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Monthly Market Review - March 2021

Updated: Mar 8, 2022

In the note, we will look at NFTs in more detail. Firstly, March is Bitcoin's sixth month in a row of positive returns. It is closing in on the record of seven months, set between November 2012 and May 2013.

NFTs or Non-Fungible Tokens burst onto the scene during March with Mike Winkelman, known as Beeple, selling his collection of 5000 digital artworks called 'Everydays: The First 5000 Days' for $69 million via Christie's. This sale made him the third most valuable living artist and had many people scrambling to work out what an NFT is? We will briefly look at what NFTs are, the current state of the market, and their potential future use cases.

So, a non-fungible token could instead be called a unique digital token. Unlike money, which is fungible, i.e. interchangeable, each of these tokens is unique. The novelty of this being that before NFTs, users couldn't verify digital assets as unique. A JPEG file could be replicated easily and at no marginal cost. So there was minimal value in each copy of a file. Much like there is minimal value in a photograph of the Mona Lisa.

This unique feature isn't only applicable to digital art. Vitalik Burtin described his reason for founding Ethereum was because of a lack of actual digital ownership. His World of Warcraft character had a skill taken from it after spending hundreds of hours' grinding' to acquire it. This character and the digital items he collected were unique, and he was devastated that he never truly owned the character and somebody could unilaterally take it from him. He created Ethereum to ensure that this couldn't happen again.

Fittingly, many of the first incarnations of NFTs were characters within computer games, allowing gamers to trade rare assets or characters. A simple, early manifestation of this was CryptoKitties. One 'kitty' sold for as high as $117,000 in December 2017. Although at the time, many people questioned this price's rationality, the idea of digital assets having value is now beginning to enter the mainstream. NBA Top Shot, a digital card collection game, sold a limited edition of Lebron James for $208,000 in February 2021.

What is exciting about the NFT space is the economic experiments it entails. It allows creators to profit off their work in previously impractical ways. For example, a band could release a new song in a limited number and make money from its exclusivity instead of aiming to profit off mass streaming. Or an NFT could have a form of stamp duty built-in into the code, where for each future sale of the asset, the original creator takes a small slice (paid directly to their wallet), creating an annuity stream from art. These are a few examples of unique financing methods enabled by NFTs that could prove to become very popular in time.

Currently, NFTs are going through a correction as the average price is 70% down from its February high. Pundits expected this drop as many lower quality items flooded the market post Beeple's record sale. So, it's still too early to write off NFTs as a fad. In time, we will learn if NFTs are just digital tulips or if the market stabilises and starts to grow as artists discover unique economic models that only NFTs can enable.


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