Trading on OpenSea, the largest digital certificate trading platform, has collapsed. Until recently, the daily volume used to be more than $100 million (€101 million) per day, this month the daily volume fell below $9 million, according to crypto data aggregator DappRadar. Interest in it has cooled considerably: the number of users and transactions on the platform has halved.
Non-Fungible Tokens (NFTs) are unique titles for digital products such as artwork, video clips or objects in the virtual world. Think of it as a stamp of ownership that you can print on such a digital product. These certificates are per definition not interchangeable: there is only one of each NFT. Like cryptocurrencies such as bitcoin and ether, they are stored in the blockchain, a publicly accessible online record of all transactions. NFTs in the form of a unique code are securely stored in this ‘ledger’ and an owner can provably find his ownership rights.
The first NFT, a music video by artist Kevin McCoy, dates back to 2014. Since then, they’ve appeared in many forms, from images of the first ever tweet to songs and lyrics. Although digital art is particularly popular with buyers of NFTs. Due to its uniqueness, an NFT creates scarcity in an online world where everything else can be copied with the click of a mouse. In that respect, it’s a smart setup. However, the resale of NFTs quickly led to speculation with only one goal: to make a lot of money quickly.
Last year there was a real craze around NFTs. Trading in these certificates grew to unprecedented heights. NFTs from digital artists such as Pak and Mike ‘Beeple’ Winkelmann were sold for tens of millions each. Especially NFTs from Bored Ape Yacht Club, a collection of tens of thousands of cartoons of boring monkeys, was extremely popular. Some of them rose from $80 to worth 4 tons within a year, whether they were driven by celebrities such as rapper Eminem and top soccer player Neymar. They paid tons for their NFTs that they proudly displayed on social media.
Also read: Buying an NFT, how does it actually work?
In the corona era, it fueled the hype even more, says technology expert Jarno Duursma. He has followed the NFT market closely for years. “People were at home and looking for new income. They already had an affinity with cryptos, heard from others that they had made a lot of money with NFTs and thought: I want that too.”
This behavior is referred to as ‘flipping’ NFTs: you buy them in for little, then quickly sell them for a higher amount. Duursma: “It’s a combination of greed and naivety that can be compared to crypto trading. People think: I see through this game, here I’m going to make a big splash. But luck and bad luck are close to each other.”
The fact that trading has now fallen must be seen in the light of the broader development on the stock market. Rising interest rates and a looming recession have made conservative options like investing in bonds and savings more attractive again, while cryptocurrencies have taken a dive. In such an environment, it is extremely risky to speculate on sudden value increase, for example, of NFTs. In the second quarter of this year, the resale of an NFT globally no longer produced a profit, shows a report from the data company NonFungible. “The least we can say is that the market has changed quite drastically in three months” […] and that not all NFT owners have become millionaires,” the researchers conclude with a wink.
Trading NFTs is also risky for other reasons. Some scammers pose online as famous artists and then sell digital artwork with NFTs. Also, malicious parties sometimes impersonate entire crypto marketplaces, such as OpenSea. And so the number of new NFT projects is so high that about a third of NFTs will never be sold, blockchain research firm Nansen concluded this spring. In the Netherlands, the Netherlands Authority for the Financial Markets (AFM) does not supervise the trading of NFTs. It also does not have an overview of safe providers in the Netherlands.
‘No financial product’
The financial regulator calls the risks of NFTs comparable to cryptos and advises consumers to thoroughly study the matter before trading NFTs. “AFM advises against investing in NFTs.” The regulator says it is following the development with interest and points to upcoming European crypto regulations (MiCAR) which will soon better regulate the crypto market. It may also include rules for NFTs.
Tech expert Duursma also warns. “NFTs are not liquid. You can’t get rid of them as quickly as cryptos. You just have to find someone who wants that specific piece of art, while a drop in value can set in quickly.”
Duursma wrote the online manual How to buy an NFT, which takes beginners by the hand. He gives practical advice; how to check the reliability of a seller, how to create a secure crypto-wallet, and what costs are associated with an NFT transaction, which is settled with ether, the largest cryptocurrency after bitcoin.
Because Duursma believes in the promise of NFTs. “Technically, it’s not something you should throw in the bin. You can program all kinds of things in NFTs, that’s the added value.” As an example, he gives the sale of music rights, merchandise and exclusive tickets of musicians, which can make money in a new way. Duursma: “As a fan, you can get all forms for bonus material by buying NFTs. It can function as a kind of VIP pass in the digital world.”
Dollar signs in the eyes
Meanwhile, NFTs also continue to be of value in the art world. Thanks to technology, Dutch artist Rik Oostenbroek is selling his digital artworks with a certificate of ownership for the first time. Arranged for thousands of euros each so he can now survive on his work.
“The value of the Bored Ape collection skyrocketed in a year, so many people had dollar signs in their eyes,” says the artist. “People were constantly hoping to have ‘the new Bored Ape’ in their hands. Also, many projects have not kept their promises. You notice that many players have left. Some with a big bag of money, others with a big loss.”
Oostenbroek says he is happy with the cooled market. “As a result, NFT art is a bit more in the spotlight. Artists are still making and selling NFT art, and I’m actually glad it’s no longer about the ridiculous amounts.”
Also read: ‘NFTs Bring Possession and Scarcity Back to Music’
A version of this article also appeared in the newspaper on 22 September 2022