A long with many, you may be confused by non-fungible tokens (NFTs) and how they fit within the art and collectibles auction ecosystem. NFTs are: (1) code minted with digital content; and (2) a blockchain describing the creation and ownership of the underlying digital asset. Are NFTs a billion dollar scam or the future cannibalizing the art market? Or something in between?
NFT Basics
NFTs are unique art, gaming, collectible, one-of-a-kind things, unlike cryptocurrency, which is fungible and can be traded. NFTs can also be multiples of the same content, such as prints and multiples in the fine art world. NFTs can be anything digitally minted—static or dynamic, with or without sound. These tokens have put a new wrinkle on the meaning of ownership, in that buyers have the exclusive right to that digital data but don’t have the right to the underlying material. The blockchain contains evidence of ownership and authenticity back to creation of the minted asset.
Due to the fast paced and ever-changing nature of the NFT market, some aspects of this article may be outdated by the time of publication; however, there are a few distinctive characteristics of NFTs. Their sales are conducted online or at least start as online-only sales.1 They often lack an auction estimate (although the NFT may have a contractual reserve), and bidding may start as low as the equivalent of USD $1. Buyers often identify themselves, through pseudonyms with blockchain addresses, in the bidding process, and their wallets publicize their acquisitions. These addresses may or may not be publicly verifiably tied to individuals.2 Payment of NFTs is primarily via cryptocurrency, although fiat is increasingly an option too. NFT transactions are recorded in smart contracts, which are computer programs written in code (without human lawyers) and can provide for royalty payments to the creators. The royalties typically range from 3% to 10% of the resale price for secondary sales of the NFT.3
In March 2021, NFTs exploded onto the global auction world with Christie’s $69.3 million sale of Beeple’s (Michael Winkelmann) NFT entitled The First 5000 Days.4 Later that same month, the former CEO of Twitter, Jack Dorsey, sold an NFT of his first tweet for $2.9 million via the platform Valuables.5 Nevertheless, NFTs’ meteoric rise to popularity didn’t happen overnight; they were being traded as early as 2015.
NFTs are a means for artists, celebrities and brands to commoditize their content in the digital world and to access the huge gains of cryptocurrency. They reflect the generational transformation of how our lives are moving online into the “metaverse.” Although according to Wikipedia, NFTs aren’t classified as art, they’re an increasingly debated concept in the art world.6
Market Size
For context, global art market sales exceeded $50 billion in 2020 albeit down due to the pandemic from 2019. In 2021, the NFT market traded anywhere from about $3.5 billion (according to ArtTactic) to $22 billion (according to DappRadar).7 This is a staggering increase as it was reported in the $100 million range in 2020. By anyone’s accounting standards, the NFT market has undergone exponential growth in 2021. These numbers are subject to quick and sizable swings because of the volatility experienced (as is common with cryptocurrency) in the NFT market, as it fell 69% in September 2021, and another 41% in October 2021.8
Not all NFTs, however, are in the stratosphere of multi-million dollar sales. In fact, the average price of an NFT is in the $1,000 range, which is a significant drop from the average sale price of $7,000 last year.9 The lower average prices can be attributed to the major increase in low valued NFTs being traded in 2021, including Fvkrender’s voluminous drop of $1 NFTs last summer.
How to Buy
There are many ways to purchase NFTs. There are NFT-specific marketplaces such as the popular OpenSea, SuperRare and Nifty Gateway platforms. These platforms are digital spaces to collect, hold and trade NFTs. By the last count, there were 44 different NFT marketplaces. Some of these venues are open and others are curated, closed places. Artists themselves typically offer their NFTs directly via such marketplace, with the marketplace charging around 15% commission for the first sale of each NFT.
At the beginning of 2021, the traditional international auction houses entered the NFT space in a meaningful way. For brick-and-mortar auction houses with legacies dating back centuries, offering NFTs is a win-win proposition to participate in the cryptocurrency boom, to get to know crypto holders —including the coveted crypto whales (individuals who own a significant amount of cryptocurrency, but may not be art collectors)—and to cross-market other property to NFT collectors.
Bonhams led its NFT strategy through partnerships and became the first auction house to curate a sale, CryptOGs: The Pioneers of NFT Art, in conjunction with a digital platform.10 This record-breaking sale with SuperRare led the way for other thematic NFT sales at Bonhams, including collaborations with Nifty Gateway,11 world famous Royal Ballet dancer Natalia Osipova12 and football legend Cristiano Ronaldo.13 On the other hand, following in the gaming spirit, Sotheby’s created its own metaverse, offering NFTs off the house’s regular website. The Sotheby’s metaverse in Decentraland arts district is a replica of the London gallery scene.14
Galleries, such as Pace, are entering the NFT space too. Pace built an NFT platform and represents NFT-creating artists such as Simon Denny, Lucas Samaras and Urs Fischer.15 Contemporary artists, such as Damien Hirst, launched their own NFT projects. Hirst’s project, The Currency, sold a collection of 10,000 NFTs, which correspond to 10,000 physical works and grossed over $20 million from the initial drop.16 NFTs were highly visible at recent art fairs such as Art Basel Miami. They’re also being traded everywhere from Artsy and 1stDibs, to CNN and Martha Stewart’s new platform, FRESH Mint.
