NFTs to Drive Our Parallel Universe – if a Bubble Doesn't Pop First

The Metaverse – or virtual reality (VR) world few of us know much about – is about to get a big boost from crypto assets, particularly non-fungible tokens or NFTs, set to monetize a fast-growing market for unique online experiences. NFTs are born out of the Ethereum cryptocurrency network. They serve as digital authenticity certificates to trade myriad non-fungible (unique and unalterable) assets, mainly art, collectibles and gaming.

It’s a burgeoning market that has seen exchanges such as Open Sea and Foundation strike a fortune by enabling users to exchange rare digital works. Most recently, a JPEG collection of 101 ‘bored apes’ fetched $24 million at Sotheby’s. Other works before it, such as Crypto Kitties, Crypto Punks and the new and increasingly popular Pudgy Penguins collection, are raking up millions after trading for under one Ethereum ($3,500 at press time) earlier this year.

Market bull William Quigley, who helped start digital stablecoin Tether, recently declared that “all consumer products that can’t be eaten will have digital twins in 10 years,” boosting the market for NFTs, worth around $20 billion currently, well into the trillions in the foreseeable future. But others are more cautious about its future.

Apes’ virtual paradise

The next big thing in the NFT world is the Metaverse.

The Bored Ape Yacht Club, the community behind the bored ape prints (born from a digital algorithmic program ensuring unique traits such as fur patterns or outfits), is scrambling to buy virtual land to build a Metaverse gallery where users can come see the apes, buy them and earn rewards in a game-like environment. As the concept takes off, even the makers of The Walking Dead are looking to create a similar community for fans to mingle and trade NFTs as a result.

“You can now display your NFT collection in a gallery that you set up on the Metaverse platforms where players [clients] can come and linger, you can distribute rewards to users and add game elements, all in an interactive environment,” says Matthew Sigel, head of digital assets research at VanEck. As these digital real-estate properties multiply, the NFT market should see huge growth, he adds.

Pick your island

Currently, several virtual land platforms are rushing to dominate the space, including Decentraland, CryptoVoxels, Somnium Space and Sand Box, which sell "land" or islands in which people can interact through avatars and access interconnected virtual worlds through VR headsets like Facebook's (FB) Oculus. The Sand Box, for instance, will feature the Walking Dead Metaverse in which users will be able to recreate the series’ storylines through Lego-like game characters.

Carlos Domingo, founder and CEO of digital-asset firm Securitize, agrees the market “is growing very rapidly, adding that NFTs are digitizing “multi-trillion art and collectibles markets” and could be worth several trillions by 2024.

Meanwhile, market researcher CoinMarketCap says 57 projects in the “Collectibles & NFTs” category have ballooned to $16.7 billion so far this year, up from $4.67 billion in January. A broader project pool, however, puts the market at nearly $20 billion.

Booms and busts

While excited about the market’s booming potential, Domingo conceded there could be dizzying volatility. The market has experienced hyperkinetic growth lately and a bubble could likely pop soon (NFT prices at Open Sea, for instance, have dropped in recent days). That said, Domingo sees a so-called Gartner hype cycle which starts with a tech boom, inflated expectations, and a big drop. Following investor capitulation, however, the market begins to recover and gets much larger over time.

Regulation could also take out the punch bowl.

“The biggest risk is policy errors or regulators applying securities law to individual collectibles which would be very hard to enforce,” says Sigel.

If that were to happen, the U.S. could lose its edge in the space, prompting investors to look for opportunities in more relaxed jurisdictions such as Latin America or Asia, he adds. There is also rampant manipulation, such as fake NFTS, which Open Sea recently pledged to tackle amid customer complaints.

Fakes rise

Ironically, while blockchain technology is expected to track and validate an NFT’s authenticity, the public’s ignorance about how it works is a worrying issue.

“There is enormous risk,” said Stephane Ouellette, co-founder of crypto derivatives firm FRNT Financial. “Fakes are a huge problem. The only proof these tokens have is the blockchain. Everyone can see its data but not everyone can interpret it properly or recognize when something is being manipulated.”

NFTs are also in a bubble with video art, for instance, easily copied.

“Video art has been a huge dud in the art market. There is a lot of competition and things can be easily replicated. People never bought video art and now that there is a crypto component, every NFT is worth a lot. That’s ridiculous. Some of these NFTs are going to get destroyed.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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