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Opinion | Why the NFT market will collapse – and it’s not because of environmental concerns
- The NFT boom rests on shifting sands, with no real, secure ownership of the underlying asset, and value tied to highly volatile cryptocurrencies
- As global monetary policy tightens and investors shy away from riskier assets, NFT buyers should beware – a crash is coming
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Last March, auction house Christie’s sold a JPG file created by the artist Beeple for US$69.3 million, a record for a digital artwork. The ownership of the “original” JPEG – titled Everydays – The First 5,000 Days – was secured as a non-fungible token, or NFT.
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The sale made headlines, and NFTs have since become red-hot. Investors poured an estimated US$27 billion into the market last year, and Meta, Facebook’s renamed parent company, reportedly plans to allow users to create and sell NFTs. There’s just one problem: the NFT market will eventually collapse, for any of a host of reasons.
In essence, an NFT is a tradeable code attached to metadata, such as an image. A secure network of computers records the sale on a digital ledger (a blockchain), giving the buyer proof of authenticity and ownership.
NFTs are typically paid for with ethereum’s cryptocurrency, ether, and – perhaps more importantly – stored using the ethereum blockchain. By combining the desire to own art with modern technology, NFTs are the perfect asset for newly wealthy members of the Silicon Valley set and their acolytes in finance, entertainment and the broader retail-investor community.
But, like other markets driven by exuberance, impulse purchases and hype, the fast-moving and speculative NFT market could burn many investors. The frenzy invites comparisons with the 1634-37 Dutch tulip mania, when some bulbs fetched extremely high prices before the exuberance dissipated and the bubble collapsed.
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JPG file by digital-only artist Beeple fetches nearly US$70 million at Christie’s auction
JPG file by digital-only artist Beeple fetches nearly US$70 million at Christie’s auction
The NFT market is likely to suffer a similar fate – but not, as some might think, because of environmental concerns. To be sure, NFTs consume considerable amounts of energy, because cryptocurrencies like ether and bitcoin are “mined” using networks of computers with a large carbon footprint – one that grows with every transaction.
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