Reasons to Buy
Buyers acquire NFTs for many different reasons. NFTs support digital artists akin to the early European art patronage system. NFT buyers are part of a movement favoring market disruption and the crypto community, who feel passionately about the emotional and social counter-culture ethos associated with an unregulated asset class. Most buyers are tech-savvy millennials who aren’t art collectors.17 They’re primarily men who are keen to acquire NFTs as a means to diversify their crypto portfolios and leverage their crypto gains. But, similar to all aspects of NFTs, this too is evolving.
There are no traditional market gatekeepers to the NFT market. Without museums and galleries dictating tastes or endorsing certain artists and creative movements, the NFT market is a relatively flat, democratic ecosystem. Auction houses act as a marketplace in the sale of primary market NFTs. While the auction houses brought NFT sales to the forefront of mainstream media, they’ve been criticized by crypto purists for not conducting NFT sales on chain. When sales occur on NFT marketplaces, crypto payment and ownership transfers are archived directly on the blockchain.
The NFT market is speculative for risk-tolerant investors as well as collectors interested in the crypto art and collectibles experience. This is reflected, for instance, in the phenomenon of the NBA Top Shot NFT. The basketball dunking video clip (that can be seen for free on the Internet) was sold, without any promotion or advertising, to 400,000 collectors for over $500 million. Another example is The New York Times’ first NFT. The newspaper sold its column about NFTs for $558,000, with proceeds going to The New York Times’ Neediest Cases Funds. Bidders later shared that the scarcity factor, coupled with its historical importance, fueled their bids.18
NFT Creators
There are several kinds of NFT creators. The NFT movement was started by individual artists like Pak and Mad Dog Jones. Most NFT artists tend to create under fictional names, such as Bosslogic and XCopy, who are males in their 30s or 40s residing in North America. Many NFTs are collaborations among more than one maker, whether it be an artist, musician, actor or model. Today, 25% of all NFTs are the product of these sort of maker collaborations.19
There’s also been a boom in NFTs created by artificial intelligence (AI). Works such as CryptoPunks and the Bored Ape Yacht Club are code-generated, algorithmic NFTs that have garnered an incredibly devoted community of followers. For example, the Bored Ape Yacht Club (cartoon primates) raised $26 million in sales and is owned by prominent celebrities, including Jimmy Fallon and Post Malone. Sotheby’s sold CryptoPunk #7523 for $11.8 million, and there’s been a billion dollars of other CryptoPunk NFT works traded to date.20 Some critics find AI NFTs contrived, but fans love their fun, gamification and storytelling elements.
Similar to the physical auction world, where blue chip artists reign as most desirable, select top NFT artists are most highly sought after by NFT collectors and account for more than half of all NFT market sales. For instance, from February 2020 to September 2021, on Nifty Gateway’s platform, $185 million of NFT sales (or 55% of their sales) were minted by the same 16 NFT artists. In short, the top 25% of NFT artists accounted for 90% of all NFT sales.21
Future of NFTs
Similar to cryptocurrency, the NFT minting process creates a high carbon footprint. This concept has proven controversial, and the publication of such climate damaging facts has led to harassment on websites such as cryptoart.22 Nevertheless, the tide is turning towards making NFTs more ecologically friendly. Certain NFT artists and digital minting studios, such as Palm Studios, are committed to making their NFT projects carbon neutral.
Whether you like them or not, NFTs are here to stay and will continue to disrupt the traditional auction market. The minting of new NFTs is easy on new software such as Readymade NFT as well as on open marketplaces such as OpenSea. This ease of minting will further facilitate the growth of NFTs, whose creation doesn’t yet appear to be saturated.
There’s an emerging secondary market for NFTs too. This market isn’t very liquid or consistent, but that’s changing as marketplaces, including Mad Dog Jones, Fewocious and Nifty Gateway, hold regular secondary sales of previously traded NFTs. In 2021, Nifty Gateway resold $142 million of secondary NFTs, with 10% of resales below the launch price, 43% of resales above the launch price and 47% of resales going unsold. Their tagline, “We will not rest until one billion people are collecting NFTs,” may soon come to fruition, whether traditional art collectors embrace NFTs or not.23
Endnotes
1. There are also online non-fungible token (NFT) auctions that have a live auction component at the end of the sales period.
