What you need to know about NFTs and the ‘Boring Monkey’ boom and bust cycle

What you need to know about NFTs and the ‘Boring Monkey’ boom and bust cycle

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Ever since NFTs, or non-fungible tokens, screamed into the public consciousness in 2020 with millions of digital artifacts sold, the discussion around them has gone more or less like this: NFTs are the future of art and commerce! No, NFTs are a worthless scam! No, NFTs have a useful, albeit limited, future doing something that is not entirely clear yet! In the world of digital currencies, these are familiar arguments. So is the boom and bust cycle that NFTs have gone through, with big gains and losses along the way. For example, the price of joining the Bored Apes Yacht Club by purchasing an NFT image of a bored monkey jumped to $420,430 before falling nearly 79% in June, while the JPG NFT Index, which tracks a handful of blue-chip NFT projects, through June has fallen more than 70% since its inception in April.

1. What are non-fungible tokens?

Think of them as digital certificates of authenticity. An NFT is a unique, irreplaceable identifier created by an algorithm: a unique barcode for a digital artwork or collectible. It helps solve a problem that digital artists have long faced: how to create scarcity for an object that can be reproduced endlessly. The uniqueness is the reason (ok, one of the reasons) that the Mona Lisa is priceless, while a signed and numbered Peter Max print of his version of the painting is $4,900 and Mona Lisa posters are $7.95.

When an artist wants to sell their digital work, they create, or “make,” an NFT that is then tied to the ownership of that particular work. NFTs are registered on open blockchain ledgers, allowing tracking of ownership (or as they say in the physical world, “province”), previous sale prices and the number of copies in existence. The security provided by blockchain technology makes it more difficult to sell fake tokens than it is to sell fake physical artwork, although it is not impossible. The price of an NFT is determined by its rarity and popularity. Merge, for example, is an NFT made by artist PAK that shows three moon-like masses on a black background. It was sold for $91.8 million in December 2021.

3. Are NFTs a type of cryptocurrency?

No, although there are some similarities. NFTs and cryptocurrencies are both digital assets and powered by the same types of decentralized blockchains. But in theory the point of cryptocurrency is that it can be used in transactions just like dollar bills – and what makes dollar bills useful is that they are identical and have little intrinsic value. NFT, on the other hand, is a unique creation whose purpose is to protect the ownership of a specific object.

4. What happened during the boom?

Before the pandemic, people started finding new uses for NFTs as ways to sell sports memorabilia or special event tickets. Then, NFTs gathered money among bored hoarders during 2020 and took off next year. Artists, celebrities and financial investors bought NFTs, a boom that coincided with the rise in the price of Bitcoin and other cryptocurrencies. In March 2021, Jack Dorsey NFTed his first tweet and sold it for $2.9 million, and a digital artist named Beeple sold the artwork for $69.3 million. Bored Apes, which are (literally) animated monkeys that look bored, have become a favorite celebrity avatar on Twitter, with the likes of Gwyneth Paltrow and Serena Williams sharing their customized monkeys on social media. Possession of NFTs has become a statement and a golden ticket to access an intimate network or community — whether it’s a Discord server for fellow Bored Apes (Bored Apes Yacht Club) or entry to a French film festival.

When NFTs became a popular investment choice for those looking to diversify their portfolios ahead of inflationary warnings, some critics saw the trend as mere hype. What buyers were getting, they argued, were merely bragging rights to images that anyone could equally well look at, copy or enjoy. Questions have been raised as to whether those benefiting from the parallel cryptocurrency boom are using some of their newfound wealth to pump up a market whose rise they would benefit from. Others have argued that for any work of art, the original hand of the master is what makes it valuable. And then there was that segment of Americans who just didn’t understand what it was all about or why NFT sellers were getting paid millions of dollars.

6. Why did the market turn?

NFTs have been caught up in a major fall in cryptocurrency prices that accelerated after the collapse of the Terra blockchain stablecoin shook investor confidence. The world’s largest NFT marketplace, OpenSea, saw its June sales drop by more than 70% month-on-month, according to Dune Analytics. OpenSea began laying off staff in July after the crypto collapse to cut costs and prepare for a prolonged downturn. A dizzying number of frauds wiping out hundreds of millions of dollars and cases of alleged insider trading have further challenged the industry.

7. What would be left if the NFT bubble burst?

There is a chance that the current crisis will bring an end to the NFT frenzy from 2021. But the urge to mint money, whether through cryptocurrencies, NFTs or otherwise, is not going away. NFTs have also proven useful in unexpected ways, such as raising $600,000 for the war in Ukraine through the NFT museum. Its use is expanding to cars, games and, of course, the metaverse as it attracts more and more customers. Yuga Labs, the company that developed Bored Apes Yacht Club, launched a land in the metaverse called NFT called Otherdeeds, which recorded a transaction of $320 million in late April.

More stories like this are available at bloomberg.com



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