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Fad or Future: Are NFTs here to stay?

Fad or Future: Are NFTs here to stay?

Till a few years ago, very small fraction of investors saw potential in NFTs. But in 2021, the market opened up to massive NFT pitches globally. Is this a passing fad, or will the growth continue?

Fad or future? Fad or future?

A decade ago, you’d have scoffed at the idea of a wedding in virtual space. Not anymore. A Chennai-based couple recently celebrated their wedding—Asia’s first on the metaverse—where people interacted through their avatars. Even the bride’s late father attended!

That’s not all. The couple also launched non-fungible tokens (NFTs) featuring them and the wedding invitation. “We launched 10 unique NFTs of around $25-150 which were resold for $1,000-2,000. The response was huge,” says Dinesh Kshatriyan, the groom, who is a project associate at IIT Madras.

NFTs have come a long way from the time when only celebrities created and sold them for millions. “NFTs are slowly but surely becoming a part of our everyday lives. Not only are NFTs a great business opportunity, they are also a new way for people to enjoy themselves while making money. That’s why NFTs are here to stay,” says Toshendra Sharma, Founder and CEO, NFTically, a Polygon-backed NFT marketplace.

As the world embraces the metaverse, NFTs will become the thing to own. “Owning an NFT would give people access to certain exclusive things in the metaverse... Collectors can access unique and credible artworks in the form of NFTs from around the globe. Since the NFT market is booming, some collectors are also looking at NFTs as a long-term investment option,” says Sandesh B. Suvarna, Co-founder and Vice President, WazirX NFT Marketplace.

Why are people buying jpegs and gifs?

You’ve heard of the deed that represents a house without being the physical house? That’s what NFTs do. It is a type of programmable deed of ownership to an asset that exists on a blockchain. This digital deed gives its holder the exclusive ability to use, sell and transfer the asset’s ownership rights. Here, an item can be made unique by giving it a code and the ‘digital deed’ or token—which cannot be replicated—proves one’s ownership of that digital asset.

NFTs can offer anything from GIFs to digital art to static images. The USP of an NFT is that it is used to prove ownership of a digital item; The use-cases for NFTs—run on blockchains such as Ethereum and Matic—are varied. An NFT can be looked at as an authentic digital art piece or an asset which can be used to earn cryptocurrency in games. Artists also use them to prove ownership of their digital art, which often includes JPEGs or GIFs, paintings, audio or video files, or any other type of digital file, says Vikas Ahuja, CEO at crypto trading platform CrossTower India. The file is stored in decentralised storage and an NFT can be created to prove its ownership. “From digital art to ticket sales, music, collectibles, luxury items, and gaming—NFTs have the potential to transform the way we interact,” he says, adding that India ’s NFT market had the potential to grow to $1 trillion-plus.

NFTs have also created a secondary market for the sale of digital assets. This allows NFT collectors, just like creators, to list and sell their NFTs on a marketplace. Every time the token changes hands, a royalty is paid to the original creator.

“NFTs provide a way to create and trade digital assets that are not subject to the same volatility as cryptocurrencies. While this may seem like a minor distinction, it opens up a world of new possibilities for the usage of these tokens,” says Kyle Fernandes, CEO and Co-founder of Meme Chat, a social networking app.

What’s in it for buyers?

According to a Cointelegraph Research report, $1,000 invested in Bitcoin in 2017 would have given returns of more than 16x now. Compare that to the 125,000x return on $1,000 invested in an imaginary portfolio of NFTs comprising a small fraction of all NFTs ever sold on the Ethereum blockchain. However, the report adds that it isn’t possible to create this portfolio as the calculation assumes that the $1,000 was distributed evenly among the NFTs available at the start of each project.

The growing popularity of NFTs is reflected in its numbers. “Earlier, a very small fraction of investors saw potential in NFTs but 2021 led to a complete U-turn as the market opened up to massive NFT pitches with a record $2.5 billion in sales globally. As per Google Trends data, in August 2021, global interest for NFTs rose by 426 per cent with people showing a lot of interest in buying NFTs,” says Tarusha Mittal, COO and Co-Founder, Oropocket, a digital assets investment platform. Experts say this trend will continue.

NFTs have also emerged as a powerful branding and marketing tool as it helps expand the fan base of a brand by allowing consumers to own a piece of it. For example, MG Motor India announced 1,111 tokens as part of its digital marketing initiative in December. Mahindra & Mahindra has also recently announced its entry into the NFT space. “When an NFT from a big automaker is released, it is looked at as an authentic digital art piece from the maker. So, the value increases because of the demand from users,” says Ketan Surana, Co-founder and CFO, Coinsbit India, a cryptocurrency exchange.

What can go wrong?

The NFT space is not devoid of challenges. Sometimes, prices are driven by speculation than by value. Moreover, price manipulation from insider trading, influencers and other deceptive practices are common. “Beeple’s $69-million NFT, for example, is arguably overvalued due to price manipulation from the purchaser MetaKovan, who purchased a large number of Beeple’s works prior to this record-breaking auction. Shortly thereafter, MetaKovan launched the B.20 fund, which included fractionalised Beeple NFTs,” says Cointelegraph Research.

Another challenge is the uncertainty in determining an NFT’s price. Value is mostly governed by the ‘hard-to-get’ factor. Also, there’s no legal definition of NFTs globally, with countries such as the UK, Japan, and the EU moving ahead with different approaches to classify them. “The popularity of NFTs has also increased the chances of cyber threats. [There are] plenty of cases where replicas of the original NFT stores are put up on the internet,” says NFTically’s Sharma.

Another risk is when someone impersonates a famous artist and sells fake NFTs. Shill bidding is another risk, where prices are artificially inflated by bidders who do not intend to win the auction. This could be in collusion with the marketplace or with the NFT vendor. Add to that the recently levied flat 30 per cent tax on gains made from NFTs, and the 1 per cent TDS to be paid on the transaction value by the buyer which make many in India jittery about investing in NFTs.

While the NFT market has been growing at a rapid pace, many are still wary of entering it because of the speculative mania around its value. One needs to be extra careful when diving into this unregulated space.