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NFTs Are Facing a Bubble, but Crypto Art Platforms in It for the Long Term

So you've bought a non-fungible token (NFT) — a one-of-kind digital asset that exists on a blockchain and could be anything from a social media post to a painting. What happens next? 
Do you place your newly acquired digital artwork in a virtual display? Do you brag to your friends about owning a tweet from your favorite movie star? Or do you start looking for another buyer? 
All of these are technically possible, but the last option comes with some follow-up questions: If you do decide to sell your NFT, who do you sell to? And why would they want to buy it? 
To use the language of Wall Street, do NFTs offer liquidity? Because unless buyers are only in it for the fun, at least some of them are looking for either a store of value or a return on investment — and when the dust clears on the current hype-cycle, these would-be speculators could end up disappointed.  
"It's not going to look the same as the crypto booms and busts, but there are going to be a lot of these sales that maybe don't have buyers in the future," said Nick Tomaino, founder of 1confirmation, a venture fund backed by Peter Thiel and Mark Cuban, which invests heavily in the crypto space. 
While the secondary market for NFTs isn't likely to garner the same headlines as multi-million dollar deals, experts agree the future of the market depends on more than one-off, high-profile purchases.
"Will there be a secondary market for this stuff? Certainly," Tomaino said. "Will some of the stuff that's getting bought now at millions of dollars go down in value? I would say so." 

Collectors vs. Buyers 

Yet not all NFTs are built the same. In fact, the NFT landscape is really made up of multiple markets scattered over different blockchains and platforms of varying quality and staying power. 
The online market for crypto-art, for instance, has been around for years. It also happened to generate the recent spate of headline-catching deals, such as Beeple's $69 million, 13 years-in-the-making digital collage or Grimes' $6 million in video art. 
"Before the 2021 hype, there were passionate collectors that were buying stuff for real money on SuperRare and [Nifty Gateway] and the other platforms," Tomaino said, referring to platforms that deal in digital items. "Now some of those people are selling to new collectors who are coming in based on the media hype and attention."
In many ways, crypto-art is a good fit for NFTs, because value in the art world is determined more by reputation, personal taste, and fads than supply and demand. It’s also always attracted a lot of money. 
"Art has traditionally been a sport for the wealthy, and that's not going to change in crypto," said Mason Nystrom, an analyst for the research firm Messari, who tracks NFTs. 
For example, SuperRare, which touts itself as an "authentic digital art marketplace," hosts a relatively small number of buyers and sellers, with roughly 1,000 artists and 3,000 collectors on the platform. 
"If you do the math on that, there's a small subset of collectors who are high net-worth individuals who are likely collecting the majority of pieces," Nystrom said. 
This wasn't always the case, explained SuperRare CEO John Crain, who founded the company three years ago. In the beginning, many pieces went for as little as $50, and there were fewer resales as well. In the first year, secondary sales were just 10 percent of the total volume. Now they're up to 40 percent.
Crain pointed out that resales are "pretty frowned upon" in the art world, partly because collectors are buying works based on their potential long-term value, but also because artists stop benefitting after that initial sale. He said NFTs help solve this problem by putting provenance and pricing data on the blockchain and by offering smart contracts in which artists receive a set percentage after every sale.  
"Part of the idea was if you could give artists exposure to the upside, maybe it's more of an equitable thing and wouldn't have to be something that's done behind the scenes," he said. 
With sales volume exploding since the beginning of the year, the upside is potentially huge. In December, $2.2 million in art was sold on SuperRare, according to the data-tracking site cryptoart.io and Dune Analytics. In February, as NFT buzz seemed to sweep in like a late winter storm, that number shot up to more than $15 million, making SuperRare the second largest player in the space behind Nifty Gateway. Right now, prices on the site's main page range from under a hundred dollars to thousands.
While Crain said some of the recent interest in crypto-art might be hype-based, he stressed that art collection is inherently unpredictable and socially-determined. "If you think about collecting generally, it's not rational," he said. "It's not really a logical thing. It's something kind of inherent to humans."
But SuperRare and other platforms like it are undeniably becoming the center of a massive marketplace, in which large sums of money are changing hands, and whether these prices are ultimately sustainable, let alone sensible, looms large for even the most committed NFT evangelists. 
"I'm a big believer in crypto-art in the long term, but I think it's clear that we're in some type of bubble right now," said Tomaino, whose firm has invested in OpenSea, another popular NFT platform. "A bubble means the long-term trend is real, but there's a lot of noise and garbage. And, I think a lot of people are going to lose a lot of money."

'An Unknown Scenario'

But Tomaino is no stranger to bubbles. In the crypto-world, they're par for the course. You might even call them growing pains or necessary bumps on the road to legitimacy. 
"At the end of the day, it's very similar to cryptocurrencies," he said. "These are memes that more people have to believe in in the future for them to continue to have value. So the question when you're buying an NFT is, are more people in the future going to think this is valuable?"
You hear this a lot talking to people about NFTs: that cryptocurrencies have been there and done that. But there are some fundamental differences as well, with one big one being that tokens, unlike coins, are "non-fungible," meaning they can't be interchanged for another asset of a similar type. 
So while cryptocurrencies may rise and fall in value —  leading many a bull to alternately grit their teeth during dips or cheer in delight during spikes — there is a certain amount of built-in liquidity. An obscure work of digital art, on the other hand, has to stand on its own perceived value. 
Much also depends on the blockchain or web platform in which an NFT is based, explained Nystrom. 
"To an extent though, you are kind of betting on the base layer blockchain that your NFT is issued on," he said. "That comes with different tradeoffs depending on the network." 
He predicts that the likeliest path forward is that different use-cases will emerge around different blockchains. One might focus on digital art, for instance, while others could specialize in sports collectibles or video game avatars or "CryptoKitties" — you pick. 
Indeed, the NFT platform with the highest sales volume is NBA TopShot, which specializes in officially-sanctioned digital sports collectibles. According to cryptoslam.io, another website tracking the space, the site generated over $10 million in sales in just the last 24 hours. 
But what happens if one of these blockchains or platforms, where perhaps you've purchased thousands of dollars in NFTs, shuts down suddenly or even just fades into obscurity?
"It's kind of an unknown scenario," said Nystrom. "Ethereum is in a very strong position, so I think most people who purchase NFTs on Ethereum are fairly confident that their NFT will retain value. To a greater extent, other blockchains kind of have to prove that, but the market will definitely decide."
However, being based on the Ethereum blockchain, which is most NFTs, doesn't ensure quality or longevity, said Tomaino. He stressed that there was plenty of "junk" on there as well. 
In one sense, this is very similar to the early years of cryptocurrencies, in which various players vied for market share. We now know that only a few beat the odds, and many others went the way of the dodo. 
Crain of SuperRare is banking on a similarly turbulent near-future.
"Moving forward, we're going to have a number of booms and busts, but long-term I'm very confident that more and more people will start to collect," he said. 
For these NFT believers, surviving a bubble, if not bubbles, might just come with the territory.  
"NFTs are really interesting because they reveal about financial markets a truth that I think a lot of people don't recognize, which is that every investment is based on people's collective belief," Tomaino said. "People like to tell a story about certain companies having cash flows or things like that, and that is a story that makes people believe that an investment has fundamental value, but at the end of the day it's all belief. NFTs are no different than art or traditional investments or cryptocurrencies in that sense."
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