NFTs – The new Bitcoin?

By Mik Mrd

Bitcoin is currently one of the world’s most famous cryptocurrency sitting at the price of just under $55,000 at the time of writing this article. The cryptocurrency really began to pick up speed around October 2020, doubling the value of 1 Bitcoin to $20,000. Major purchases of Bitcoin such as Elon Musk’s $1.5 billion worth of Bitcoin and the acceptance of Bitcoin as a method of payment by companies such as Tesla and PayPal now mean that Bitcoin is looking to stay. There are many arguments for and against the use of Bitcoin as a method of payment but this article will not go into that space.

As of right now, there has been a very quick rise and lots of hype around NFTs (Non-Fungible Tokens). As Sharma (2021) explains, NFTs are ‘cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other’. The main distinguisher between NFTs and cryptocurrency is that they cannot be traded or exchanged at a specific, objectively agreed on price, such as $10 for 2 $5 notes or 1 Bitcoin for 1 Bitcoin (Sharma, 2021).

Currently, NFTs usually take the form of artwork. The most notable ones at the moment being Grime’s collection of artwork which sold for $5.8 million and CryptoPunks, a site which sells 24×24 pixel art of simple portraits that rakes in an average price of 11.53 Ethereum or $21,160 (Kay, 2021). These numbers are quite ridiculous personally considering the majority of mainstream media have only very recently jumped on the hype of NFTs.

The idea of NFTs is quite hard to grasp. In an attempt to help us understand this, consider a trading card collection. NBA fans might be particular with the Exquisite Collection and football/soccer fans may be reminded of Match Attax or Topps. NFTs bring the concept of having different ‘cards’ or ’pieces’ online that have a specific identification number and design.

Consider the example of the new online NBA Collectibles called NBA Top Shot. Essentially, cards are collected as moments of individuals such as a dunk or even a layup. An additional layer that adds value to these moments are their specific rarities that include the common, rare, legendary and ultimate tiers. Buyers can buy packs that contain a specific amount of moments with specific rarities, with the cheapest pack being $9 or use the marketplace to buy moments from other collectors.

This concept of NBA Top Shot is even harder for me to grasp. This is because these moments are not unique to the point where only the buyer can see them, but these moments are replays or highlights that everyone can search up on YouTube. Even more mind boggling is the concept of rarity that could add more than $10,000 for the same clip with legitimately no difference in media presentation.

Essentially, what makes these NFTs so valuable is their scarcity. As Browne (2021) points out, each NFT is unique and cannot be replicated, and that they can be stored in buyers’ digital wallets as collector’s items. Going back to the example of real life trading cards, rare cards often have a specific card number out of the total number produced of the card. A similar concept is applied for NFTs and NBA Top Shot, as only a specific amount is initially available for purchase. Additionally, it must be highlighted that different identification numbers of NFTs make a huge difference in price. For example, in NBA Top Shot, a LeBron James Throwdown Series 1 moment of him making a dunk for the Lakers against the Rockets currently has it’s lowest asking price of $40,000 for ID #274 whilst also having an asking price of $250,000 for ID #175. I am not sure at the moment why #175 has any significant value over #274 for LeBron James, but those are the prices as it is.

I use this example of NBA Top Shot because it is one of the original outlets that an official organization, that is the NBA, have started to utilize NFTs. But there are so many more NFTs which are available to purchase. Take for example the online site OpenSea, where there is a marketplace for people to buy and sell artwork as NFTs with bidding starting from as little as 0.0001 Ether. Some sellers sell their genuine artwork and some others look to make some money by buying and selling those NFTs. You can view the history of bids made for the item, so it is easy to spot whether the NFT has been purchased before or not.

The concept of NFTs definitely does bring up some worries. Straight away there are questions of legitimate uniqueness, as in being able to just screenshot the NFT and you can witness it for free. Another thing that concerns me is that there is no intrinsic value. While it is understandable that the scarcity of the NFT just like trading cards play a huge role in determining their value, would it not be so simple as to produce an NFT that is similar to the original one? These are just a couple of concerns that instantly come to my head when thinking about NFTs.

From this, you can see a correlation to what some people thought of Bitcoin and cryptocurrency in general before it took off. There were concerns of continuous mining that would render the cryptocurrency worthless as well as huge criticism of cryptocurrencies having no intrinsic value. While these criticisms can be applied to actual bank notes issued by the government that could be easily produced and having no intrinsic value, I would propose that banknotes have become so ingrained in our society that it would be hard for people to not see value in banknotes. Note that this does not include the hyperinflation events in countries such as Venezuela, and that I will not go into the topic of hyperinflation as it can be a separate article, maybe even my next one.

An added concern for NFTs is that they mostly come in artworks and in turn do not have an objective, set value in place for the NFT. This feature essentially restricts or complicates the elements of trading and payment with NFTs, which leads to a significantly lower volume in comparison to other popular methods of payment. As Wintermeyer (2021) explains, while weekly trading volume on Bitcoin futures passed $500 billion in January 2021, the NFT market sits at at a weekly trading volume of only $8.2 million. But of course, these are early days and I expect this number to rise.

So is there a case to jump on this hype of NFTs and start buying? Brown (n.d.) suggests that the quick soar in prices of NFTs feel a little bit bubbly. This, paired with the fact that the market is new, led Brown (n.d.) to predict wild price swings of NFTs that other cryptocurrencies have experienced. This prediction is supported by Nadya  Ivanova, a close observer of NFTs at L’Atelier and the person being interviewed by Brown (n.d), claiming that there is a high amount of risk.

Overall, I personally feel that the concept of NFTs are hard to grasp at the moment and that we might be entering into some bubble. However, with this being said, Bitcoin, which shares the same concerns of NFTs, were originally thought to also be bubbles, but it proved many people wrong. Before it comes back to bite me, I will officially claim that I am not 100% sure whether we should start looking to buy and hold NFTs or not, and I am not completely sure whether this is a bubble. I will definitely, however, be looking to buy a moment from NBA Top Shot for the sole reason being that I can say that I own an NFT.

Kay, G. (2021). Available at: https://www.businessinsider.com/grimes-nft-art-warnymph-sells-for-millions-20-minutes-2021-3 (Accessed: 10 March 2021).

Browne, R. (2021) Crypto collectibles are selling for thousands — and celebrities like Mark Cuban are cashing in Available at : https://www.cnbc.com/2021/02/25/nfts-why-digital-art-and-sports-collectibles-are-suddenly-so-popular.html#:~:text=Crypto%20investors%20say%20NFTs%20derive,digital%20wallets%20as%20collectors’%20items.&text=The%20number%20of%20digital%20wallets,make%20profits%20of%20over%20%24100%2C000. (Accessed 10 March 2021)

Browne, A. (2021) What is an NFT – And Should You Buy One?, Forbes. Available at https://www.forbes.com/sites/abrambrown/2021/02/26/what-is-an-nft-and-should-you-buy-one/?sh=3a73a18b24b2 (Accessed: 12 March 2021).

Sharma, R. (2021) Non-Fungible Token Definition: Understanding NFTs. Available at: https://www.investopedia.com/non-fungible-tokens-nft-5115211 (Accessed: 12 March 2021).

Wintermever, L. (2021) Non-Fungible-Token Market Booms As Big Names Join Crypto’s Newest Craze, Forbes. Available at https://www.forbes.com/sites/lawrencewintermeyer/2021/02/12/non-fungible-token-market-booms-as-big-names-join-cryptos-newest-craze/?sh=74f24318460a (Accessed: 12 March 2021).

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist. 

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