What’s next for the explosively controversial and popular NFT?
If non-fungible tokens (NFTs), and those who create them, want these digital assets to be around for the long run, there is still some work to do to improve their reputation in the eyes of the wider public and prospective investors.
You only need to wade onto social media to see that NFTs have a poor reputation. Some say they’re a scam, a bubble, the most speculative of speculative assets, or even totally worthless. Others remain deeply concerned about the environmental impact that they’re having.
To discuss NFTs and their reputation in the broader community, we spoke to Professor Marco Navone, Senior Lecturer in Finance, University of Technology, Sydney and Dr. John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, and NATSEM, University of Canberra to get their contrasting thoughts on where things may go from here.
What are NFTs?
NFT stands for “non-fungible token”, let’s break that down.
When something is “fungible”, it means it is interchangeable, it can be substituted for another something of the same kind which has equal value. Currencies, including cryptocurrencies, are fungible, a $5 note is interchangeable with another $5 note, or with five $1 coins, or ten 50¢ coins, it is all $5.
Conversely, when something is “non-fungible” it can’t be substituted. It is unique. Besides NFTs, non-fungible tangible goods include things like diamonds, houses, or collectable baseball cards. Houses and diamonds vary in size, diamonds can differ in clarity, colour, and cut, houses can differ with location or architecture, but there’s never an exact equivalence between examples of them. Baseball cards might be printed en masse, but each collection is unique to the person that owns it, how they store and maintain it. These assets are not interchangeable, not-fungible.
A token, in crypto terms, is a digital asset that is created using an existing blockchain, and this is why NFTs are different to coins, which are digital assets that are native to that blockchain. For example, $ETH is the digital coin of the Ethereum blockchain, and Bored Ape Yacht Club NFTs are the tokens created using the Ethereum blockchain.
NFTs are hosted on the respective blockchain they were created on, and can include anything available digitally, from pictures, digital art, GIFs, audio, or video files. In addition to the digital content, many also offer some kind of real-world “utility,” such as the Australian Open NFTs, which promise to provide the owner with a real match ball from the tournament.
With that background out of the way, let’s see what our experts say.
What is in store for these assets over the next few years?
“My guess would be that NFTs are new enough that they could run for another year, but I would expect the price of many to be much lower in ten years,” Dr. Hawkins said.
“It will partly depend on how aggressively central banks hike interest rates,” he added. “The US Fed is likely to make some significant increases this year, but the RBA may only start moving in late 2022 or 2023.”
“Higher interest rates will make borrowing for speculation less attractive, and a move away from near-zero returns on bonds and bank deposits will make traditional savings instruments more attractive.”
Professor Navone has a different view, tying the health of the NFT market to technology developments.
“The long-term development over say 10 years, is, in my opinion, tied to the development of AR/VR technology,” he said.
“Online goods, and their property rights, become more relevant the more we can interact with them in our daily life.
“If I had to make a wild guess (and this is not a serious prediction), I would say that the single most relevant event for the long-term development of NFTs will be the release of the Apple AR/VR goggles next year, and all the disruption that will follow.
“In the shorter run, over one to three years, I see a period of clarification and stabilisation with the emergence of the successful use-cases and the disappearance of many bad ones.
“If you want a reference point, a few years ago every major stock market was looking at blockchain as a possible tool to record transactions. All those efforts have largely disappeared as people started experimenting and realised that running a true decentralised system is both slow and expensive, compared to a traditional centralised clearing system.
“In the same way, today, we see NFTs used to sell collectables, artwork, and concert tickets.” At some point soon, Navone said, the forms of NFTs that work will rise to the top, and experimentation will determine those that don’t.
Are NFTs a bubble?
“There’s a definite whiff of ‘speculative bubble’ around NFTs and cryptocurrencies at the moment,” Dr. Hawkins said.
“As with earlier bubbles, going back to Dutch tulip bulbs, South Sea bubble, railway stocks in the mid-1800s and more recently the dot.com boom of 1999 and mortgage-backed securities before the GFC, it is almost impossible to predict when the bubble will burst.
“NFTs, and most crypto, are close to a pure bubble in that many, most, if not all buyers are only or primarily buying because they expect the price to go up.”
Navone shared Dr. Hawkins’ sentiment in this regard, saying that most NFTs are a “fad”, with holders not knowing the real value of their asset.
“The textbook definition of a financial bubble is when it is impossible to reconcile the market price with the fundamental value of an asset,” Navone said.
“Here the problem is that many people do not really understand what the “asset” is or how it can be used. I think many buyers now are not aware of the specific nature of the rights that they acquire when they buy and NFT. Many others do not know how to use the virtual object they have acquired.
“Rather than a ‘bubble’ I would talk about a ‘fad,’ he added, equating NFTs to an expensive version of trading cards, Pogs, or marbles. “It’s a fad in the sense that people are buying NFTs, especially of the ‘collectable’ kind, without any rational estimation of their fundamental value.”
What could cause the bubble to burst?
“[With NFTs] there is no yield or other return like dividends on shares, rent on houses or interest on bonds,” Dr. Hawkins said.
“For most of them, stablecoins and some NFTs being an exception, there is no fundamental value to underpin or set a floor on the price, as corporate assets do for shares or industrial and jewellery uses do for gold, so they are very vulnerable to changes in sentiment.
