Art of the real: the intriguing post-bubble future of NFTs
After making headlines for over a year, the market for NFT art and collectibles has crashed. Yet below the surface, NFTs are establishing themselves as one of the fundamental building blocks of the digital asset space. Institutional investors and asset managers should take note.
When Christie’s auctioned Beeple’s digital artwork “Everydays: The First 5,000 Days” for USD 69.3 million in March 2021, it catalysed a spectacular and highly visible bull run for NFT art and collectibles.
Unfortunately, that initial run would prove short-lived. After reaching a monthly peak of USD 17 billion in January of this year, NFT trading volumes have fallen off a cliff, and are now down some 97 percent according to Bloomberg.
Is this the end of the non-fungible token? We do not think so.
As one of the fundamental building blocks of the digital asset economy, there are good reasons to think that NFTs are here to stay. To understand why, and where the opportunities may lie, it helps to have a clear picture of what an NFT really is and what it can do.
NFTs are a key technology for creating digital assets
The term NFT, which dates to the Ethereum ERC-721 “non-fungible token” standard released in 2018, simply refers to a unique token that lives on a blockchain.
Like their “fungible” cryptocurrency counterparts, NFTs cannot be copied or counterfeited. Unlike cryptocurrencies, they cannot be substituted for each other either. While one Bitcoin is, the same as another, each NFT is unique and uniquely identifiable. That is the point.
Typically, NFTs are used to refer to underlying assets that have value. Since the item represented by the NFT is bound by cryptography to a single, unique owner, and since ownership can be easily transferred through transfer of the private key, NFTs are extremely useful building blocks for digital asset ecosystems.
By making it easy to create viable, secure “digital twins” of physical assets, NFTs represent an easy way to securitise hitherto unbankable, or not-easily-bankable, assets. Because they are flexible and programmable, they can also generate value in innovative ways.
Some NFTs throw off revenue – for example paying royalties or as part of play-to-earn platforms. Utility NFTs grant their owners exclusive (and valuable) rights, like access to “gated” online communities or real-world events. NFTs can also generate returns as collateral for loans or for staking on DeFi platforms.
Virtual blue chips
Many mainstream organisations have realised this. Visa recently spent USD 150,000 on a CryptoPunk NFT. KPMG in Canada has been investing in World of Women NFTs. Bitwise has released a “Bluechip NFT Index Fund”.
Mainstream art houses are putting their money into the digital art space too. Christie’s has its own digital art and NFT department, an in-house VC arm to invest in digital art and NFT tech start-ups, and an online NFT marketplace on Ethereum. New York’s Museum of Modern Art announced it is considering a hefty investment into NFTs. Even the British Museum is minting NFTs.
Other traditional institutions are getting into the act as well. The Economist minted and sold (for charity) an NFT of one of its magazine covers. The Japanese government is issuing NFTs to reward the good work of local governments. Sumitomo Mitsui Bank (SMBC) announced its plans to build an ecosystem involving NFTs. Samsung introduced NFT capabilities into its smart TVs, with LG recently joining the trend.
If there are any worries about NFTs besides the current state of the market, it is their reputation for harming the environment through the excessive energy use associated with many blockchain platforms.
The good news is that after Ethereum – the most popular platform for NFTs – moved from the energy-intensive proof-of-work to the highly green proof-of-stake consensus mechanism, this has become much less of an issue.
Institutional investors will want to watch – and understand – this space
With this in mind, we think there are many reasons why institutional investors and asset managers should be interested in NFTs.
As hinted above, they are likely to provide interesting alternative investment opportunities. Asset managers will likely find their clients increasingly interested in such opportunities and will want to be ready with sound advice. That will mean understanding not just the investment cases, but also how the technology works – for instance, how to use a wallet or mint tokens.
Where will all this lead? The NFT space is in very early days, so any predictions need to be made with caution.
That said, while the digital art market will remain volatile for now, we think that the market for tokenized traditional art should steadily grow and mature. We also think NFTs will help foster interesting, and innovative, new markets for intellectual property. The poet Arch Hades, for instance, recently sold an NFT of a poem for half a million dollars, and there are many projects working to develop markets for other types of IP, like academic research or pharmaceutical formulas.
Another interesting space may arise around utility NFTs that provide access to “gated” communities of experts. As NFTs enable easy transfer of these rights between owners, over time they could catalyse valuable secondary markets for such access.
All this remains to be seen, of course. But we are convinced that NFTs are almost surely here to stay.
Their future is not just intriguing, it is also now.
Learn more about digital asset banking at Sygnum here.
 The First 5000 Days, Christies, March 11, 2022.
 NFT Trading Volumes Collapse 97% From January Peak, Bloomberg, September 28, 2022.
 ERC-721 Non-Fungible Token Standard, Ethereum, August 15, 2022.
 Visa Buys NFT of Digital Avatar, Bloomberg, August 23, 2021.
 KPMG in Canada purchases WoW Non-Fungible Token, KPMG, February 28, 2022.
 Bitwise Blue-Chip NFT Index Fund
 Museums are cashing in on NFTs, New York Times, March 25, 2022.
 Japanese Government Rewards Local Authorities With Non-Transferable NFTs, Bitcoin.com, September 9, 2022.
 What tomorrow’s ETH Merge means for investors – short and long term, Sygnum Bank, September 15, 2022.
 Arch Hades, the $525,000 poem and the new meta verse, Financial Times, September 22, 2022.
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