NFTs: Could They Be A Bubble About To Burst?

NUGGET'S NEWS
31 May 2021
NFTs are the latest trend to take the crypto world and the internet by storm. This is hardly surprising, given NFTs have made many artists and other creatives life-changing amounts of money.

With the initial hype settling, now is a great time to step back and ask: “Are NFTs a speculative bubble or are they here to stay?” Let’s explore both arguments.

What is an NFT?

In case you aren’t aware, NFT stands for ‘non-fungible token’. NFTs represent ownership rights in just about any kind of digital asset or media, such as artwork, audio files, tweets, images, domain names, plots of virtual land, books, articles and trading cards.

Are NFTs here to stay?

When you’re thinking about whether a new concept will still be around in the decades ahead, a key question you’re trying to answer is whether that concept is something that’s never existed before.

When it comes to NFTs, they most certainly have never existed before.

NFTs make proving ownership cheap and easy

Before NFTs were around, proving ownership of a digital asset was highly impractical. For example, if you made a piece of digital art and wanted to sell it, how would people know you hadn’t just copied the original?

Thanks to NFTs, it’s now cheap and easy to verify the original digital asset. Whilst 1,000s of copies of a digital asset can exist, the original is distinguishable because it’s specified by its associated NFT, which anyone can check. This is an incredibly big deal.

Changing the game when it comes to fan engagement

NFTs offer brands, creators, sports teams and influencers, better ways to engage with fans. For example, Kings of Leon recently sold six golden ticket NFTs. Each NFT holder gets four front-row tickets to one headline show for each tour in the future, VIP concierge services, a meet-and-greet with the band, and more. (Separately, the rock band also sold their latest album in the form of an NFT.)

From the sports side of things, the Golden State Warriors became the first pro sports team to launch an NFT collection. The collection featured six Championship Ring NFTs to commemorate the championships won by the team. Because rings are only ever awarded to players, making NFTs of the rings allow fans to connect with their team in a completely new way.

New ways for creatives to monetise

NFTs unlock new ways for artists and other creatives to earn money. For example, an NFT can have rules programmed into it so that the creator gets a cut of all future sales of the NFT.

Zoë Roth did this when she sold her famous ‘Disaster Girl’ meme in April for A$650,000. For any future sale of that NFT, Ms Roth will automatically get 10% of the sale amount.

Why the NFT market may be in a bubble

To many, NFTs look like a stock standard investment bubble; a fad that no one will remember in a few years. Heck, even the artist who sold the world’s most expensive NFT called them a bubble. Below are some reasons they could be right.

NFTs as part of an “everything” bubble

NFTs are booming during a period when many other asset classes are doing the same, such as stocks, real estate, sports memorabilia or cryptocurrency. Even commodities prices are soaring, with the likes of iron ore, copper, and lumber having recently hit all-time highs.

Soaring cryptocurrency prices are particularly relevant here. In early January, all cryptocurrencies hit a combined market cap of US$1 trillion for the first time. As of May 6, that figure is $2.5 trillion, according to CoinGecko. Investors have gotten ‘crypto rich’ and are happy to spend loads of crypto on NFTs as a ‘flex’. (Think of it as the crypto equivalent of wearing designer clothes or driving a fancy car.)

When stocks, real estate and cryptocurrencies inevitably cool down and a bear market kicks in, the NFT bubble will almost certainly burst. Most NFTs may very well lose 80% or more of their value.

Flooding the market

Whilst it’s true that the supply of a given NFT is limited, the overall supply of NFTs is not. New NFTs have flooded the market in recent months. This will continue for as long as opportunists can make a quick buck by creating NFTs based on work they’ve either created or stolen.

You don’t need to be an economist to know what such a sharp increase in supply would do to the average price of an NFT. Indeed, we’ve already seen this play out to an extent, with the average price of NFTs plummeting by almost 70% between mid-February and early April.

(It is worth nothing, just because most NFT prices may collapse, doesn’t mean they all will. Take leading NFT project CryptoPunks for instance. As of early May, the average price of a CryptoPunk is above US$100,000, a record high.)

So, are NFTs a game changer?

NFTs have the potential to change the game when it comes to proving ownership of a given digital asset.
That said, NFTs are very new. There is a lot of excitement and people are making lots of money. In all likelihood, many NFTs will crash in value—particularly those that are made by opportunists looking to make a quick buck.

Cover image source: Elizaveta Galitckaia/Shutterstock.com


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This article was reviewed by our Content Producer Marissa Hayden before it was updated, as part of our fact-checking process.


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