NFT market will collapse

Non-fungible token prices are now high and may continue to rise for some time, but there will be a fall. With central banks expected to tighten monetary policy to combat inflation, new and untested asset classes are likely to be penalized more harshly than more trustworthy ones.

LAUSANNE, Switzerland — Christie's auction house sold a JPEG file made by the artist Beeple for $69.3 million in March 2021, setting a new record for digital artwork. The "original" JPEG, named "Everydays: The First 5000 Days," was secured using a non-fungible token, or NFT.

The transaction made news, and NFTs have subsequently become very popular. In 2021, investors spent $27 billion on the market, and Meta, Facebook's renamed parent company, now aims to enable users to manufacture and trade NFTs, according to reports. The only difficulty is that the NFT market will ultimately fail, for a variety of reasons.

An NFT is essentially a tradable code that is connected to information, such as a picture. The sale is recorded on a digital ledger (a blockchain) by a secure network of computers, providing the buyer evidence of both legitimacy and ownership.

NFTs are often purchased using the Ethereum money and held on the Ethereum blockchain, which is possibly more crucial. NFTs are the ideal asset for newly affluent members of the Silicon Valley elite and their train of acolytes in banking, entertainment, and the larger retail-investor community because they combine the desire to own art with contemporary technology.

The fast-moving and speculative NFT market, like other markets fueled by excitement, hasty purchases, and hype, might burn many investors. The present craze evokes memories of the Dutch tulip mania, which lasted from 1634 to 1637 and saw some bulbs command exorbitant prices before the euphoria faded and the bubble burst.

The NFT market is going to face a similar fate — but not due to environmental concerns, as some may believe. To be true, NFTs utilize a lot of energy since cryptocurrencies like Ethereum and Bitcoin are "mined" using massive networks of computers that have a significant carbon footprint that rises with each transaction. However, climate change is a red herring when it comes to determining what will bring the NFT market down. The actual issue is that the present NFT craze is based on a shaky basis.

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Begin with the issue of inexhaustible supply. NFTs, give you ownership of a digital item but not the right to stop others from copying it. The quantity of masterpieces is limited; the artists are long gone and cannot make new artworks, which is one of the reasons why affluent investors are willing to spend tens of millions of dollars (or more) for conventional physical artworks by the likes of Rembrandt, van Gogh, or Monet. On the other side, NFT copies may become a commodity.

Furthermore, as with all things digital, there is no discernible difference in look between a $69.3 million original JPEG file and a copy acquired for free online. In principle, the quantity of legally useable copies of NFTs is endless, leading demand to outstrip supply and prices to plummet.

Because the blockchain can't keep the underlying digital asset, when someone buys an NFT, they're really purchasing a link to the digital artwork rather than the artwork itself. Despite the fact that purchasers receive rights to the link, the transaction costs associated with monitoring the limitless internet venues for displaying NFTs, detecting illicit usage, and pursuing and punishing infringement make enforcing the copyright and deterring abuse practically unfeasible. This severely restricts the asset's monetization.

Another issue is that NFTs are being manufactured and marketed using unproven technology such as blockchains and cryptocurrencies. ERC-721, ERC-998, ERC-1155, flow and non-flow standards, and Tezos' FA2 are only a few of the competing standards for generating, safeguarding, distributing, and certifying NFTs. The consequent ambiguity about how ownership certification will be assured in perpetuity puts the assets' value and even ownership at jeopardy.

In fact, if the next wave of sophisticated technology that surpasses crypto or blockchain is incompatible with safe NFT ownership, the value of NFTs may vanish. Firms that engage in NFTs now may not exist tomorrow, causing ownership claims to become muddled.

The price volatility of the cryptocurrencies that support the NFT market is also a major concern. The price of NFT tends to fluctuate in lockstep with the price of cryptocurrencies. When the crypto market crashed in 2018, so did the budding NFT industry.

The mentality of purchasing high-end items will likewise put downward pressure on NFT pricing. The majority of high-end items are so-called Veblen objects, which have minimal value beyond allowing their owners to flaunt their money. As a result, they often earn substantial returns for sellers.

NFTs allow purchasers to publicize their riches, mostly via the high price they paid, but only if their peers respond positively. If this kind of spending does not appeal to this audience, the investor may as well burn money to light a cigarette.

Because possessing an NFT does not prohibit others from exhibiting and signaling possession of identical assets, these tokens aren't very useful as markers of unique spending power. And since the blockchain assures that information of ownership is restricted, many NFT purchasers stay anonymous.

Finally, shifting macroeconomic circumstances may have a detrimental impact on the pricing of alternative assets like NFTs and conventional artworks. The number of billionaires in the globe has more than fivefold grown in the last two decades, resulting in a surge in available money to invest in alternative asset classes. This tendency has so far been confirmed by the COVID-19 pandemic. Much of the massive monetary stimulus supplied by central banks poured into financial markets, enhancing the super-net rich's worth even more.

However, investor interest might be fickle. Following the global financial crisis of 2008, sales of art and other luxury goods dropped by over 40%. With central banks tightening monetary policy to combat inflation, new and untested asset classes are likely to be penalized more severely than more trustworthy ones. And the very volatile NFT market, which is based on digital currencies with no backing, is far from a safe haven.

NFT prices will eventually fall precipitously and permanently. For the time being, they are still high, and they may continue to rise for some time, but the fall will come. Those who believe they can time the market are entitled to try, but their confidence will almost certainly be unfounded.