For starters, homogeneous goods are interchangeable. A good example is currency, where a $100 bill is worth equal to other $100 bills (or even two $50 bills). Despite nuances like serial numbers and release dates, financial institutions consider them fungible because it simplifies the transaction process in everyday life. In contrast, non-homogeneous goods are unique and not interchangeable. Some examples include artwork, place names, and birth certificates.
One of the most important problems with non-fungible items is their ability to demonstrate authenticity. For example, if someone were to steal the Mona Lisa and sell a counterfeit copy on the market, it would generally be difficult to tell, and it would be impossible to bring in an art expert to determine its legitimacy. And NFT can do it.
NFTUse smart contract technology to store and record its unique information on the blockchain: this means that for every NFT created, one of them can be stored verifiably. NFT creators can also encode details such as rich metadata or secure file links. Such technological capability has a huge impact on how we handle ownership as it enables the safe, efficient and verifiable transfer of assets.
understand the hype
NonFungible and L'Atelier BNP ParibasThe total market capitalization of NFTs is estimated at $338 million in 2020 alone, a staggering compound annual growth rate (CAGR) since 2018. Many cryptocurrency experts are calling 2021 the year of the NFT; however, some fear it will be a repeat of the initial coin offering (ICO) frenzy of 2017, when overhyping the new funding method led to massive fraud and asset inflation. Is the hype justified, or is it just a giant speculative bubble?
To answer this question, we divide this paper into three separate parts. The first part considers the factors fueling the hype. The second considers the value of NFTs; the last part attempts to contextualize the industry as a whole based on the findings presented in this paper.
A) What are the factors fueling the hype?
1. Humans are nature collectors
Just look at traditional collectibles like postage stamps and trading cards to see how people collect different items for a variety of reasons. A good example would be collectors in the toy/model industry. Collectors in the toy/model industry reportedly generated $3.45 billion in U.S. retail sales in 2012 (15% of the total market value).The NPD Group conducted the study, which excludes other channels such as auction houses and e-commerce platforms. Imagine if the survey covered different industries such as online games, books, and art, then we cannot underestimate the sheer size of the overall collectibles market.
The traditional collectibles industry is very similar to the NFT industry.NonFungible and L'Atelier BNP ParibasThe NFT report breaks down the NFT industry into six areas, including a "Collectibles" section. However, we believe that each segment has its own "collection" elements. Whether it’s a tokenized asset on “The Sandbox” or “Aavegotchis,” regardless of its use case, NFTs will always have collectors. Indeed, aboutofofliteratureshows that it is a common phenomenon that people can collect almost anything, even among adults.
Despite the many theories proposed by sociologists, the overlapping themes carry a huge emotional investment. An article from Everest Ventures Group (EVG) wrote about virtualizing clothes. The digital investment group highlighted that spending on virtual assets has increased since online multiplayer games became popular in the early 2000s. While there are functional assets in some games that provide a competitive advantage, the same reasoning does not apply to cosmetic items that serve no purpose other than providing player differentiation. Non-blockchain-based games like Fortnite, Dota 2, and Counter-Strike, which thrive on revenue generated from “skins” (virtual fashion clothing) and other cosmetic-related effects.
According to EVG, the more time spent in a game, the stronger the emotional attachment, and this applies to all aspects of the game, especially the community. Many players are increasingly fond of their virtual properties and their respective communities. Some people even prefer virtual communities to real ones, making an in-game look and good sense of community crucial.
While not all NFTs are game-based, there are many similarities we can draw from. No one can deny that despite the decentralized nature of the crypto community, many of us are proud to be part of something that is constantly evolving. We really go out of our way to support developers, artists and NFT projects. Others use NFTs as a flexible mechanism. In short, playing with or buying NFTs is often done for public reasons.
EVG further stated that one of the main barriers to greater adoption of virtual assets is the lack of actual ownership. In the game world, the developers control the entire world, stripping the user of key attributes that real items possess, such as the ability to perform any manipulation on the item. If we accept this proposition, NFTs will functionally solve this problem. Unlike traditional digital assets, NFT can give holders "real" ownership in an emotional and legal sense.Nonfungible and L'Atelier BNP Paribasprovides further support for thisThe results of the NFT holder survey showed that 68.4% of the respondents said that they do have an emotional attachment to the NFT (as opposed to answering "no, it's just an investment"). Therefore, NFTs are a reliable gateway to new collectibles, and they provide stronger sentimental value, which is bound to attract more consumers.
2. Higher disposable income
"Collect" canback toPrimitive societies, where people collected strangely shaped rocks. Since then, the makeup of the "collector" has evolved.According to social psychologist Andrew Dillon（Andrew Dillon：
"The modern notion of the collector referring to the amassing of objects for entertainment, display, or other subconscious motives other than consumption or survival needs is closely associated with the emergence of disposable wealth."
Dillon's explanation suggests that wealth accumulates. Originally, only the wealthy and powerful ruling class had the financial freedom to pursue their own interests. However, with the development of modern society, there are more and more leisure activities, which become the catalyst for people to gather.
