The rise and fall of the NFT

We’ve been here before. Scarcely a year after a global hype wave around non-fungible tokens (NFTs) saw Christie’s in New York auction off a digital collage by an artist named Beeple for $69.4-million in a groundbreaking sale of a non-physical artwork, the NFT market has collapsed, losing 97% of its market value since January last year. So, are NFTs the dotcom bubble of the millennial generation?

The price paid for Beeple’s artwork, titled Everydays: The First 5000 Days, in 2021, made him (real name Mike Winkelmann) one of the top-three most valuable living artists, along with more household contemporary-art names Jeff Koons and David Hockney. The furore also meant that the NFT boom became associated with digital certification for “artworks”. But what exactly is an NFT, how did they become so expensive, and why are they now losing their market lustre?

The acronym itself simply denotes a certification, or token, that guarantees that the associated digital object (for example, an artwork) is not replaceable by an exact copy. Both physical and cryptocurrencies are fungible, which essentially means they are tradable or exchangeable for one another at agreed values.

But each NFT has a digital signature designed to make it a unique object, thus “nonfungible”, and is subject to a speculative setting of value. It was the NFT, said Beeple after his record-breaking sale, that ushered in “the beginning of the next chapter in art history”. Since digital art was among the first assets certified by NFTs, a lot of attention in the market has focused on artworks, though NFTs have a much wider set of applications, including music, in-game items, and videos. Recently the hype wave has seen NFTs floated for designer sneakers — Gucci, since you ask — music, even tweets. In the kind of tech-bro postmodern joke that infuriates traditionalist art lovers, Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT for just shy of $3-million.

On the plus side, the disruptive influence of the technology does put power back in the hands of artists. Theoretically, artists can bypass galleries and auction houses and sell directly to buyers in the form of an NFT. Also, royalties can be programmed into the file, so that artists receive a percentage of sales whenever their art is sold to a new owner.

But the real issue with NFTs and their relation to the conventional art world is the nature of the objects, digital or otherwise, that attract value in the virtual realm. Various pixelated gaming figures, among them the famous “CryptoPunk” portraits (an NFT project that displays special pixel image characters), change hands for six- and seven-figure sums.

Nyan Cat, a 2011-era GIF of a cat with a Pop-Tart body, sold for nearly $600 000 in February this year. Clearly the idea of what constitutes an art object is different for NFT and crypto aficionados. Driven mostly by NFTs for these kinds of artworks, the niche market was worth a staggering $41-billion in 2021 alone. This was getting close to the total value of the global market of physical fine art, and, of course, led many to question whether we were witnessing a speculative bubble in the tech market.

The bubble bursts

While the jury is still out for now, the bubble has, for the time being, well and truly burst. And the plunge in the value of NFTs is not, strictly speaking, to do with the technology itself. Opensea is the largest cryptocurrency-trading market for NFTs, and the chart shows the precipitous decline in value and sales volumes over the past few months — a total decline of almost 96% in value from its highest point. Partly, the decline reflects the general trend of a correction in the speculative inflation of value in the cryptocurrency market at large.

But, for NFTs specifically, as a recent US survey shows, most purchasers of the tokens bought them simply so they could sell them on at a profit — very far from the ethos of most real-world art collectors. The survey revealed that only 12% of buyers of NFTs were interested in them as artworks. The other side of this coin is that the digital realm of NFTs is too volatile to immediately replace the traditional value mechanisms of the analogue artworld. This is mainly owing to the massive currency fluctuations undergone by the cryptocurrencies used to buy and sell most digital artworks. Cryptocurrencies such as Bitcoin and Ethereum have plunged in value in recent months, taking NFTs down with them. Apart from the common volatility that goes along with a new technology-investment vehicle, the NFT space is also subject to the same scams that bedevil the rest of the online world. Earlier this year, the Bored Ape Yacht Club, a popular purveyor of NFTs, had its Instagram account hacked and millions of dollars’ worth of NFTs were stolen.

The hack revealed one of the main issues for the stability of the market — it is concentrated in the hands of a few hundred individuals, usually wealthy tech speculators. That this new hype crowd can also be socially and politically regressive was revealed by a closer inspection of Beeple’s artwork. Everydays: The First 5000 Days is a digital collage, comprising one digital image saved each day by Beeple since 2007. ArtNet spotted a number of homophobic, racist, and sexist images among the plethora, possibly making Beeple just another regressive US frat-boy tech-head rather than the standard bearer for new digital art. And the frat-boy tech-head influence extends beyond the art world, into the altogether less savoury realms of financial ruin and the global climate crisis.

NFTs and geopolitics

Despite claims of their providing forward-thinking, decentralised alternatives to physical artworks and the economy around them, NFTs still require actual electrical energy to exist, even in the virtual realm of blockchain ledgers and cryptocurrencies. They require quite a lot of energy, in fact — in the form of coal, copper, rare-earth metals, and plastic, among others. The energy demands of crypto have led to its banning in China, amid concerns about the country’s ability to control energy expenditure and currency flows.

The banned crypto miners set up shop in Kazakhstan last year, using up to 8% of the country’s energy capacity and threatening to disrupt its national grid. This led to riots over escalating energy prices and unreliable supply (which only goes to show how patient South Africans are with Eskom). In another grim turn, the Ukrainian government has issued NFTs to generate revenue to buy arms in its war with Russia — and Russia has taken to the crypto markets in a bid to subvert international financial sanctions resulting from its hostilities in Ukraine.

These less-than-innocent pursuits further explain the volatility of the crypto/NFT market, and its often unscrupulous nature. It’s a long way from overpriced digital art, and something from which its alternative-investment approach may never recover.

• Originally published in the print issue of Wanted's Watches, Jewellery and Luxury special edition.