Blog #6 from our series "NFTs and Crypto: The next big asset class?"
Now that we know all the basics of this new NFT market, it is important that we understand how it works and that we identify the market’s main drivers which are leading all this growth.
To put things into context, during the pandemic in 2020, the NFT market tripled and total sales volume traded increased from $159M in 2018 to reach $250M in 2020. The number of active wallets also increased from 110,551 in 2018 to reach 222,179 wallets in 2020. Finally, according to Pitchbooks, the NFT market grew at a CAGR of 711% between 2020-2021. Just in the first half of 2021, there have been $2.5 billion in sales volume, signalling a massive sales boom of NFTs.
So, why is this happening?
Driver #1: Rise of cryptocurrencies & digitalisation of payments
The increased value of the Crypto market has driven the increased volume of NFT transactions, integrating them into the blockchain ecosystem. In other words, as the popularity of cryptocurrencies and their value increased, this new market opened up different ways in which users could actually use their crypto to purchase different types of assets. The development of crypto wallets and an entire crypto community online has also nurtured the widespread adoption of NFTs.
What’s more, the rise of digitalisation of payments in developed and now emerging economies has driven the adoption of crypto and other digital assets, such as NFTs, even further. The NFT market is now on route to penetrate India with a massive market and user affinity for crypto and NFTs.
Driver #2: NFTs work for anyone and any industry, anywhere.
Given what we know about NFTs, this driver might just be the most important one driving the industry forward. NFTs are generally free to create and put up to sale. Thus, content creators see value in NFTs by monetising their content. For instance, NFTs provide the potential to create copyright royalties for their generated content, and so artists can earn royalties every time their work is part of a transaction.
Moreover, many content creators, now most of them called influencers, have become brands themselves. This means that they can sell the NFT reflecting their brand rather than negotiating deals for using their public image. Many celebrities have also taken advantage of this and jumped on the NFT wagon to sold content they created. For instance, Grimes, Elon Musk's former partner, has made over $6 million by selling her art as NFTs.
Crucially, the NFT market is now at a point where if you don’t participate in it, you are actually missing out on all its upside because NFTs can work for anyone. Luxury brands, sports leagues and teams, artists, songwriters, video creators and celebrities have already started their NFT collections. Most prominently, NFTs in the gaming industry have allowed users and players to own the characters they create on online or in story-mode games. These can also be put up on sale on various marketplaces and allow the player to earn a reward from their hard efforts in the game, thus providing more utility to the player from the digital purchase of an asset.
Driver #3: New Asset Class desire
The third driver in the NFT market is the widespread desire for investing in new asset classes that are not bonds or stocks. A lot of people who come into the crypto and NFT world lack confidence on traditional asset classes (PE, equities, fixed income etc.) providing solid returns on investments. This is forcing retail investors and essentially anyone interested to find alternatives.
Therefore, NFTs enter the scene as speculative assets, where buyers or collectors are hoping the prices of the digital assets they purchase go up in the future. Hence, the NFT market runs on the believe that digital assets will appreciate in value, just like owning a stock. For instance, NBA Top Shots (video versions of player highlights) are sold in limited edition packs (for between $9 and $230). After the packs leave the store, the only way to get them is in the Top Shot marketplace. Each TopShot NFT has value due to its authenticity (secured by a blockchain called Flow) and scarcity, and the marketplace also allows the community’s users to determine its value.
The difference between NFTs and stocks is that stock prices are largely determined by a company’s value by aggregating their revenues and assets, while NFT prices are determined by the people so they are only as expensive as what a buyer wants to pay for them.
Driver #4: Rise of digital art
In many ways, NFTs are working as "democratising" agents for the art collection market, which has traditionally only catered to wealthy individuals. Similar to what was mentioned previously, NFTs are also changing the way valuing art is conducted. Usually, a group of experts would analyse art and determine their value according to the painter, materials used, where and when it was created etc. Now, their value is determined by the general public, allowing artists to monetise anything they produced digitally, including memes.
On this note, NFTs allow digital artists to obtain ownership for their digital work and receive income streams for it (e.g. royalties). Thus, many artists, musicians and video editors have started to create NFTs to earn additional streams of revenue and provide more content for their fans.
Driver #5: Tokenising ownership
Finally, the most important factor that is driving the market is NFT’s unique ability to tokenise ownership. NFTs’ technology allows users to represent digital and true ownership of their assets, and they have their tokens to show for it!
In fact, the popularity of NFTs mostly emerged out of the perceived status and authenticity of the digital asset that users would acquire. Given that the NFT is supported by blockchain technology, we know that each can be authenticated using a specific code that only the user who purchases that particular NFT owns.
Now, there are more opportunities to explore with this feature. For instance, this could lead to governments adopting NFTs to identify people or deeds of ownership more easily than before.
This topic will be discussed further in our blogs to come. For now, we can just try to understand what the NFT mania is all about!