Many strange things happened in the global economy during the depths of the COVID-19 pandemic, but few as curious as the NFT boom of 2021.
At the beginning of that year, almost no one knew what a non-fungible token (NFT) was. In the end, more than $40 billion (โฌ36.6 billion) had been spent on works of art and digital assets recorded on the blockchain. That made the sector almost as valuable as the global art market itself.
If 2021 was the boom, then 2022 was the bust. In January 2022, the market reached its dizzying peak, but by September of that year, trading volumes had fallen by a gigantic 97 percent. The NFT crash was part of the broader demise of the cryptocurrency sector, which saw a staggering $2 trillion in value loss.
Read also | Sam Bankman-Fried: Fraud conviction culminates surprising fall of 'Crypto King'
So are NFTs simply dead or is there some kind of future for them?
In early November 2023, OpenSea, the largest NFT marketplace, announced that it would be laying off half of its workforce. Then there was a strange event at a promotional event in Hong Kong for the โBored Ape Yacht Clubโ, one of the most well-known NFT collections. Dozens of people reported "severe eye burns" after attending the event, which heavily used ultraviolet lighting.
None of that is good news, but there have also been signs of a very modest recovery in the battered sector recently, with trading volumes recently rising after falling steadily throughout 2023.
Cryptomania and 'clubby' exclusivity
When the NFT boom took off in the summer of 2021, Andrea Barbon was one of many people intrigued by the potential of the innovation. She quickly created and sold her collection, a set of computer-generated fractal images.
"This company sparked a deep curiosity in me and a desire to delve deeper into NFTs," Barbon, a finance professor at the University of St Gallen in Switzerland, told DW. "My fascination with the combination of art, technology and finance that NFTs represent motivated me to study them in great detail, exploring their potential impact on various sectors and their role in the future of digital ownership and creativity."
From the beginning, many were dismissive of NFTs. Bill Gates said they were "100 percent based on the 'greater fool theory'": the idea that one can make money by purchasing overvalued and fundamentally worthless assets, as long as there is a "greater fool" come. and pay even more. "Obviously, expensive digital images of monkeys are going to greatly improve the world," Gates joked in an apparent reference to the Bored Ape collection.
Read also | Explained: Why some NFTs are so expensive
However, NFTs took off. Perhaps the unique circumstances of the time, when the pandemic meant people around the world spent unusual amounts of time online and at home, played a role. Barbon says the cryptocurrency boom, in full swing in 2021, fueled enthusiasm for NFTs, while user-friendly platforms like OpenSea made it very easy for people to buy and trade them.
Then there was the exclusivity factor, cultivated by celebrity purchases and the creation of NFT clubs. โThe appeal of NFTs was further amplified by their novelty, the promise of high returns, and their role as status symbols within the crypto community,โ Barbon said. "This combination of technological innovation, market dynamics and cultural factors created a perfect storm that fueled the rise of NFT."
NFT: A bubble if there ever was one
For Barbon and his colleague Angelo Ranaldo of the Swiss Institute of Finance, NFTs represented a fascinating field of study. As part of their academic research, they examined more than 15 million NFT transactions, worth around $18 billion, between January 2021 and September 2022. They concluded that the entire market represented a bubble.
โWe observed a pronounced trend toward bubble-like behavior in the NFT market,โ Barbon said. โThis was characterized by rapid price increases, often doubling in a matter of days or even hours, followed by sharp declines. โThese fluctuations offered significant benefits to investors, but also posed substantial risks.โ
Another thing they noticed was that some investors showed the ability to consistently capitalize on market volatility, making significant amounts of money, while others showed more reckless behavior. "The market experienced inflated valuations driven more by speculative fervor than underlying fundamentals," he concluded.
Doubts will persist, but NFTs can last
Some NFTs have seen surprising drops in value. For example, the Bored Ape collection, which became especially popular among celebrities, has lost more than 90 percent of its value, amounting to several billion dollars. Singer Justin Bieber and Brazilian soccer player Neymar are among those who spent around $1 million each on Bored Ape NFTs, only to see the value virtually disappear.
The fallout from the celebrity NFT craze continues to this day. This week, soccer player Cristiano Ronaldo was the subject of a class-action lawsuit seeking at least $1 billion in damages for his role in promoting NFTs issued by cryptocurrency exchange Binance. As a result, there is a deep underlying skepticism about the market. But Barbon says it may still have a future, especially if it returns to its roots as a marketplace for digital artists.
Read also | The rise of 'finfluencers' generates a debate about influence and responsibility
"They are not just a technological novelty, but a revolutionary innovation with practical applications," he said. "NFTs have revolutionized the digital art market, giving contemporary digital media artists a platform to authenticate and monetize their creations."
He also sees other possible uses of NFTs beyond the art world in areas such as digital identity and virtual asset ownership. However, the bubble and the huge losses suffered mean that there will be a big question mark over NFTs for a long time.