“Once some investors get nervous and sell, the price falls, in turn causing other investors to sell and lowering the price further in a vicious circle.
“With shares, when the price drops to a certain level there will be buyers who think the underlying assets of the company now make it a good buy, but with speculative tokens, there is nothing to stop the price going to zero.
“This could happen very quickly if panic really sets in. I would also expect quite a bit of contagion between high-profile NFTs and crypto and some related tech stocks.”
Professor Navone, meanwhile, had some different thoughts on the resiliency of the market.
“Funnily enough, I am less worried about big ticket items, such as Beeple’s electronic painting or Tarantino pages from his original scripts, than about all the ‘rabble’ at the lower end of the market,” he said.
“Beeple’s NFT is basically a world-famous electronic art installation, and Tarantino’s scripts are a piece of cinema history memorabilia. We know what these ‘things’ are, we have been buying and selling them for a long time in other formats. Prices can fluctuate, but we know what are the value drivers.”
“At the other end of the market, we have a myriad of NFTs based on well-known memes, randomly generated images and virtual objects tied to a specific online environment. Here, your guess is as good as mine as to how long they will be in demand. I have no clue where the value of these tokens comes from.
“If you ask me what could ‘burst the bubble’, I would answer that I do not see a ‘bursting’ in the traditional sense.
“Bitcoin has repeatedly lost more than 40 per cent from its previous high, and the market has so far recovered. For these memetic assets, the interest of the public seems to be pretty resilient with respect to a drastic drop in price. This is especially true for NFTs where we are looking at a multitude of non-fungible assets, so you will never have to deal with a “crashing” of a traded market price. Some tokens will lose value, others will go up.
“What could be more concerning is a change in the media narrative due to a ‘scandal’. By scandal, I mean the exposure of a big ‘pump and dump’ operation created to capitalise on the fad, or of a money laundering ring based on the use of NFTs.
“Since we are in the ‘fad’ phase where most of the demand is motivated by some irrational fear of missing out, a change in narrative could pull the rug from under the feet of the long tail of the market populated by small-ticket items of unknown origin.”
Are these assets worth anything?
“If we focus on collectable NFTs, we can see them in relation to a painting,” Professor Navone said.
“When you buy a painting you have the so-called ‘aesthetic dividend’, the pleasure to look at the painting in your home, and the bragging rights from showing it to your friends, and you have the re-sale value. The same applies for an NFT.”
He continued, “Do you derive any pleasure by showing your token in some sort of virtual environment? Being it an electronic frame hanging from a real wall or your Zoom background or Virtual office? This is why I think that the adoption of AR/VR will be the main value driver of NFT value in the long term.
“As per the resale value, the issue is how many people share your same appreciation for this token, and here is why I am not concerned about the re-sale value of a Tarantino NFT, but I am concerned by a NFT based on some random meme that has not stood the test of time yet.
“Better memes are born every day, and the old ones may be forgotten quickly.”
Dr. Hawkins, meanwhile, said that while some tokens have some value, it often isn’t worth the prices paid for them.
“I agree, some NFTs do have a component giving them some underlying value,” he said. “But often it seems quite small relative to the prices.
“The chance of getting a used tennis ball that may have been hit by Rafa Nadael is worth something, but I would think not that much. The ability to enter a chat room with other people who have bought ‘bored ape’ tokens may have some value to some people, but I do not see how it could be worth anything like $200,000.”
“The Damien Hirst ‘currency‘ NFT, and full disclosure, I was an unsuccessful bidder for one of these, is different as it entitles the buyer to exchange it for a unique, attractive physical artwork by a famous artist.”
What would your suggestion be to someone who is the owner of an NFT?
“First of all I would ask them if they understand what they have bought,” Navone said. “Have they read the small print of how the specific smart contract works?”
“Second, I would ask if they have any use in mind for the token, if they can derive any pleasure from it, for example by ‘hanging it on a wall’ (physically or metaphorically). If the answer to either of these questions is no, I would suggest to start quietly exploring the market and see if they can offload the token ASAP.”
Dr. Hawkins, meanwhile, shared some simple home truths to anyone thinking of dabbling in a token purchase.
“I’m not an investment advisor,” he stated, “but I think a sound principle would be not to use money you can’t afford to lose in buying NFTs.”
Can NFTs “turn their reputation around”? What is their future?
“I do not think that NFTs as a whole need to be rehabilitated,” Navone said.
“Investors need to understand that “NFT” is just a technology and does not define the nature of the object itself, in the same way a wooden frame does not define a painting.
“What we will hopefully observe is the emergence of the Sotheby’s and Christie’s of the NFT markets: well-recognised players who stake their reputation, and business model, on certifying the quality of an NFT.
“I understand some may see this as antithetical to the ethos of a decentralised system, but it seems to me to be the shortest path to the creation of a trustworthy environment.”
Dr. Hawkins, meanwhile, has an outlook that NFTs will benefit by being put to real use.
“While I’m a sceptic on crypto and many NFTs, I think the blockchain technology has scope to be used for monitoring ownership of assets in some circumstances,” he said, “whether you call this an NFT is a matter of terminology.”