Surging NFTs shrug off bubble trouble

Finance | Aiden He 18 Oct 2021

With central banks continuing to flood the world with cheap money, the frenzy for crypto assets including non-fungible tokens is hitting new highs as investors hunt for alternatives to traditional assets like stocks, bonds and real estate.

The figures don't lie: Data from market tracker DappRadar shows sales of NFTs in the third quarter surged more than seven times to US$10.67 billion (HK$83.23 billion) over the previous quarter, and were up a colossal 38,060 percent over the same time last year.

So what exactly is an NFT?

An NFT is a "one of a kind" digital certificate that allows anyone to verify the ownership and authenticity of a digital asset such as a work of art, a file, an address or anything that can be stored in digital form.

The digital record is saved on distributed ledgers built upon blockchains - a technology that validates and records transactions on computers around the world rather than a centralized location, and used by cryptocurrencies like bitcoin. Anyone can view the transaction and the owner of the asset, but no one is able to modify or erase the record.

However, there are several blockchains around the world and they are all not compatible with one other, which means that an NFT created in one blockchain may not be transferable to another, while buyers may be in the dark about whether the reproduction by the artists is legitimate.

NFTs have been around a few years but most people had never heard of them until digital artist Beeple's NFT artwork - Everydays: The First 5000 Days sold for US$69.35 million at Christie's in March this year.

That was the third-highest price for a work by a living artist and the first-ever piece of purely digital art sold at a major auction, according to the house.

HISTORIC TWEET

Ever since then, more and more NFTs have been put up for sale on various platforms including auction houses.

Jack Dorsey, the co-founder, and chief executive of Twitter sold his first tweet - "just setting up my twttr" made in March 2006 - as an NFT for US$2.9 million in March.

Another high-profile sale was made at Sotheby's in June, when a pixel art image of Cryptopunk #7523 sold for US$11.8 million in an online NFT auction.

Created by Larva Labs in 2017, Cryptopunks are a series of 10,000 uniquely generated characters that originally could be claimed for free by anybody with an ethereum wallet. Now, these NFTs must be purchased from someone via marketplaces.

Total sales of these 10,000 pixel arts had reached US$1.47 billion as of this month, with 11,580 transactions made in the past 12 months, according to Larva Labs.

Local celebrities too are jumping on the bandwagon.

Well-known film director Wong Kar-wai traded his first NFT - a never-before-seen 92-second video footage from the first production day of the movie In the Mood for Love - for HK$4.28 million at Sotheby's.

And actor Shawn Yue Man-lok sold 14 of his NFT artworks for HK$96 million at an online auction held by Christie's last month.

However, NFTs only account for a tiny fraction of the art market.

While Christie's notched up sales of US$3.5 billion in the first half of the year, NFTs accounted for just US$93.2 million of this total as of July 13. However, the auction house believes NFTs are paving a new way forward for the digital art market.

But NFTs are not without their risks. While the virtual assets display the information about their creators, they do not reveal whether these people have the right to issue such work.

Therefore, anyone can steal another person's work, turn it into an NFT, and sell it on online without needing to prove they have the copyright to it, making NFTs a hotbed of piracy.

Various NFT recreations of a picture from Caixin of a Tibetan woman carrying a mining machine were recently uploaded on OpenSea, the biggest NFT marketplace, with prices ranging from a few to a dozen Ether - a cryptocurrency that NFTs are usually denominated in - all without the consent of the photographer or the media house.

POWER OF SPECULATION

And since anyone can make an NFT, some experts doubt these assets hold any actual value. Former vice-president of Bank of China (3988) Wang Yongli wrote in a Caixin column recently that the sky-high-prices that NFTs command can only be put down to "the power of belief and speculation" because it is impossible for an item to appreciate one hundred or a thousand times over just by turning it into an NFT.

Also holding a similar view is short-seller Jim Chanos who told a Financial Times conference that the NFT market is full of "nefarious activity" and conflicts of interest.

Even Beeple believes there is a "very good chance" that it is a bubble. But "if everybody wants it, well, then it has value," he told the Business Insider.

Liquidity is also a concern.

From mid-June to mid-September, roughly 1.9 million NFTs were sold on OpenSea, but about three quarters never saw another transaction, Bloomberg reported citing data from OpenSea.

The most actively traded 3 percent of collections accounted for 97 percent of all dollar volume, the report said.

Raymond Tsang, associate professor of practice at the Center for Financial Engineering of the Chinese University of Hong Kong, however, reckons NFTs have more liquidity than traditional art, but it is unfair to compare them with the more-liquid assets like stocks or bonds as they are totally different.

Tsang believes that some of the NFTs are bubbles that will pop when the consumers realize there is nothing substantial to back the price of these assets, but the impact will not be as huge as when the dot-com bubble burst in 2000, as the higher thresholds of owning NFTs make them less popular among investors.

However, it is more difficult for the government to regulate virtual assets which are rapidly expanding because average prices are low and they are more diversified than cryptocurrencies, according to Tsang.

 



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