The Rise and Fall of NFTs: A Never Ending Story?

16

September

2024

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In 2020 and 2021, non-fungible tokens (NFTs) took the digital world by storm, bringing with them innovative technology for digital ownership. Verifiable ownership of digital goods such as music, art, and collectibles was made possible by these indivisible, blockchain-based assets (Malik et al., 2023). High-profile sales of digital artwork, such Beeple’s Everydays: The First 5000 Days, which sold for an incredible $69.3 million at a Christie’s auction in 2021, helped bring attention to NFTs (BBC News, 2021). The idea that NFTs would revolutionize the digital economy and the art world was further strengthened by this sale.

The popularity of NFTs spread to the cryptocurrency markets, where certain tokens—like Ethereum and Bitcoin—saw rapid rises in value. Virtual real estate, meme-based NFTs, and digital art have all attained astonishing valuations; two such instances are CryptoPunks and the Bored Ape Yacht Club, whose values have surged into the millions. In June 2021, a CryptoPunk NFT at Sotheby’s sold for $11.8 million, demonstrating the speculative frenzy that was driving the market (Howcraft, 2021).

The NFT market’s expansion was not without difficulties, either. Because NFTs and cryptocurrencies are speculative in nature, there was a bubble-like situation where values were frequently not in line with the inherent worth of the digital assets. The NFT market started to fall significantly by the middle of 2022. The value of many investors who had entered the market early on suffered a sharp decline in their money. For instance, in a 2022 auction, Jack Dorsey’s first tweet—which was originally auctioned for $2.9 million—failed to draw bids beyond $10,000 (Handagama, 2023).

NFTs are still useful, but the market drop has made clear how erratic speculative digital assets can be. The rise and fall of NFTs serve as a warning about the dangers of making speculative investments, especially in developing markets. Nevertheless, will the NFT hype rise again like it did in 2021? In my opinion, the bubble in 2021 has shown the potential and the essence of what the NFT market could bring. So in this case, if the bull market cycle for the crypto space rebounds, then the possibility of pixelated art and collectibles hitting the millions will re-emerge.

References:

BBC News. (2021, March 11). Beeple’s NFT digital art nets £50m at Christie’s auction. https://www.bbc.com/news/technology-56362174

Handagama, S. (2023, May 11). ‘Jack Dorsey’s first tweet’ NFT went on sale for $48M. It ended with a top bid of just $280. CoinDesk. https://www.coindesk.com/business/2022/04/13/jack-dorseys-first-tweet-nft-went-on-sale-for-48m-it-ended-with-a-top-bid-of-just-280/

Howcraft, E. (2021, June 10). ‘CryptoPunk’ NFT sells for $11.8 million at Sotheby’s. Yahoo Finance. https://uk.finance.yahoo.com/news/cryptopunk-nft-sells-11-8-154742975.html

Malik, N., Wei, Y. “., Appel, G., & Luo, L. (2023). Blockchain technology for creative industries: Current state and research opportunities. International Journal of Research in Marketing, 40(1), 38–48. https://doi.org/10.1016/j.ijresmar.2022.07.004

‘Miners’ vs ‘Gamers’

6

October

2021

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GPU shortages are not new, as many graphics cards like the top-end NVIDIA cards often immediately sell out. However, due to the extremely fast increasing cryptocurrency prices, demand for PC components has skyrocketed with the rise of cryptocurrency mining. As a result, graphics cards are going to disappear even faster and this could be a disaster for anyone looking to buy a graphics card for gaming. And it’s not only graphics cards, good processors (CPUs) are also very hard to buy at the moment as they can also be used to make a profit mining crypto. Most of the (financial) gains are made with GPUs, however. To make this even worse, prices of many components have more than doubled and there is no sign of this slowing down (Esteves, 2018; Walton, 2021).

Because of the problems I mentioned above, gamers now have to fight both bots and miners when they want to buy components for their PC. You could thus say that crypto and the technologies related to it are giving normal PC-gamers a hard time enjoying the things they like to do: play video games. My own experience with this problem, as someone who likes to play video games in his free time, is that you either have to pay a very high price or have to get extremely lucky. I have bought my current GPU 3 years ago for about €350 and at the moment it is going for about €700. Usually, I would be tempted to sell and make a profit. The problem, however, is that it will probably be near impossible to buy an upgrade, leaving me with no GPU at all (Esteves, 2018; Walton, 2021).

It is expected that crypto prices and effort needed to mine them will become balanced again. When that will happen and what price will come out of it is hard to guess, but for gamers the future is not looking very bright. Overall, it is difficult to find a solution to this problem. NVDIA could, for example, introduce buying limits of X products per person, but I assume this would be extremely complex and costly to implement for them and in the end NVIDIA’s main goal is to make money (Walton, 2021).