If we look at the NFT industry, there are some striking similarities to the development of the NFT market following this article. existAndrew Steinwold's history lesson on NFTsWillNonFungibleWillthereafterThe period of time is regarded as a period of consolidation and stabilization. Despite the proliferation of new NFT projects, most had low retention rates and eventually failed.
image description
Source: NonFungible
Currently, most NFTs on the market revolve around collectability and entertainment. Based on past market trends and human psychology, it is reasonable to assume that most NFT spending occurs when disposable income is high. In other words, a bull market is a period of higher average disposable income, leading to a higher willingness to buy recreational goods (such as NFTs).
3. Profit
Yes, NFTs have great use cases and have major implications for how we treat assets; but let's not pretend that a lot of people aren't here to make money.
According to Nonfungible, there are several indicators to support this:
Sales above $1,000 on the primary market (i.e., first point of purchase) have surpassed sales on the secondary market (i.e., peer-to-peer sales) in Q4 2020. This suggests that NFT traders are buying NFTs at launch and resale at a higher price.
NFT buyers outnumber sellers. This suggests that more users are buying NFTs, but this could be for different reasons such as reselling them for profit or keeping/using them.
The liquidity ratio (calculated by the total amount of unique assets traded on the secondary market divided by the total supply of each asset) is relatively high for specific NFT categories (such as Metaverses and Sports). This suggests that NFT sellers are driving significant speculative prices within these spaces.
With the right investments, NFT trading can offer lucrative profits. One need only look at the media attention over the past few months (discussed further below). pictureGrimessuch a mainstream figuremanaged to sell$6 million worth of its own NFT art tokens, while "Rarest Pepe Meme” sold for $320,000. Of course,And the famous Beeple, he auctioned an NFT artwork for $69 million.
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Source: Messari
Messari'sTotal sales include major NFT marketplaces and upcoming marketplaces. A total of 8 of them are accounted for: Opensea, Zora, SuperRare, Rarible, Foundation, MakersPlace, KnownOrigin, and Async Art. There were almost no sales volumes before September 2020 and slow growth in 4Q2020. However, in February 2021, sales skyrocketed, closing just above $200 million.
The NFT market is for trading only and is a solid indicator of where money is being made. Even the recent growth of new marketplace platforms is showing signs of healthy demand for NFT trading.
4. Enhance market awareness
There's a bit of a dilemma here. Are the factors discussed in this article fueling the hype? Or is mass media coverage, social commentary and brand recognition the main drivers?
DoubleVerifyimage description
Source: DoubleVerify
Across every content type and channel surveyed, consumption is on the rise, with social media leading the way – this is in line with Nonfungible’s findings on the number of new active NFT wallet holders in 2020 (205,046), which is up from 2018 ( 84,839) more than double the number). However, if you look atGoogle Trends, another image will be displayed.
image description
Source: Google Trends
SuchNBA TopshotandChristie'sSuchbig star latelyhas been the headlines, whileMark Cuban, Lindsay Lohan and GrimesSuch celebrities continue to be the focus of the narrative. This is further supported by the money-making opportunities and record sales of NFTs in February (mentioned above).
However, we should not ignore the shifting habits of content consumption as it may have a complementary effect on the NFT industry.
5. The online world is taking over
Source: Statista
Source: Statista
predictpredictShows that future growth is exponential. From the survey resultsKPMG Global Consumer Report (2017)It also shows that more and more consumers are willing to buy new product categories online, especially those that are more traditionally sold in stores. NFTs are a new type of asset that could benefit from wider online acceptance.
Another metric to watch is theSource: Statista。
Source: Statista
In 2019, a person spent an average of 2 hours and 12 minutes on a mobile phone and 39 minutes on a desktop computer. Covid-19 has only accelerated this trend to new heights. Combine that with the increased usage of online content (based on DoubleVerify research), and virtual worlds, by their very nature, will take more time and effort.
Reiterating EVG's findings, the longer consumers spend in virtual properties and communities, the more emotionally they develop emotional attachments. Based on current market trends, this only further supports the value proposition of NFTs.
People are increasingly keen to explore and transact in new online mediums, so they spend more time online. NFTs fill this gap in the market, as they are only digital products. Also, some NFTs compete directly with traditional merchandise such as artwork and trading cards. For example, NFT artwork can be bought, sold, and viewed online within minutes, whereas physical paintings must be shipped and limited to home viewing. Photos can be uploaded online, but there is a big difference between owning an asset and posting a picture of a painting on Instagram.
For many, the line between reality and the virtual world is becoming increasingly blurred. NFT can bridge the gap and fulfill its social needs in digital media.
B) How is NFT valued?
Many NFTs have a minimum price initially set by the creator. Others have no benchmark price; instead, they are either determined entirely by auction or dominated by speculative market demand.
The biggest problem is that there is no reliable benchmark for NFTs. NFTs may be unique or part of a collection. Different NFT categories have different market power. It doesn't help that the industry as a whole is still in its infancy. All of these factors add to speculation big.
Due to the speculative nature of NFTs, it is almost impossible to provide quantitative indicators. However, this does not apply to qualitative aspects. By observation, we have listed some core characteristics that people look for in NFTs.
