by Karim Raffa
NFTs were all the craze this past year, and not just from a hype and attention perspective – not a day goes by without a rare mutant ape or a plot of virtual land going on sale for hundreds of thousands of dollars on platforms such as OpenSea or Mintable.
If you’re from a generation that’s reading this on their computer and not on their phone, the idea of paying half a million dollars for a pixelated JPEG may seem insane. But let’s all be reminded about something that we’ve all done before, or have relatives that have done it.
We’re talking physical collectibles like numismatic coins (with little R2D2s where George Washington should be), vinyl, rare toys that you can’t take out of the packaging without it losing all its value, and Pokémon cards (some of which are selling for close to US$400,000).
The hunt for the rare
We as a civilisation have always coveted things that are scarce or otherwise limited in supply. From gold to seashells, we’ve even used them as payment methods. The jump to finding value in things that are rare – because they require a lot of craftsmanship and only so many can be produced in one year like luxury watches, to things that were intentionally limited in supply to convey an exclusive value – was an easy one.
Go to any auction these days, and you’ll find value in items with at least one of these attributes:
- They’re old (antiques, fossils, old books, etc)
- They’re made of something of value (jewellery, precious stones, precious metals)
- They’re rare (a Banksy painting, a classic car, a luxury watch)
In the last few years, digital art has proven to have value because they tick at least one of these boxes. They’re rare, unique, or limited in supply.
As a generation that knows at least someone who’s pirating movies, attributing value to something digital that can be so easily copied requires a complete rewiring of the valuation system. The main reason we struggle with the concept is because digital scarcity wasn’t something we had when learning about supply and demand (either in a classroom or in the real world). The idea of something being both digital and non-fungible just made very little sense.
But NFTs and digital art can be more than just pixelated JPEGs. You can think of them as a member’s card, or a certificate of ownership for things in the real world or in the digital metaverse.
Are NFTs just a hype?
Admittedly the hype may seem crazy to most, but as with the advent of any new technology, we can expect a relatively standard hype cycle. According to the latest “Gartner’s Hype Cycle for Emerging Technologies” in August 2021, NFTs could still be five years from mainstream adoption and they’re currently riding the “Peak of Inflated Expectations” phase.
While NFTs are popular in the art and collectibles scenes – you may have heard of the 2021 Bored Ape Yacht Club? – the potential of NFTs goes far beyond eccentric and expensive digital artworks. Big brands like Nike are already working on expanding the application of NFTs by acquiring RTFKT (creators of virtual sneakers and collectibles), and the $85 billion video game industry is already experimenting with NFTs as building blocks for a next-gen digital world – something that’s being proposed by Meta (formerly Facebook) for their metaverse.
You may be wondering where this leaves you, what action you should take, and whether or not you should YOLO your life savings into a pixelated bunny.
Here’s some not financial advice:
The crypto market is valued at around USD1.6 trillion
The NFT market is valued at around USD31.4 billion
Gold’s market cap is around USD11.7 trillion
Apple’s market cap is around USD2.6 trillion
The traditional Art market cap is around USD39.5 billion
With this in mind, and the past growth rate in view, ignoring this market as a whole from a purely diversification perspective would seem unsound. The earth is shifting below our feet, and pretending it isn’t won’t make the shaking stop.