might represent a price bubble as digital art continues to sell for ever-increasing prices. At OpenSea, a marketplace for NFTs, monthly sales increased $78.3 million between January and February this year. Last year, monthly sales for the assets only totaled $1.5 million a month. If the bubble bursts, the market collapse could hold major losses for investors who continue to bank on NFT prices rising.
Popping the burgeoning NFT bubble, however, likely only holds real financial risk for a privileged few. Much like the tulips 400 years ago, NFT investment is primarily populated by luxury investors, buyers who have big bucks to spend on blockchain-based art. Though a market crash would be devastating to NFT investors who have sometimes placed millions on digital kittens or ghost GIFs, such an event isn’t likely to have market-wide reach. A 2019 report from the Financial Stability Oversight Commission exploring “challenges to financial stability” found that bitcoin holds “very limited” implications for financial stability, perhaps because the cryptocurrency ecosystem is relatively small. NFTs, representing an even smaller sector of the cryptocurrency market, would likely have a similarly limited impact on the larger economy if the bubble burst. However, many can rest assured that if the NFT market collapses, it likely won’t cost those who chose to stay away from $6 million video clips and invested their earnings elsewhere.
