SECTOR SPOTLIGHT: NFT Demand Fuels Crypto Adoption
SECTOR SPOTLIGHT is a monthly series on FinTechtris exploring a niche sector within FinTech, by defining its history, frameworks, business model, leading companies, and outlook.
Nonfungible tokens (aka NFTs) have made waves over the last year as a speculative $250M market for alternative investments. Many of the same investors targeting cryptocurrency are now trading in NFTs hosted by marketplaces such as SuperRare, MakersPlace, and Rarible. The items being invested and traded? Art, memes, sports (video) cards, and graphic collectibles.
Some of these works have sold at auction for over $100K and continue to increase in value in secondary markets. The well-known image of Nyan Cat by Chris Torres (animated flying cat with a pop tart for its body) sold on the Foundation platform for over $500K! Let’s explore the world of NFTs in our Sector Spotlight:
Growth and market opportunity of NFTs;
How the technology works behind NFTs;
Disrupting art & sports card collection marketplaces;
MARKET OPPORTUNITY with NFT
The central theme within these genres is collection of stored value that can be authenticated and securely transacted in an open forum. The item can consist of an image or video file, sometimes with a physical object attached, verified with a digital signature. The file is permanently linked to a creator and makes the collectible one-of-a-kind.
The buyers are usually not acquiring copyrights, trademarks or even the sole ownership of the purchase. They’re essentially buying bragging rights and the knowledge that their copy is the “authentic” one. People have emotional and aesthetic attachment to physical goods, like art, vintage clothing, or baseball cards — many willing to pay to become collectors.
Some NFT buyers are collectors and avid fans excited to share purchases on social media or in their homes. Short-term buyers are looking to quickly flip items as soon as prices rise — making the market lean towards gambling mixed with day trading.
High-flying NFT prices are a magnet for cryptocurrency speculators. Proponents of crypto’s legitimacy are pointing to the use case of nonfungible tokens as a sign of what’s possible in adopting this emerging technology.
TECHNOLOGY behind nonfungible tokens
Blockchain technology, which is commonly linked to Bitcoin, is expanding the use of cryptocurrency beyond trading. In particular, NFTs rely on blockchain to create and assign an official (original) copy of a piece of an artwork or digital media, from an artist to a buyer. Artists, influencers, musicians, celebrities, and sports leagues are leveraging these tokens to create a marketplace for the next generation of digital goods.
In an NFT sale, computers plugged into a network post the transaction on a shared ledger (blockchain) and thereby create a permanent public record. Since the transaction and record are immutable (i.e. unable to be modified or erased), authenticity can be easily verified. Traditional brokers (or middlemen) can be removed and new marketplaces can operate directly with buyers and sellers.
Creators put images up for sale in auctions, automatically accept payment from the highest bidder in the end, and transfer ownership to purchaser — functions made possible by NFTs and platform marketplaces.
ART collection through nft
Even renowned, traditional art institutions, like Christie’s, have entered digital art through NFT. It’s first sale of a digital artwork was Beeple’s “Everydays — The First 5000 Days” last month and payment was accepted in cryptocurrency (Ether).
Responding to the need for digital authentication and ownership history in art, NFTs are a modern option to link a creator and digital file. The owner of the piece can be easily verified through blockchain.
Unlike traditional art collection, new digital collectibles are not being held as long-term investments. Buyers are known to “flip” (purchase then quickly resell at a higher price) and gain a profit on rising market value. In using NFTs, there are added rules and conditions in reselling, which reduce some the proceeds a seller makes. A common standard is the original artist profit sharing with every resale. Some artists set a 10% benchmark on every subsequent sale of their work, capturing the growing value of their pieces over time.
the nft marketplace for SPORTS cards
Similar to art, sports cards and memorabilia has its own community and marketplace that trades rare items at rising valuations. Initially starting with baseball cards in the US, this area has expanded through digital media to all sports around the world. A new venture in basketball has received tremendous attention in the last 5 months, as it mixes cryptocurrency and dynamics of sports memorabilia collecting/trading.
NBA Top Shot, a joint venture between the National Basketball Association, the NBA Players Association, and Dapper Labs (creator of CryptoKitties) — was founded in July 2019 and launched in October 2020. The platform runs a marketplace of “Moments” — an NBA Top Shot video card (similar to a virtual trading card) that is 1 of 1 and 100% certified. The video card is a clip of top NBA play and secured by blockchain with an NFT.
Top Shot had more than $40M in sales in January. Over 30K users signed up and generated over 450K transactions in February month. The company became the biggest NFT marketplace heading into March (based on overall sales). Out of the transaction volume, Dapper Labs takes a 5% cut.
This is the new frontier of sports collection — an open, digital marketplace that eliminates the risk of storing/protecting/shipping physical memorabilia but provides the excitement and validation of being an owner/collector. For younger generations of fans not caught up in tangible ownership, this is a great option for collecting and potential long-term investment opportunity.
Soccer (or ‘football’ outside of the US) is also entering the world of NFTs. Sorare is company that creates digital items (such as soccer cards) with NFTs that are digitally scarce, but allow users to build a fantasy team of players for weekly competition. Cards are usually $5 - $10 (featuring over 125 teams worldwide), but some have reached over $100K in the marketplace (e.g. Cristiano Ronaldo). Fans are incentivized with new prizes each week paid out in ether (the crypto that runs on Ethereum).
NFT OUTLOOK
Similar to evaluating cryptocurrency at large, NFT’s value proposition is on scarcity — limited supply driving demand and fueling higher prices. If market speculation is the key driver, potential investors focused on “flipping” as a resell opportunity may be hit hard with losses on sudden downturns. There are no clear indicators of future growth or declines in price. As quickly as Bitcoin climbed in the last 5 months, external forces (i.e. political, economic, regulatory) can cause a negative impact. This movement can also be part of broader shift in financial services and marketplaces (as seen with the GameStop stock frenzy) away from traditional systems and platforms.
For true collectors of art or sports memorabilia interested in long-term ownership, this is welcomed opportunity to enjoy the best benefits of collecting and reducing the traditional risks (of storage, maintenance, or insurance). Future generations may no longer be interested in physical items, opting to go completely digital. NFTs can likely be passed down to family members or even auctioned off when the owner passes away, similar to current industry standards for collectors.
Overall, anticipate other collectibles and forms of art to enter this sector. Local and independent creators can build new revenue streams and portfolios. Art houses can soon add digital platforms and reach the next generation of collectors. Athletes and influencers now have an additional monetization path and way to connect with the general public.
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