References:
Esteves, R. (2018, April 14). Bitcoin Mining Pressures Hardware Prices. Retrieved 6 October 2021, from https://www.newsbtc.com/all/bitcoin-mining-pressures-hardware-prices/

Walton, J. (2021, January 4). GPU Shortages Will Worsen Thanks to Coin Miners. Retrieved 6 October 2021, from https://www.tomshardware.com/news/gpu-shortages-worsen-cryptocurrency-coin-miners-ethereum

Stablecoins Are Not So Stable – Crypto

3

October

2021

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The popularity of cryptocurrency has been increasing over the years. According to the global crypto adoption index, in 2021 there has been an adoption increase of 880%. Even institutional money and cash of huge firms have been added into the crypto market. Names like Blackrock, Tesla, PayPal, and Square are all examples of organizations that have adopted Bitcoin in some form. There are even rumors that Amazon will soon allow payments to be made with cryptocurrencies.

Although the increase of adoption has a positive effect on the future of cryptocurrencies, there is still one elephant in the room to be addressed that makes further adoption more difficult: the high volatility of cryptocurrencies. Perhaps today you could still use your bitcoin to buy a shirt, but the opposite could be true for tomorrow. To solve this problem, stablecoins like Tether and Binance Coin were introduced to the crypto scene by crypto organizations. The idea behind this special digital money is that it is pegged with fiat USD on 1:1 ratio, which means that one does not need to be worried about losing buying power in the short-term. Just like normal fiat money, the only way for stablecoins to lose buying power is by inflation. The question remains, however, how are these crypto organizations able to keep the stablecoins pegged on a 1:1 ratio with the USD?

In theory, stablecoin organizations are able to produce an infinite amount of stablecoins. But in order to be pegged with the USD on a 1:1 ratio, the same amount of USD must be owned by the stablecoin provider on their balance sheet. The problem is that many stablecoin organizations do not allow external auditing, which means that nobody knows if stablecoins are really backed by fiat money. Therefore, stablecoins could turn out to be a ponzi scheme. Another problem is the fact that stablecoins are rumored to be backed by bonds, some even of the almost bankrupt Evergrande, risking the intrinsic value of stablecoins. Although as of today both potential problems have not been proven yet to be real, it is clear that the use of stablecoins is still quite risky, making the coin potentially to be worth $0.

Interestingly, even with this risk in mind, there is still lots of demand for stablecoins. In fact, one could earn up to 8.25% interest if they store their stablecoins on crypto banks or crypto exchanges. Compare that with the interest rate of barely a percent by fiat banks, this seems like a great way for the normal people to earn interest on their savings. To good to be true? Maybe.

*Interest rates for stablecoins on Blockfi.*

The reason for the high interest rate of stablecoins is due to the high demand of borrowing stablecoins by investors to speculate on the crypto market. Given the high volatility of cryptocurrency, this makes it possible for borrowers to have a high return of investment, using a part of their proceeds to fund the high interest rate. This concept is not new: fiat banks are doing the exact same. The only difference is that fiat money stored in fiat banks are insured by the government. In other words, if the borrowers are not able to pay back their debt, the government could still save the fiat bank and its customers with funding. The unregulated crypto banks and exchanges, however, are not insured, making it very risky to lend out stablecoins. Earning interest on stablecoins is thus high-risk high reward. Not to mention what could happen to the value of your lend out stablecoins once it is clear that it is perhaps a ponzi scheme. It was not a surprise when some governments are planning to come with their own stablecoins. China has done it.

To conclude, current stablecoins are not that stable as they seem to be. Not for daily use, and not for storing in your savings account. However, it is still quite useful for high-risk high reward investing strategies. Are you into that? Let me know in the comment section below.

https://www.cnbc.com/2021/09/21/evergrande-crisis-could-drag-down-tether-and-other-cryptocurrencies.html

https://cointelegraph.com/news/how-the-digital-yuan-stablecoin-impacts-crypto-in-china-experts-answer

https://www.pymnts.com/cryptocurrency/2021/stablecoins-under-the-microscope-as-us-preps-digital-currency-framework/

https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index

https://www.forbes.com/sites/lawrencewintermeyer/2021/08/12/institutional-money-is-pouring-into-the-crypto-market-and-its-only-going-to-grow/?sh=64bbb24d1459

https://www.cnbc.com/2021/07/23/amazon-is-hiring-a-digital-currency-and-blockchain-expert.html

https://cointelegraph.com/news/tether-promises-an-audit-in-months-as-paxos-claims-usdt-is-not-a-real-stablecoin

https://ronaldmulder.medium.com/why-stablecoins-make-no-sense-999490b08910

https://blockfi.com/rates/