NFTs : Has the art bubble burst already?

With the sudden boom in popularity of NFTs (Non Fungible Tokens) in 2021, NFTs have sparked contention on their utility. One side claims it to be a revolutionary technology with a myriad of uses and real life uses whereas the other side believes it to be nothing more than a fad.

Image courtesy of Google Images

But before we get into this debate, it’s important to understand how NFTs work and get their value from.  Non fungible tokens are tokens with each having a distinct and unique value, such tokens cannot be replaced with each other. What makes this technology special is the ability to verify the existence and uniqueness through blockchain technology. NFTs hold value through the economic principles of Functional and Hedonic value. Functional value refers to the utility of the item, while the Hedonic value is how pleasurable and fun an item is for a person. NFTs display both types of values. The profit potential through the resale of NFTs gives them functional value, while showing off and bragging about exclusive NFTs ( such as the Bored Ape NFTs) provides emotional value. The technology used in NFTs can also be used in the real- estate and gaming industries. 

NFTs : An Art Bubble

Non fungible tokens better known as NFTs are digital assets which include a song, a picture, a video, a tweet – or even a piece of digital land in an online game or virtual world, thus it deals with different forms of art. In recent times, many artists and businesses have embraced the concept with an aim of selling songs and tokenizing financial assets. NFTs have become a sort of status symbol. 

Most of the buyers are buying NFTs without thinking much. Mostly the people are either investing for the short term high returns on investment or because of herd mentality (many people are investing so I will also invest in these assets), without understanding the intricacies of this trade platform and the risk associated with it. Like other tools in the crypto world NFTs are also associated with high volatility. 

In NFTs ownership of the digital asset is valued the most. Ownership matters more than the art itself, making it the most boring form of art ever created. As stated earlier, the new technology, astronomical high prices and the (fast) high returns associated with it has been tempting plenty of the investors to come out and invest. Most of the time traders are more interested in profits than owning the image. Another reason NFTs might be so expensive is because of the potential they have to link with the metaverse. Hence many experts have anticipated its downsides and refer to this space as an art bubble which is destined to burst one day.

So has the bubble burst already? Why is it currently  in the news?

Recently, it is observed that NFT sales have flattened as compared to last year. the present data shows (a source form the Wall Street Journal) that NFTs are on the decline. NFT sales fell from 225,000 in September 2021 to 19,000 in May 2022. The NFT wallet activity also saw an 88% decline (from 119,000 wallets in November 2021 to 14,000 this month) due to NFT owners not receiving the expected rates of return on their investments. NFT sales are “flatlining” this year, with the daily average number of sales last week 92% lower than a September peak. The NFT prices have also witnessed a jaw-dropping fall. The most popular example of this phenomenon is of the NFT of twitter founder Jack Dorsey’s first tweet. The NFT was initially sold for $2.9 million. However, during its resale, it fetched a highest bid of only $280.

What are the possible reasons for such an abrupt fall?

One of the most important reasons is the recent developments in Axie Infinity. Axie Infinity is a non-fungible token-based online video game developed by Vietnamese studio Sky Mavis and known for its in-game economy which uses Ethereum-based cryptocurrencies. Players of Axie Infinity collect and mint NFTs which represent axolotl-inspired digital pets known as Axies. 

Lately it has seen a steep drop in its user base mainly due to the recent  Ronin attack. Last week it was declared that Axie Infinity lost 625 million dollars in this attack where the hackers hacked the ronin bridge, which enables transferring usable funds between the Ronin network and Ethereum. Some experts in crypto think that this attack highlights the cons of the crypto world and points out that right now cross chain crypto is too far from efficiency and becoming a part of reality.

Square Enix Holdings Co., Ltd. is a Japanese entertainment conglomerate and video game company best known for its Final Fantasy, Dragon Quest and Kingdom Hearts role-playing video game franchises, among numerous others. Another reason for such a fall is Square Enix’s latest sale of some of its biggest titles. These events have sparked observations mainly pointing out the fall in demand of NFTs. Thus, the experts are of the opinion that the bubble is set to burst earlier than expected.

Padmaja Uttarwar – FYBSc Division 2 (2021-24)

Jatin Kulkarni – FYBSc Division 2 (2021-24)

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