Digital assets: the fun of non-fungible tokens

Non-fungible tokens may not sound aesthetically pleasing, but they have transformed the contemporary art market. Prices set records this year as bitcoin reached an all-time high. Yet future growth in the NFT market is likely to come from gamers, not aesthetes.

NFTs can range from images to videos to animations to tweets. What is for sale is claim of ownership. A digital identifier is recorded on the blockchain. Physical objects backing the digital counterpart can exist, but they do not have to. What matters is authenticity. Anyone can replicate or view a digital image, but there is only one true owner.

The NFT market is already worth about $15bn, according to analytics platform DappRadar, up from a few hundred million dollars last year. Analysts at Jefferies believe it could be worth almost $80bn by 2025.

Top NFT collections by volume ($bn)

Gaming NFTs are likely to drive this growth. Axie Infinity, an NFT-enabled online video game created in 2018 by Vietnamese studio Sky Mavis, involves players acquiring and doing battle with cute pet characters. It has generated almost $3bn of transactions and now has nearly 1m players.

In the art world, NFTs trade on exclusivity. Digital art collections like CryptoPunks and Bored Ape have just a few thousand owners. Gaming NFT transaction volumes are far higher. The biggest sales may be artworks, but the highest volumes are in gaming.

Gamers have been spending large sums on in-game purchases for years. NFT purchases stand out because they require cryptocurrency. Transactions are often made using a game’s own tokens, which can be converted to ethereum and then to the player’s home currency. Axie’s token is called AXS.

As NFTs grow more popular, the potential for abuse rises. There are concerns that they might be used for money laundering. Plus, even with blockchain technology, fraud is still possible at the tokenisation stage. NFT investor Pranksy found this out when buying what was thought to be a Banksy NFT for $341,000 that he says turned out to be a scam.

This is the sixth article in this week’s series of Lex notes on digital assets. We have also covered bitcoin prices, investment research, bitcoin ETFs, bank margins and tokenised securities.

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