NFTs - From Digital Gold to Gold Foil Collectibles

With a recent sale of an NFT for more than $69 million, are these tokens more for love of art or money?

See also: How to Make Your Own NFT

Yesterday, Christie's became the first major auction house to sell a piece of Non-Fungible Token (NFT) art. The work, titled "Everydays: The First 5000 Days" by Mike Winkelmann, aka Beeple, sold for a cool $69,346,250 during an online auction.

But what is the intrepid art collector really buying?

For nearly $70 million the collector/investor who purchased "Everydays" now owns a digital file. They do not own the intellectual property rights to the file -- those still reside with the artist. Of course, digital files can by their nature be copied in a way that is just as good as the original. 

So for more than twice the production costs of Pixar classic "Finding Nemo", the collector has no rights to the reproduction of "Everydays". It's like buying a painting -- you own the painting, not the IP. As with all NFTs, the buyer has a digital file and, probably more importantly, they have the contract that goes along with it.

Where Does the Value of an NFT Come From?

A great many people are rushing to explain what an NFT is lately, but redundancy shouldn't keep us from trying again.

We think of an NFT as a trading card -- printed on a contract. 

Of course, it can be any form of media or file -- music, video, and still images -- but backing that media is an Ethereum smart contract, one that shows the provenance of the NFT and handles any stipulations and rights that go along with the purchase.

From a value point of view, the contract is the important part of the equation -- it's an immutable ledger entry that shows who sold the NFT, who made the purchase, when it was made, etc. This is a certificate of authenticity that can never be lost or separated from the art. That is a definite advantage in the world of collecting. 

But the face of that "trading card" is all about marketing and finding a hook to appeal to the imagination of the audience  -- the NFT can be whatever the creators want it to be.

Recently, someone paid $390,000 for a 50-second video by Grimes (which you can watch right now for free.) The creator of the internet-famous pop-tart cartoon cat meme, NyanCat, sold an NFT last month for 300 Eth (roughly $600,000 at the time.)

The National Basketball Academy (NBA) Top Shots digital trading cards NFTS had done $230 million in trading as of February. Last week rock band Kings of Leon announced it would be releasing its album as an NFT.

In case you wondered if you have anything laying around that could be turned into an NFT, Jack Dorsey is now selling his "original" tweets as NFTs. By March 6th, the highest bid on one of Dorsey's tweets was $2.5 million. Enough to buy a Bugatti Chiron. Unlike the Bugatti, we can share the full Dorsey tweet experience here.

Can you feel the living history? It's like being transported to the unfathomable reaches of 15 years ago in a world of missing vowels and punctuation. 

Why Now?

It's easy to assume that NFTs have been riding the incredible bull run which has skyrocketed Bitcoin by more than 300% and lifted many altcoins along with it, particularly Ethereum. However, to those who have been following the technology, this is not such a sudden turn of events. 

"The current surge of interest in NFTs will not come as a surprise to anyone who has been tracking the evolution of the technology. When NFTs first emerged several years ago, there simply wasn't the infrastructure in place to support widespread adoption. Today, that situation has fundamentally changed, with a proliferation of high-quality DeFi protocols and NFT marketplaces acting as onramps to the technology… Viewed in conjunction with the macroeconomic backdrop and pre-existing interest in rare art and collectibles as a store of value, NFTs can be understood as another prominent example of how blockchain technology is being used to secure value," Konstantin Richter, CEO and Founder of Blockdaemon said.

NFTs are certainly not a proven store of value but their appeal is inherently more difficult to define than other forms of crypto. There are two sides to the value of NFTs and some buyers are picking up NFTs for a separate, more abstract value.

"Purchasers are looking to own a moment in time, a snapshot of history. NFTs allow for digital content and pieces of our digital history to be preserved, controlled, and consumed at any moment in time, and those that hold real value will also be useful to the users..." said Jeremy Born, co-founder and CEO of NFT Genius, creators of Bitcoin Origins. 

Of course, not all new retail purchasers of NFTs are looking just for a connection to something historical. Some are just hoping to "hit it big".

"The appeal of NFTs for retail buyers is twofold. Some will buy out of dedication for their favorite artists, musicians, athletes, or celebrities. For these people, they will serve as end users. They will hold the cards over time and whether they appreciate or depreciate, they will be happy. But for others, these NFTs are seen as pure arbitrage investments. Very similar to trading small crypto projects in hopes one will help them "hit it big". Many will win in that game and many will lose while the market corrects itself," Ben Armstrong, Founder of Bitboy Crypto and influencer said.

So, is the latest frenzy of NFT enthusiasm based on abstract qualities of art and history, or is it another attempt to get in on the ground floor of something potentially much more valuable? There are arguments to be made for both sides.

NFTs for Art

Some respondents eagerly extolled the virtues of NFTs and what they can mean for the artist's relationship with their audience and ability to connect and get paid. 

