• NFTs will have a banner year in 2021. Here’s what you should know

  • According to Laura Ballman and Michael Greenwald, the NFT boom is transforming the art world. Collectors should learn everything they can about this new technology.

    NFT collectibles are a byproduct of the art market’s twenty-first-century march toward technology, democratization, and commodification — and they’re here to stay. The aggregate sales value of NFTs in the art market was approximately US$774 million as of September 2021. However, prior to the Covid-19 pandemic, most art collectors had never heard of non-fungible tokens (also known as NFTs), and those who had heard of the digital assets had largely dismissed them as bad art, vehicles for dirty money, or both. What changed, why would anyone pay for digital images they could get for free, and what should art collectors think about before purchasing an NFT?

    In summary, five factors converged in 2021 to kickstart the initial NFT boom: First, during Covid-19, the artworld mirrored our broader society’s physical isolation and rapid adaptation to the digital world, prompting artists, collectors, and brokers to develop new engagement strategies. Second, market participants recognized that the immutable cryptographic signatures of NFTs solve two issues that have long plagued the art market: proof of artwork authenticity and ownership. Third, reputable entities mainstreamed NFTs, beginning with the eye-catching US$69.3 million hammer price for a single NFT sold at Christie’s in March. Fourth, non-profit experts began educating art collectors about NFTs. Fifth, the growing population of “digital natives” with disposable income has led to a greater acceptance of virtual assets.

    NFT fundamentals: non-fungibility

    The NFTs we see as digital pictures, memes, videos, or interactive documents known as “smart contracts” are visual representations of unique underlying cryptographic data built on blockchain technology, a distributed ledger. The data of an NFT is stored on immutable blockchains (typically Ethereum), to which data can be added but not removed. Fungible tokens, on the other hand, such as cryptocurrencies, which are also built on blockchain technology, are interchangeable. One Bitcoin is worth one Bitcoin, just as one US dollar is worth one US dollar. One Litecoin is equivalent to one Litecoin. So on and so forth.

    Consider boxcars containing information rather than dry goods, permanently linked together as a linear train, to help visualize how an NFT’s data is stored on blockchain. More boxcars carrying additional data may be added to the train’s back, but not to the front or middle, and the data on board may never be removed. Because each train is unique, it cannot be interchanged with another train. Anyone can see the outside of the train or the NFT, but only those with permission can see the ownership data or other content carried inside each container. For example, one may be aware that Damien Hirst created (or “minted” in current parlance) an NFT image featuring his famous dots, but ownership information for each NFT is only as public as the buyer chooses to make it.

    During the pandemic, adaptation and innovation were essential.

    During the first 18 months of the pandemic, quarantines and travel restrictions closed or disrupted the art trade’s primary distribution channels, as they did in other industries. To adapt, galleries, fairs, and auction houses established or expanded their online sales and content platforms, which drew in house-bound art collectors. According to the UBS Art Market report, for example, online sales will account for 37% of art dealer sales in 2020, more than doubling the amount in 2019.

    During the Covid lockdown, quarantined artists innovated and expanded into the NFT space. Respected contemporary artists such as Damien Hirst have embraced the medium, which is no longer the sole domain of gamers, computer coders, and other art world outsiders. An NFT provides artists with greater control and potential profit in addition to a new creative medium. Artists discovered they could sell their digital artwork without relying on dealers as the primary and secondary trading markets for NFTs developed. Furthermore, when minting an NFT, an artist can enable a feature that automatically captures resale residuals in perpetuity, even for works sold on platforms with small transaction fees.

    The value proposition of NFT

    Aside from obvious supply and demand factors, art valuation is primarily determined by authenticity and provenance. NFTs provide clarity on the following issues: When an artist mints an NFT, he or she establishes the authenticity of the work, which is recorded on the underlying blockchain. Each subsequent transaction is also recorded on the blockchain, creating a secure chain of title. This is inherently desirable in a highly litigious industry where disputes over authenticity and ownership are common. As a result, just as an artist’s signature adds value to a fine art photograph that would be worthless as a digital print without the signature, the value of an NFT is determined by the integrity of its (in this case, cryptographic) signature.

    Increased acceptance and credibility of cryptocurrencies as legitimate value exchanges is also boosting the value of NFTs. With the vast majority of Western nations debating proposed regulations governing cryptocurrencies as a legitimate asset class, digital art gains even more legitimacy.

    In the future, NFTs may accelerate the already collapsing barriers between digital and analogue artwork, causing long-term damage to their value. A CryptoPunk owner in Brooklyn, for example, purchased a limited edition CryptoPunk that came with a framed print of the digital character and an analogue signature from the NFT maker. Taken together, this will undoubtedly increase the CryptoPunk NFT’s already high value. Similarly, in September 2021, Artory, an art registry technology company, closed a US$ 4.5 million venture capital raise to tokenize physical artwork with NFTs.

    Digital immigrant vs. digital native

    Finally, we can look to the growing number of young “digital native” consumers who are helping to establish the legitimacy of digital assets. Digital natives are people who have grown up with the ability to transact, communicate, and exist in a digital environment. Digital natives frequently take the form of a “avatar,” which is a video game placeholder for a real person. A digital immigrant is someone who was born before 1990 (or so) and is less accustomed to being completely immersed in digital interactions — they feel compelled to use technology for necessity rather than convenience and enjoyment. Young consumers are building the case for this sector, from cryptocurrencies to metaverses, digital property to any number of in-game purchases available on digital platforms. While “digital immigrants” may struggle to understand the value of owning digital land, “skins” (the appearance of an online avatar), or digital artwork (NFTs), the younger generation is accustomed to interacting in this manner on a regular basis. To understand future trends in the digital assets sector, we must first understand how the younger generation perceives value.

    Mainstreaming

    Christie’s auctioned off the infamous Beeple NFT, whose previous work had sold for a maximum of US$100. Sotheby’s and other competitors, including blue chip galleries such as Pace and the Aquavella family, jumped on the NFT bandwagon. Though NFTs have been around for a while, they have mostly been associated with niche markets of gamers and coders rather than mainstream investing or collecting. Coinciding with the sale of Beeple in March 2021, there has been a surge in NFT sales, with DappRadar data showing that volumes reached US$2.5 billion in the first six months of the year. In comparison, during the same period in 2020, this figure was only US$13.7 million. The art market is no longer reserved for those with vast wealth and connections to art galleries, thanks to democratized access to sales and buying platforms — it has been mainstreamed.

    This sentiment has only been echoed in Asia, where a growing digital native consumer base has rapidly adopted advanced tech products. With a growing customer base and excitement about the potential for future NFT sales, it will be critical for newcomers to become acquainted with the technology and concepts that define this new field. Because the internet has long been used by malicious actors to scrape credit card and identity data from unsuspecting users, education on credible platforms and art outlets will be critical to successful transactions. Several straightforward guidelines for identifying legitimate NFTs and their trading platforms can be found here.

    Education

    The largely unregulated NFT landscape is rapidly changing, built on transformative technology and causing seismic waves in the artworld. Art collectors require independent education about buying, holding, and selling NFTs in order to understand its latest developments and manage acquisition risks. Collectors should look to academic resources like MIT’s Computer Science & Artificial Intelligence Lab (CSAIL) and blockchain industry leaders like Dr. Merav Ozir to get this education, but they should not dismiss more recent sources of reporting. Podcasts such as Barron’s Live with artist Tom Friedman, “The Nifty Show,” and NFTs for Newbies are excellent resources for readers who enjoy listening to frequent industry updates. The NFT market will continue to develop. Keeping abreast of industry challenges and opportunities will keep a collector informed and ready for their next investment.

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