People pay millions for clips that are free to watch. Welcome to the world of ‘NFTs’

A virtual work of art called “Everydays: The First 5000 Days”. It was designed by digital artist Beeple and is the first NFT-based artwork to be auctioned at Christie’s.

Christie’s

From art to sports trading cards, people spend millions of dollars on digital collectibles.

These crypto collectibles, known as NFTs, have become increasingly popular lately. A video clip by digital artist Beeple, whose real name is Mike Winkelmann, was shot last week for a record $ 6.6 million. It was originally purchased for around $ 67,000.

Meanwhile, one of thousands of computer-generated avatars called CryptoPunks has sold for $ 2 million. And a crypto-art rendition of the 2011 Nyan Cat meme sold for about $ 590,000 in an online auction.

At the same time, critics see the NFT mania as yet another potential speculative madness in crypto that is sure to come to a standstill at some point.

What are NFTs? And why are they suddenly being sold for millions? CNBC goes through everything you need to know.

What are NFTs?

NFTs, or non-fungible tokens, are a new type of digital asset. Ownership of these assets is recorded on a blockchain – a digital ledger similar to the networks on which Bitcoin and other cryptocurrencies are based.

But unlike most virtual currencies, you cannot exchange an NFT for dollars or gold bars in the same way. Each NFT is unique and acts as a collector’s item that cannot be duplicated, which is inherently rare.

You can think of these as a crypto alternative to rare Pokémon or baseball cards.

The rise of the internet meant everyone could watch pictures, videos and songs online for free. People buy NFTs out of the belief that thanks to blockchain, they can prove ownership of a virtual object.

NBA Top Shot, an NFT platform based on the US basketball league, allows users to buy and sell short clips that show the highlights of star players’ games. The NBA licenses the roles to Dapper Labs, a start-up that digitizes the footage and creates limited scarcity. According to the website CryptoSlam, NBA Top Shot has had sales of over $ 280 million to date. Dapper Labs earns a cut on every transaction while the NBA receives royalties.

Basketball isn’t the only sport that deals with crypto. With the French start-up Sorare, users can collect and play officially licensed soccer cards in fantasy games. Sorare’s marketplace has generated over $ 22 million in revenue to date, according to NFT data tracker NonFungible. Sorare announced last week that it had raised $ 50 million from investors including Benchmark, Accel and Reddit co-founder Alexis Ohanian.

“It’s an obvious use case for NFTs in the industry,” said Lars Rensing, CEO of blockchain company Protokol. “Trading cards and collectibles have always been a profitable source of income for clubs.”

Art dealers are now also involved, as Christie’s auction house is holding an auction for a virtual work of art by Beeple. The auction is still ongoing, but up to $ 3 million of the work has already been bid.

NFTs are not a new phenomenon. One of the earliest examples, CryptoKitties were once so popular that they clogged the digital currency ether network. To date, these colorful online cats have made over $ 40 million in sales, according to NonFungible.

Why are they so popular?

The coronavirus pandemic played a big role in the NFT boom. Last year, the total value of NFT deals quadrupled to $ 250 million, according to a study by research firm L’Atelier, affiliated with NonFungible and BNP Paribas.

This is due in no small part to the restrictions on staying at home which resulted in people spending a lot more time on the internet and saving money from not having to commute. It is similar to the surge in retailers betting on GameStop and other historically unloved stocks advertised on the Reddit board WallStreetBets.

Meanwhile, there is also a time when bitcoin, ether and other digital coins have increased in value and bitcoin briefly hit a market value of $ 1 trillion in the last month.

“Right now we live at a point in the world where the majority of the population spends 50% of their time online and a significant amount of their time on a PC,” claims Whale Shark, a pseudonymous NFT collector, amassed a collection worth over $ 2.7 million, said CNBC.

skepticism

Many investors buy NFTs as a speculative investment in the hopes that they can flip them over at a much higher price than originally tipped. But a growing number of people are also keeping them as collectibles for the long term.

“As with any cycle of technological hype, we begin with speculative activity, usually giving way to a more fundamental value,” Nadya Ivanova, L’Atelier’s chief operating officer, told CNBC.

“NFTs started in 2017. A lot was speculation. What we saw in 2020 is that the market is actually maturing.”

NFTs have attracted celebrities like Mark Cuban, Lindsay Lohan, and Gary Vaynerchuk, while big brands are also getting involved. And people are finding other use cases for NFTs, like virtual real estate and gaming.

Even so, the NFT room was received with skepticism by some artists and investors. Critics see this as yet another crypto fad that is similar to the first coin offerings from 2017 and ultimately becomes irrelevant. Unsurprisingly, the companies behind such tokens disagree.

“I think 99% of the projects that are in space today may not exist two or three years later, which is very similar to the ICO boom,” said WhaleShark.

Many NFTs cost Ether, the digital token on the Ethereum blockchain. The digital asset briefly hit a record price of more than $ 2,000 last month before plummeting $ 600 in a matter of days, reminding investors of the wild volatility of cryptocurrencies.

Correction: This story was changed to correct the spelling of the name of Reddit co-founder Alexis Ohanian.

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