NFTs: Boom and Bust

What non-fungible tokens are, why they boomed in 2021, why most lost their value, and what uses might last.

A non-fungible token, or NFT, is a unique digital record on a blockchain that represents ownership of something, often a digital image, video or collectible. “Non-fungible” means each token is unique and not interchangeable, unlike a bitcoin, where each coin is identical.

The 2021 boom

NFTs exploded in popularity in 2021:

In March 2021, a digital artwork by the artist known as Beeple sold at Christie’s auction house for around 69 million dollars.
Collections of cartoon-style profile pictures, such as the Bored Ape Yacht Club, sold for hundreds of thousands of dollars each at their peak, with celebrities buying them.
Trading volumes on NFT marketplaces reached billions of dollars a month.

The bust

From 2022, NFT prices and trading collapsed. Many collections lost almost all their value. Research and analyses of NFT collections found that the great majority had become effectively worthless by 2023.

Why the boom happened

Speculation and fear of missing out during a broader crypto boom.
Celebrity endorsements and media attention.
Low interest rates and abundant money in 2020 and 2021.
Status: owning rare NFTs signalled wealth and membership in online communities, a digital version of Veblen goods.

Issues

What do buyers actually own? Often, an NFT is a token pointing to a digital file stored elsewhere, which can be copied freely. Ownership rights to the underlying artwork may be limited.
Market manipulation: studies found evidence of wash trading, where traders buy and sell to themselves to inflate prices.
Scams and hacks.

Possible lasting uses

Some see potential uses for NFTs as digital tickets, proof of membership, in-game items, or certificates of authenticity. Whether these will become widespread remains uncertain.

The copied image

A buyer pays thousands of dollars for an NFT of a cartoon ape image. Anyone can right-click and save the same image for free. What the buyer owns is a blockchain record linked to the image, not exclusive control over the image itself. Its value depended entirely on others valuing that record, which collapsed when enthusiasm faded.

Thinking an NFT gives full ownership of the artwork

Many NFTs grant only ownership of a token, not copyright or exclusive use of the image. Buyers should check what rights, if any, come with an NFT.

Key takeaways

An NFT is a unique blockchain token often representing digital art or collectibles.
NFTs boomed in 2021, with a Beeple artwork selling for around 69 million dollars.
Prices collapsed from 2022, and most NFTs became nearly worthless.
Speculation, status and wash trading drove the bubble; lasting uses remain uncertain.