NFT’S: THE FUTURE OF THE WORLD OF ART OR JUST A SPECULATIVE BUBBLE？

2022-03-17, 07:04

[TL;DR]

By now, everyone is familiar with bitcoin, which has been a gateway to cryptocurrencies, and the use of blockchain technologies as additional security for a multitude of transactions on the Internet. But are you familiar with NFTs, or non-fungible tokens? Because since last year, that's the word on the lips of just about everyone in the art world.

NFTs are a booming sector. Initially reserved for a very closed club of insiders, the value of NFTs keeps expanding. The sale of digital objects exceeded 10.7 billion dollars in 2021. A frenzy that is far from calming down and that even reaches the art market.

What is an NFT? How do we explain its success and does it really revolutionize the art market? While some shout genius, others see it as yet another speculative bubble.

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What is an NFT?

You may not know it, but you already use the principle of tokens in your daily life with your ID card, your driver's license or your gym membership card.

An NFT, for "non-fungible token," is a digital asset defined as unique, creating scarcity in the digital world. Its age dates back to 2014 but it is only recently that it has been democratized in the art world, in the widest sense.

An NFT is created, from digital works that represent tangible or non-tangible elements. Among them, we can mention art, GiFS, videos, collectibles, virtual avatars, pairs of shoes, music, etc. Even a tweet can be considered an NFT, with Twitter co-founder Jack Dorsey being the first to do so for the modest sum of over $3.5 million. The buyer receives a digital file that acts as a collector's item, similar to a painting or photograph. NFTs can only have one owner at a time.

Is NFT a cryptocurrency?

Well, no, NFT is not a crypto-currency and it is important to differentiate between the two. Let's take the example of a cryptocurrency like bitcoin. bitcoin is a token that represents a certain piece of information that is assigned a certain value. Like a bus ticket, bitcoin is fungible, meaning that it is interchangeable with another bitcoin and will retain the same value. Non-fungible tokens, such as NFTs, are not interchangeable because they are tied to a digital asset and cannot be replaced. In other words, they are unique and have no equivalent value. In addition, they are subject to market fluctuations. However, they can be given away, traded, or sold.

How do NFTs work?

It's the same principle as for cryptocurrencies, it is possible to buy and sell NFTs on specialized platforms like Ethereum. If you make a transaction and buy an NFT, a digital certificate of authenticity is assigned to you by the blockchain. This is a digital property that cannot be compromised. Think of the blockchain as a vast platform for data storage and information exchange. The data exchanged is transparent and secure through a decentralized global system. Among the information stored on the blockchain, you have: contracts completed transactions, and property titles.

So when you buy a digital object, its ownership is traceable. All these cryptographic processes make NFTs unfalsifiable and unique. A first in digital art! To keep your rights on this digital certificate, you must have an electronic wallet (digital wallet), whether it is a software as an extension for a web browser or a securely connected object, for example, a USB.

NFT cannot be exchanged for another NFT

Bought and sold online and often associated with cryptocurrencies, its operation is however quite different. What they have in common is that they are usually coded with the same software, but the similarity ends there. A currency like bitcoin is fungible, which means that one bitcoin has the same value as another bitcoin, whereas an NFT cannot be exchanged for another NFT. It functions as a digital certificate of authenticity based on cryptocurrency technology, the blockchain. This technology can be understood as a directory that records transactions made in a transparent and decentralized way by constantly adding new blocks. Each transaction is added to the block and each block is an immutable record, that is, eternally printed and impossible to copy, which guarantees the security of this type of transaction.

In the first half of the year, an estimated $74 million has been spent on NFT since November 2017. An example of a recent record sale is that of artist Mike Winklemann (Beeple) with his digital work "Everydays: the First 5,000 Days" which sold at Christie's for a record $69.3 million. It is a work composed of 5,000 drawings, yet freely available on the Internet. The lucky buyer, therefore, owns the original object, with built-in authentication to prove the work's authenticity. This type of collector usually values the certificates of authenticity more than the work itself.

Major auction houses have already begun to follow suit.

Do NFTs offer us new opportunities?

For virtual artists, NFTs are new opportunities to earn money and to depend less on art galleries and auctions to sell their works. The artist retains control of his or her copyright and remuneration because he or she is dependent on fewer intermediaries.

Another effect of this effervescence is the arrival of a new generation of collectors of digital objects who are not used to traditional auctions. In the first months of the year, $2.5 billion in transactions have already been recorded for this activity.

Financial speculation and profit are not the only objectives of NFTs, some brands have taken advantage of this craze to raise funds for charitable initiatives.

Investing in NFTs remains risky for novices, we don't necessarily have the necessary hindsight to guarantee the viability of such a purchase. It is safer to start by investing a small amount and never spend more than you are willing to put in.

Remember, the value of an NFT is based entirely on what someone else is willing to pay for it. In other words, demand will set the price rather than economics. This means that an NFT may sell for less than you paid for it and you may not even be able to sell it if no one wants it. As with any investment, you have to be careful and on guard.

NFTs are volatile and difficult to trade. Plus, many collectors don't understand exactly what they are buying.

The market for digital collectibles has exploded in 2021 and money is pouring in from all directions.

Experts say buyers need to be aware of the volatility, illiquidity, and fraud that characterize this nascent market.

Some believe that NFTs will only continue to explode, while others believe it is just a bubble ready to burst.

The digital collectibles market is booming, but that doesn't mean it's a safe investment.

Last year, a digital artist known as Beeple sold a work for $69 million via Christie's. Twitter founder and CEO Jack Dorsey has auctioned off his very first tweet.

For the uninitiated, these assets are all examples of non-fungible tokens, or NFTs, which use the same blockchain technology that underlies cryptocurrencies like bitcoin to keep track of ownership and create scarcity.

Buying an NFT usually means you get access to the same file that anyone can view or download, but you also get something like a digital deed.

While NFTs have been around for years, the market for them has been in a frenzy in recent months, with traditional companies and investors moving in.

But for all the hype surrounding them, digital collectibles - like cryptocurrencies, stocks or any other asset subject to speculation - carry significant risks that people would do well to understand before diving in.

However, it is still too early to tell to what extent NFTs will become a mass phenomenon. It will take some time for the hype to die down and for them to be used in real cases that add real value, beyond a fad. We'll see what impact and volume they have.

The main risks of the emerging NFT market

And while we think the NFT market will eventually mature and become mainstream, there are a handful of additional risks and uncertainties that new collectors need to consider regarding this emerging market space.

The NFT market suffers from a great deal of volatility, in part because there are not yet mechanisms in place to value these assets. In 2020, the value of some of the most popular types of NFTs increased by about 2,000%. Some highlights initially sold for a few dollars are now worth tens of thousands.

In terms of liquidity, that is, the ease with which an asset can be exchanged for cash, NFTs are more like baseball cards or paintings than bitcoin or stocks, as each seller must find a buyer willing to pay a certain price for a specific, unique item. This can put collectors in a difficult position if they spend $100,000 and the market starts to crash.

But illiquidity can also be a good thing, because it prevents people from making rash decisions. If people don't have the opportunity to panic and dump their NFTs, the market could avoid the type of drop in value that would trigger such a sale in the first place.

What the future holds

Despite the uncertainties, the future of NFTs holds enormous potential. The market will continue to grow and NFTs could become the underlying asset of the entire virtual economy, extending far beyond digital art and collectibles.

Author: Gate.io Researcher: Aziz. H
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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