What to Know About NFTs and the ‘Bored Ape’ Boom and Bust Cycle

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Ever since NFTs, or non-fungible tokens, came into the public consciousness in 2020 with million-dollar sales of digital artifacts, the debate around them has gone something like this: NFTs are the future of art and commerce! No, NFTs are a worthless scam! No, NFTs have a useful, albeit limited, future in doing something that is not yet entirely clear. In the world of digital currencies, those are familiar arguments. So is the boom and bust cycle that NFTs have been through, with a lot of money made and lost along the way. For example, the price to join the Bored Apes Yacht Club by purchasing an NFT of a picture of a bored ape soared to $420,430 before falling nearly 79% in June, while the JPG NFT Index, which tracks a handful of blue-chip NFT projects, in June it was down by more than 70% from its inception in April.

1. What are non-fungible tokens?

Think of them as digital certificates of authenticity. An NFT is a unique and irreplaceable identifier created by an algorithm: a distinct barcode for a digital or collectible work of art. It helps address a problem that digital artists have been facing for a long time: how to create scarcity for an item that can be reproduced infinitely. Uniqueness is the reason (well, one reason) the Mona Lisa is priceless, while a Peter Max signed and numbered print of his version of the painting is $4,900 and Mona Lisa posters are $7, 95.

When an artist wants to sell their digital work, they create, or “mint,” an NFT which is then attached to ownership of that specific work. NFTs are recorded on open blockchain ledgers, allowing ownership (or as it is said in the physical world, “provenance”), previous sale prices, and the number of existing copies to be traced. The security provided by blockchain technology makes it more difficult to sell fake tokens than it is to sell fake physical works of art, although not impossible. The price of NFTs is determined by their rarity and popularity. The Merge, for example, is an NFT by artist PAK depicting three moon-like masses on a black background. It was sold for $91.8 million in December 2021.

3. Are NFTs a type of cryptocurrency?

No, although there are some similar ones. NFTs and cryptocurrencies are digital assets and run on the same types of decentralized blockchains. But in theory, the whole point of a cryptocurrency is that it can be used in transactions like dollar bills, and what makes dollar bills useful is that they are identical and have little intrinsic value. An NFT, on the other hand, is a unique creation whose purpose is to protect ownership of a specific item.

4. What happened during the boom?

Before the pandemic, people had started to find new uses for NFTs like ways to sell sports memorabilia or special access passes to events. NFTs then picked up steam among bored collectors during 2020 and took off the following year. Artists, celebrities, and financial investors were buying up NFTs, a boom that coincided with rising prices for Bitcoin and other cryptocurrencies. In March 2021, Jack Dorsey NFTed his first tweet and sold it for $2.9 million, and a digital artist named Beeple sold a piece of art for $69.3 million. Bored Apes, which are (literally) boring-looking animated apes, became the avatars of choice for celebrities on Twitter, with the likes of Gwyneth Paltrow and Serena Williams sharing their custom apes on social media. Owning NFTs became a statement and a golden ticket to gain access to an intimate network or community, whether it be a Discord server for fellow Bored Apes (the Bored Apes Yacht Club) or entry to a French film festival .

When NFTs became a popular investment option for those looking to diversify their portfolio ahead of inflation warnings, some critics saw the trend as mere hype. What buyers got, they argued, were mere bragging rights for images that anyone could equally view, copy, or enjoy. Questions were raised about whether those benefiting from the parallel cryptocurrency boom were using some of their newfound wealth to fuel a market whose rise would benefit them. Others argued that for any work of art, the original hand of the master is what makes it valuable. And then there was that segment of Americans who just didn’t understand what the craze was about or why NFT sellers were getting millions of dollars.

6. Why did the market change?

NFTs were caught in a huge drop in cryptocurrency prices that accelerated after the collapse of blockchain stablecoin Terra shook investor confidence. The world’s largest NFT marketplace, OpenSea, saw sales volumes drop in June by more than 70% month-over-month, according to Dune Analytics. OpenSea began laying off staff in July following the cryptocurrency crash to cut costs and prepare for a prolonged recession. A dizzying number of frauds involving hundreds of millions of dollars and cases of alleged insider trading have further challenged the industry.

7. What would be left if the NFT bubble burst?

There is a chance that the current recession will put an end to the NFT frenzy as early as 2021. But the need to mint money, whether through crypto, NFT or otherwise, is not going away. NFTs have also proven useful in unexpected ways, such as raising $600,000 for the war in Ukraine through an NFT museum. Its uses are expanding into cars, games, and of course the metaverse as it attracts more buyers. Yuga Labs, the company that developed the Bored Apes Yacht Club, released land in the metaverse as NFTs called Otherdeeds, which registered a $320 million transaction in late April.

More stories like this are available at bloomberg.com