NFTs – The Future of Art or Just Another Fad?

In the last week, the Internet has been raving about NFTs. And why not! Canadian singer and artist Grimes – who is also the girlfriend of Elon Musk – put up her “Digital Art” collection for sale. She earned a whopping $5.8 million in less than 20 minutes. $ 1 million at current exchange rates is a little more than ₹ 7.3 crores. So, that’s a cool ₹ 42 crores added to her wealth. That’s not all. Twitter founder Jack Dorsey has put up the first ever tweet for sale. The tweet says – “just setting up my twttr”. The buyer will get an autographed digital certificate, signed using cryptography, that will include metadata of the original tweet. The highest bid as of now is $ 2.5 million. [The tweet will continue to be available on the Twitter website.]
Amused? We haven’t even discussed NBA Top Shots yet. More on that later in the article. Now, what the hell are NFTs and why are people paying such obscene amounts of money to buy them? To understand that we need to zoom out a little and understand the underlying thesis.

1. Where do people invest their money?

In capital markets – stocks & bonds are the most common investment assets. These two were the only major assets bought and sold on regulated stock exchanges for a very long time. Other assets found a way inside the exchanges much later. That’s why assets other than stocks & bonds are known as Alternative Assets.
Even Gold, Silver and Real Estate are strangely classified as Alternative even though humans have been investing in these two assets since the beginning of known history. In the 2nd half of the 20th century, Wall Street introduced the concept of Hedge Funds, Private Equity, and Venture Capital Funds. These are vehicles for multi-millionaires to take riskier or niche bets. Even structured products like CDOs fall under this category. Synthetic CDOs were the most notorious instruments during the Global Financial Crisis in 2008.
People have also invested in Art, Antiques, Wine, Sports Collectibles etc. for a long time. But these are very niche categories and you have to be knowledgeable (and rich) to venture here. You may argue that it also involves passion and inquisitiveness. Yes, it does. But how many people would invest a million $ in a painting if they thought its value is going to decline? People who buy art just for the love for it are a minority. Most of the buyers also see it as an investment. This is the category that we need to focus on
today.

2. Can Art be Digital?
   Yes, art can be written on a code. The problem is you can easily replicate it. Remember what has happened to music and movies once they started coming out in digital format? Piracy is rampant and content creators lose tons of money. You can’t tell the difference between the original and pirated version of the latest movie that released on last Friday. In fact, I simply googled “Grimes Digital Art” and within 2 minutes I was able to watch the videos and pictures that she had created and sold this week for millions.
3. So why would someone pay a million $ to buy digital art when the entire world is enjoying a free
   version that is as good as the original?
   The answer is NFT – Non-Fungible Tokens. ‘Fungible’ means that an object is interchangeably identical to something else, like a 10 rupee note. You can exchange your 10 rupee note with your friend’s 10 rupee note and neither of you will have a problem with that. As the name suggests, NFTs are not interchangeable. You can prove that your asset is original as the
   ownership data is stored on a Blockchain. That’s why some people also call it crypto assets.
4. Can you replicate an art that is stored on blockchain?
   Yes, but people who favour digital art make this argument – There are 100s of replicas of the Mona Lisa but their value is still negligible compared to the original that hangs in The Louvre in Paris. NFTs too give you this proof of authenticity as the art is digitally signed by the creator and the data is stored on a blockchain. So, NFTs have now given birth to a phenomenon which was impossible to comprehend before – Digital Scarcity.
5. What is the concept of Digital Scarcity and why is it important?
   The rarer an artefact is the more valuable it is. But once supply exceeds demand, prices come crashing down. In the 1970s and 80s, collecting and trading Baseball cards was very popular in the USA. People made serious money by buying cards that were rare and iconic and then selling later at extreme profits. But in the 1990s, the card companies got too greedy and flooded the markets with too many cards. Once people found out that the cards were not rare anymore, the value of those cards nosedived. They became worthless. Will Digital Artists make the same mistake? Currently, the demand for digital art exceeds the
   supply which makes it scarce and thus, valuable. For example, if Grimes did an auction every week will people still continue to pay high prices for her art? I doubt that. As we move forward, more and more artists will migrate to Digital Art and that may change the demand-supply equation significantly. As Supply increases, prices may not remain so high. But we don’t know that yet.

6. Coming to NBA Top Shots…
   Do you know which is the most expensive sports card ever traded?

Mickey Mantle rookie card that sold for $ 5.2 million in January 2021.

Luca Doncic rookie card that sold for $4.6
million last week. (Both are physical cards that you can
see, touch and hold).

NBA has now entered an official agreement with NBA Top Shots (owned by Dapper Labs) to create a digital version of sports cards. So, instead of a physical card you can now buy a video of any “moment” like a Lebron James dunk which recently sold for $ 2,00,000. [The video of this dunk is available for free online in case you want to see what’s the fuss about].
NBA Top Shots have seen total transactions of $ ~250 million on its platform and its valuation is estimated at more than $ 2 billion.
Buyers own the “moment” via a Serial Number. NBA Top Shots has created a marketplace for these “moments”. Users can see all the moments that are up for grabs, their serial number, price and how many quantities of any “moment” were created and sold in the market. There are also other considerations. Like, when they say you own the “moment”, you only own the code. The copyright is still with the NBA and they can keep using it in any way they want. So, you “own the moment” only in the NBA Top Shots universe. To be fair, even when you own a physical card, the copyright remains with the NBA.
Anyways, The Sports Collectible genre is now officially online and the response from buyers has been amazing. New people are signing up every day and buying “moments” that they think will go up in value.

The important question – Why are people buying Digital Art/collectibles?
The most important reason – people think these things will increase in value over time.
Will they increase in value? In the short term, I think they will. There is a lot of demand, people see it as an easy avenue to make money, there is the novelty element, FOMO and there are a few stories of people who have made over 100x ROI on their investment.
In the long term? This is an absurd market and when the market is absurd, I would rather be a supplier than a buyer. [Unfortunately, I wouldn’t be able to write even my own name in any computer language].
Well, that’s just my view and I may be wrong.