While NFTs (non-fungible tokens) have been around since 2014, they’re gaining momentum as an increasingly popular way to purchase and sell digital assets. According to the blockchain data company Chainalysis, the market reached a value of $41 billion in 2021.
But what distinguishes a fungible item from a non-fungible one? Non-fungible items are one-of-a-kind and can’t be directly traded for something of the same value. On the other hand, fungible items can be exchanged because they are defined by their value rather than unique properties. For example, a dollar bill is fungible because it can be exchanged for another dollar, while a diamond would be a non-fungible item, characterized by a unique color, cut and value.
A digital asset that represents a real-world object, NFTs can be art, music, in-game items and videos. Frequently bought and sold online with cryptocurrency, NFTs have unique identifying codes and are usually one-of-a-kind. While most digital assets are infinite in supply, the limited number of NFTs available has created a market that has been defined by scarcity and exclusivity. The most expensive NFT sale occurred in 2021, when a creation by the digital artist PAK fetched $91.8 million at auction.
NFTs and blockchain technology go hand-in-hand. At a high level, most NFTs are part of the Ethereum blockchain, which is a cryptocurrency that also supports NFTs. Therefore NFTs are characterized by blockchain’s unique features, namely the inability to modify the record or ownership of a NFT, or copy and paste a new NFT into existence. Bored Ape Yacht Club (BAYC) is a popular NFT collection, consisting of 10,000 “apes” on the Ethereum blockchain, with each “ape” frequently sold for sums that can reach an excess of $150,000.
To some, NFTs are considered a highly speculative asset, and there are indications that the NFT bubble has started to burst, if not leak. According to Reuters, OpenSea, the largest NFT marketplace, saw sales of $5 billion in January 2022, which declined to $2.5 billion the next month. While there are risks and challenges associated with the adoption of NFTs, in just a short time period, their emergence has had a profound impact on industries from art to asset management.