How NFTs became a $ 40 billion market in 2021

In early 2021, only a niche group of crypto enthusiasts knew what non-fungible tokens (NFT) were.

However, by the end of the year, according to the latest data, nearly $ 41 billion had been spent on NFTs, making the digital artwork and collectibles market almost as valuable as the global art market.

“This year the NFT market exploded from a sub-billion dollar market to a multi-decabillion industry,” said Mason Nystrom, research analyst at crypto data firm Messari, adding that buyers were rushing to find art to discover that corresponds to their “digital identity” ”.

The NFT mania hit mainstream in March when a collage by artist Beeple sold for $ 69.3 million at Christie’s, the first of its kind at auction. The artist, whose real name is Mike Winkelmann, responded with a tweet: “Holy fuck”.

Corporate actors in the arts, sports, and music – even Melania Trump – quickly started minting NFTs, essentially digital certificates of ownership registered on a blockchain, trying to capitalize on the hype and find new ways to connect with fans.

Other hits included numbered collections of NFTs that went viral, including CryptoPunks and Bored Ape Yacht Club, which indicated their owners’ club status and are used as avatars on social media profiles.

“The core value is still exclusivity,” said Nystrom, noting that expensive collections also give buyers access to closed channels on the Discord chat platform as well as to meetups and parties.

“You’re country club-like: there’s a high barrier to entry – cost of capital – and you’re around high net worth and other individuals,” he added.

A total of $ 40.9 billion has been poured into the Ethereum blockchain contracts typically used to create NFTs in the year ending December 15, said Chainalysis, a cryptanalysis group. The total would be even higher if it included NFTs minted on other blockchains like Solana.

In comparison, the value of the global art market was US $ 50.1 billion last year, according to data from UBS and Art Basel.

Chainalysis found that NFTs brought large numbers of retail investors to the crypto world, with small transactions under $ 10,000 making up more than 75 percent of the market.

But similar to the market for cryptocurrencies, it is still dominated by a few big players or “whales”.

Between late February and November, 360,000 NFT owners held 2.7 million NFTs. Of these, around 9 percent – or 32,400 wallets – held 80 percent of the market value, Chainalysis found.

Stephen Diehl, a crypto-skeptical software engineer, said many whales are “people are sitting on hundreds of millions of dollars in crypto” from the boom in crypto prices “to turn their crypto into more crypto.”

Others say they approach the market as professional traders with collectors. A well-known NFT investor known as Pranksy Twitter, which started with an initial investment of $ 600 in 2017, now has an NFT portfolio valued at more than $ 20 million, it said.

They told the Financial Times that they are investing in a mix of projects “some of which have higher daily trading volumes and some of which are more niche attractiveness”. In addition to “flipping” lucrative projects, Pranksy said they have “certain pieces that I want to keep as a long-term investment.”

So far, most of the new NFT collectors on the secondary market have not yet amortized the cost of their purchases, according to an analysis for the FT of the blockchain analysis platform Nansen, in which early collectors also benefited from a price increase in NFTs, as in the cryptocurrency with the they are traded.

The unregulated space is also plagued by fraud, fraud, and market manipulation, especially because the identities of buyers and sellers in the real world are difficult, if not impossible, to discover.

Nansen’s analysis revealed suspicious activity of $ 2 million in the CryptoPunk and Bored Ape collections in the 30 days through mid-December. For example, some NFTs have been sold at 95 percent discount off the average retail price, either due to buyers and sellers mistakes, tax write-offs, or other scams that exploited unskilled users.

Researchers have also warned that wash trading is likely to inflate the market – when a trader takes both sides of a trade to create the false impression of demand.

“You can buy and sell an NFT on a public platform and create the impression that there is a lot of interest in the piece if only you drive the price up,” said Rüdiger K. Weng, managing director of Germany-based Weng Fine Art.

“That happens in the traditional art world too,” he said, but added that if a manipulator hands a work of art to Sotheby’s and tries a laundry deal, he has to pay the auction house 25 percent of the sale, making it an expensive business. “With NFTs, the cost is only a fraction of that,” he said, referring to the transaction fees known as gas fees, which are required to mint or purchase an NFT and which can fluctuate based on demand.

That said, there are plenty of proponents who believe the market will mature and eventually offer a range of features, such as the ability to give artists the ability to collect royalties on a permanent basis.

“What can you do because it’s software?” Asked Benedict Evans, independent technology analyst and former venture capitalist. “It could be things like artist involvement and then secondary sales,” he said, referring specifically to early innovations in music rights.

In some municipalities, the so-called “financialization” of NFTs is already taking place – for example, by using NFTs as collateral for loans or by dividing ownership of a single piece into smaller pieces, which is known as fractionalization.

In the long term, enthusiasts hope that tokens will one day drive e-commerce in any metaverse or metaverse, futuristic digital avatar-filled virtual worlds. This is where NFTs could denote ownership of virtual goods, be it clothing for digital avatars or art for the walls of their digital homes. Nike recently announced that it has bought a virtual shoe company to mint virtual sneakers.

In any case, the future of the NFT market will also depend on the attitude of regulators to the development of the free-wheeling market.

Even among corporate issuers, there are concerns that NFTs share characteristics with certain digital investment vehicles and, therefore, could be considered securities by regulators. Devika Kornbacher, partner at Vinson and Elkins, said that companies wanting to issue NFTs regularly ask, “Is this NFT viewed as a financial instrument? Is it seen as a security by our company? “

In the meantime, tax authorities like the 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.

“It is an emerging existential problem for the entire industry,” said Pratin Vallabhaneni, partner at White & Case, of the upcoming regulation.

Additional reporting by Eva Szalay and Siddharth Venkataramakrishnan