1. Historical significance
$ 1,000,000$ 1,000,000. oneA recent CryptoPunk even sold for a whopping $7.6 million。
2. Brand promotion
Brands are often associated with celebrity endorsements or big names in the space. The reasoning is simple. Brands have a powerful influence on consumers and can generate significant market awareness, which translates into higher perceived value. An example would beNBA Top Shot, which sold an NFT clip of a James Lebron dunk for more than $200,000.
3. Traits that favor collectors
It's not easy to fully catalog collector-friendly features. Much of this has to do with societal biases or preconceived notions that collectors value. For example, having an NFT with a "Social Preference ID". Recently, an Aavegotchi portal sold for 60,000 GHST for 60,000 GHST as it was the second portal ever to be released (the transaction record is no longer visible in the store). For context, the portal has a base price of 100 GHST and does not have any functional differences from other released portals.
4. Scarcity
Maybe this one needs a little explaining. The lower the quantity present, the higher the perceived value. It's simple math and basic human wiring. We always want what we can't have.
5. Novelty
People like to be the first to things. A new mechanism or system can generate hype, especially if it's a new and unique product. A good example isHashmasks, which introduced a naming mechanism in its artistic NFT. During the release phase, users can name their NFTs before the artwork is revealed, the only difference is that the names are unique and cannot be reused once used by others. All 16,384 Hashmasks were sold out within the first two days.
6. Ability to communicate with the masses
The aforementioned references to "Rarest Pepe Meme" is a case in point. To reiterate, a Homer-inspired (from The Simpsons) NFT digital art piece that sold for $320,000. Homer Pepe is Joe Looney at Developed in 2016, the user card produced by the Rare Pepe collectibles platform was exhibited at the Rare Art Labs digital art festival in 2018. It cannot be denied that part of its success is due to its relevance to the cryptocurrency scene. After all, analog Reason and drama are the lifeblood of the entire crypto community.
7. Emotional resonance
Emotional resonance comes down to personal taste and emotional value. oneThere are recent purchases on the OpenSea platformIt embodies this. @seedphrase, a Twitter account named after Danny, bought a Hashmask for $650,000 for its "Basquiat style" (a reference to renowned Manhattan artist Jean-Michel Basquiat) and several layers "Subjective Scarcity".
8. Utilities
An NFT with a functional purpose has quantifiable elements. For example,AavegotchiCombining DeFi with NFTs to provide yield farming incentives. The amount of GHST obtained corresponds to the type of rare trait possessed by the Aavegotchi NFT. Assuming Aavegotchi can earn $1000 worth of GHST per month, potential buyers can use this as a reference point for determining minimum price points.
One thing to note is that the weight attached to each feature is not predictable. Different NFTs are successful for a variety of reasons, and often share one or more of these characteristics. However, it appears that NFTs with more of these characteristics are more likely to succeed.
C) provide a point of view
Market trends suggest that there are many reasons for the hype behind NFTs. Some are sociological, while others are guided by external market forces that have changed consumer habits. One of the main drivers behind the recent explosive growth appears to be fueled by social commentary.
Does this mean NFTs are overhyped? Is there a giant bubble waiting to be popped?
To some extent, this may be true. The data shows that there has been an influx of attention and spending in recent months, likely driven by the media and celebrities.
But that doesn't mean the "value" within the industry is overstated. Additionally, there are so many different areas for NFTs, it would be unfair to describe the entire industry as a bubble, especially when most of the "hype" is centered around the art space.
according toInvestopedia：
Bubbles are created by surging asset prices driven by exuberant market behavior. During a bubble, assets typically trade at prices or within a price range that substantially exceed the asset's intrinsic value (prices that do not align with the asset's fundamentals).
As we just discussed above, NFTs cannot be valued objectively, they cannot be considered stocks, currencies or tokens because there is no fundamental. The value of $1 may be the value of $100. As the saying goes, beauty is in the eye of the beholder. That said, it does mean that the industry is largely speculative.
The real question is, is the current demand led by real collectors/users or by NFT traders artificially inflating prices to profit? If it's the latter, then a bubble is likely, as the industry will be primarily supported by market players looking for a quick turnaround. Eventually, the bubble will burst when NFT traders are unable to sell their purchases at a higher profit, exit the industry, or move on to the next NFT.
On the one hand, there is evidence that NFT traders are fueling the recent hype (discussed above in the “Take a Profit” section).
On the other hand, the NFT industry has been gearing up for exponential growth following its 2019 merger. Throughout 2020, DApp contract interactions greatly exceeded the total sales volume of buyers and sellers by a ratio of 4:1, indicating that more NFTs are being used for their intended purpose (eg, game interaction) rather than being reserved as speculative assets. Changing consumer habits and global market trends also make NFTs more attractive to a wider audience.
The NFT industry does not appear to be in a bubble, but rather in an active price discovery mode. Unprecedented new forms of use cases are being introduced to retail users. We've seen NFTs shake up multiple industries, likeKings of LeonSuch famous musicians are tokenizing their albums and selling them on OpenSea, one of the largest NFT marketplaces.
Some aspects may feel "bubbly", but there's still not enough data to support this belief. Only time will tell.
By Benjamin Hor