2. See, e.g., “Bonhams to Offer Unique Layered NFT by Digital Artist COLDIE and Legendary Beatles Album Designer John Van Hamersveld,” Bonhams Press Release (Nov. 23, 2021), www.bonhams.com/press_release/33341/.
3. See, e.g., Peter Yang, “A Step-by-Step Guide to NFTs for Creators,” Creator Economy (Feb. 18, 2021), https://creatoreconomy.so/p/guide-to-nfts-for-creators.
4. See, e.g., “Beeple’s opus,” Christie’s, www.christies.com/features/Monumental-collage-by-Beeple-is-first-purely-digital-artwork-NFT-to-come-to-auction-11510-7.aspx.
5. See, e.g., “Collecting 101: Top Questions Answered on NFTs,” Bonhams, www.bonhams.com/stories/32391/.
6. See, e.g., “Wikipedia Editors Have Voted Not to Classify NFTs as Art, Sparking Outrage in the Crypto Community,” artnet news (Jan. 13, 2022), https://news.artnet.com/market/wikipedia-editors-nft-art-classification-2060018.
7. See, e.g., Anders Petterson and James Cocksey, “NFT Art Market Report– November 2021,” ArtTactic (November 2021), https://arttactic.com/product/nft-art-market-report-november-2021.
8. Ibid.
9. See, e.g., Einleen Kinsella, “Think Everyone Is Getting Rich Off NFTs? Most Sales Are Actually $200 or Less, According to One Report,” artnet news (April 29, 2021), https://news.artnet.com/market/think-artists-are-getting-rich-off-nfts-think-again-1962752.
10. See, e.g., “Bonhams Offers NFTs in Special CryptOGs Sale in Partnership With SuperRare,” Bonhams Press Release (June 17, 2021), www.bonhams.com/press_release/32381/.
11. See, e.g., “Bonhams X NiftyGateway: The first NFT focused art residency featuring Tinie Tempah,” Bonhams Press Release (July 21, 2021), www.bonhams.com/stories/32561/.
12. See, e.g., “World’s First Ballet NFTs Starring Natalia Osipova Dance to Success at Bonhams Encore Sale,” Bonhams Press Release (Nov. 29, 2021), www.bonhams.com/press_release/33503/.
13. See, e.g., “Back of the Net: Ronaldo Scores New World Record for Digital Football Trading Card at Bonhams,” Bonhams Press Release (Nov. 11, 2021), www.bonhams.com/press_release/33216/.
14. See, e.g., Sophie Haigney, “Next Stop: The Metaverse,” Sotheby’s Magazine, www.sothebys.com/en/articles/next-stop-the-metaverse.
15. See, e.g., “News–Introducing Pace Verso,” Pace (Nov. 18, 2021), www.pacegallery.com/journal/introducing-pace-verso/.
16. See, e.g., Caroline Goldstein, “Damien Hirst’s New NFT Project Forces Buyers to Choose Between Owning a Digital Token or a Work on Paper,” artnet news (July 13, 2021), https://news.artnet.com/art-world/damien-hirst-the-currency-1988535.
17. See ArtTactic, Market + Analysis, NFT Art Market Report (November 2021).
18. See, e.g., Kevin Roose, “Why Did Someone Pay $560,000 for a Picture of My Column?” The New York Times (Aug. 12, 2021), www.nytimes.com/2021/03/26/technology/nft-sale.html.
19. See supra note 17, at p. 12. (“Artist collaborations have become a common feature within the NFT market, whether as visual artists working together to form a project, a musician working with an artist to produce the visuals or vice versa, with a visual artist requiring audio.”)
20. See, e.g., Robert Alice, “Natively Digital: CryptoPunk 7523 / Lot 1,” Sotheby’s (Sotheby’s Auction Description and Catalogue Note), www.sothebys.com/en/buy/auction/2021/natively-digital-cryptopunk-7523/cryptopunk-7523. Ten thousand CryptoPunks have been traded for over $1 billion today but were initially given out for free by Larva Labs to anyone with an Ethereum wallet. CryptoPunk 7523 is extremely rare in that it’s one of nine aliens, created in 2017, and is wearing a mask accessory, way before masks become part of our daily life in the COVID-19 pandemic.
21. Supra note 17, at p. 12. (“At present, the data suggests a winner takes all market, with the majority of sales value generated by a small number of artists.”)
22. See, e.g., Justine Calma, “The Climate Controversy Swirling Around NFTs,” The Verge (March 15, 2021), www.theverge.com/2021/3/15/22328203/nft-cryptoart-ethereum-blockchain-climate-change.
23. See, e.g., https://niftygateway.com/about.