"Digital art has been around since the 60s, but it has always faced challenges in terms of provenance, commercial value, and authenticity. NFTs solve this challenge in many ways. Further, it gives artists new ways to connect with their audiences… The creator economy that is sure to develop alongside the NFT economy, or as a by-product of it, is huge. Separately, this strong relationship between creator and collector and community, which can be more inclusive, incredibly dynamic, and borderless is truly exciting to me as both an appreciator of art and from a business perspective," Robert Norton, CEO of Verisart said.

The enthusiasm from artists is easy to understand -- NFTs are relatively easy to make, can be reproduced fairly easily if the maker chooses to produce more than one, and is bringing new attention to creators.

"This changes the game for art and music in particular because if you're an up-and-coming artist, or an artist who is struggling to remain culturally relevant, you don't have to rely on galleries or labels to strengthen your reputation in the market," Gunther Sonnenfeld, CEO of RAIR said.

Adrian Pollard the co-founder of bitHolla a white label crypto exchange provider said, "NFTs are great because it makes owning parts of the internet possible…. On the point of valuations, I think NFTs are in pure price discovery mode, anything goes. But if you really think about it, these early NFTs will be valuable because they are the first. I'm okay with artists getting rich for a change, that's refreshing."

NFTs for Business

NFTs can be used to express anything that is meant to be unique or limited-run quantities. It has the built in authentication and provenance of blockchain, but that power can be applied to anything from fine art to merit badges.

"We've been loving the recent developments and growth in the NFT space and at Status, we've incorporated the NFT experience into our workshops and meetups in Latin America.. Recently, we have started using NFTs to reward meetup participation -- think of it like a digital badge, similar to what a gamer might receive in a game when they complete a milestone," Simona Pop, Head of Community at Status.

NFTs' increasing sense of value also makes them useful incentives for users. 

"We're using NFTs as rewards whenever our users reach certain goals or perform certain actions. They can then trade those NFTs over a marketplace or use them to get certain boosts or benefits on the platform. We're looking to create loot boxes that are NFTs themselves. These can then be burned/opened to get other rewards on the blockchain, be it NFTs or tokens," Adrian Krion, Founder and Manager Director of Spielworks which operates a gaming platform.

NFTs are valuable as incentives working with users not only because they can convey value but because they are so easily personalized to reach audiences. 

"The use of non-fungible tokens (NFTs) could be applied to offer a more engaging, personalized element to existing loyalty programs… brands can build on these assets by including and encoding other features such as free gifts, access to VIP programs, and vouchers, to name a few — all the while being able to potentially transfer or sell this value to someone else. This radically changes the way brands can market and communicate with target audiences while enabling consumers to maximize the value of these engagements," Matt Dyer, Head of Sales and Marketing at Zilliqa said. 

From fine art to merit badges, NFTs are an IRL realization of the power of memes -- whether it's a Fine Art meme or a crude cartoon drawing, the cultural reference seems to be what is important and relatable, putting high and low art side by side in terms of value and collectibility. 

"Fine art and collectibles are of course different things, but the point is that both can trade on scarcity in a whole new way with NFTs… there is a novelty to owning and sharing a scarce object that has unique provenance (ownership), whether you physically store the original yourself, or not," Sonnenfeld said.

No Longer Dead by Jonathan Monaghan, commissioned by and featured on Niio. 

Will the Hype Continue?

It's fair to say any crypto market, even Bitcoin, endures more than average turbulence. The sentiment of the zeitgeist is a tricky thing to predict -- but NFTs have become a known quantity now beyond the blockchain community. 

"We're seeing an intense hype cycle in the NFT space right now, as more people are beginning to see the utility in this specific class of tokens. My fear is that the more sensational headlines are being latched onto at the expense of the attention being placed on the excellent properties and utility of the underlying technology. Perhaps it's a case of the hype being the necessary spotlight, but my opinion is that there will be a lot of short-term pain in the future as a result. I would not be surprised if there ends up being a shakeout in the NFT market as the next logical step," Eric Kapfhammer, COO of Polyient Capital said.

Ché Köhler, Co-founder of Niche Market said, "Like any new tool, it will be misused and while the headlines about digital art and tweets selling for millions take the headlines in the short term the long term future looks bright. Once the hype and overvaluing of NFT's fades and it reverts to a more value based system, I could easily see it disrupting the current centralised way we manage temporary forms of value like plane tickets and concert tickets, to how we manage ownership such as tokenized stock certificates or retail pre-orders."

Of course, institutional investors have been often credited for the steady rise in BTC, market corrections aside. Are we likely to see the same interest from the traditional financial sector in NFTs which are much harder to quantify than BTC?

"We're just now beginning to see interest from the VC side, but, at present, there is virtually zero infrastructure (trading, settlement, fund administration, custody) in place that would be the prerequisite to institutional investment in NFTs. That said, I fully expect a crop of new institutional funds to form around the investment opportunities in NFTs, which is an area I am directly involved in today," Kapfhammer said.

Steven Cordes on Unsplash