Digital Assets Bounce Back
2020 was a year where the cryptoasset industry made significant progress. We saw the rise of the Decentralised Finance movement and bitcoin come into the limelight as a potential solution to the current global macroeconomic environment we find ourselves in. Another small yet significant area of the cryptoasset industry also, for the first time, found meaningful adoption and market fit: Non-Fungible Tokens (NFT).
NFT's are unique digital assets whose ownership is tracked on a blockchain such as Ethereum. Currently, the most common or traded NFT's are collectables, in-game items and digital art. However, it doesn't stop there. In theory, any digital content could be represented by an NFT, from movies and music to photographs or digital designs, all the way to social media posts and even domain names.
The world is producing an ever-increasing variety of digital content, and it can now be distributed between consumers in a decentralised manner. So what is the real opportunity within the NFT market? NFT's are liquid intellectual property rights.
Before the creation of blockchain, it was impossible to truly own anything that was on the internet. When you sent files to one another, you were just sending a copy, easy to replicate and transfer over and over. This is a problem if you are the creator of any digital medium; there is no license attached and, therefore, no conferred rights. Even today, the majority of the content we consume is seldom owned by us; even the original creators often don't own the rights to their work.
The combination of blockchain and NFT's will create a system where holders of the NFT are granted a right to the cash flows generated. Yes, you could just stream a song by Queen on Spotify, but if you could instead share a portion of the song's revenues, why wouldn't you? The rights conferred to the owner of the NFT is where the real asset lies:
The right to own and keep
The right to sell
The right to reuse
The right to cash flows generated (i.e. royalties)
The NFT's and general distribution of these more traditional media classes are still finding adoption and may be a few years off. However, a few niches have seen significant adoption within the NFT space already, namely gaming, collectables, and digital art:
The gaming industry is currently producing revenue of $160 billion per year and projected to grow by around 10% going forward. With more and more people starting to adopt gaming and the current pandemic limiting traditional sport and activities, we see further gaming adoption going forward.
One of the main revenue drivers of gaming currently is the ability to collect and sell in-game items. Players of 'battle royale' type games such as PUGB and Fortnite have spent nearly $3 billion buying costumes, weapons and other items. However, this revenue is almost solely absorbed by the owners of the games themselves — the ability to sell on these items and make money as a player is limited.
Decentralised marketplaces present an opportunity for people to now own and trade their in-game items. We have seen the rising popularity of blockchain-based games and their marketplaces like Gods Unchained, where we have seen the in-game cards traded on these marketplaces almost 370 000 times.
In addition to trading these cards, you can earn cards as you level up, improve upon them by playing the game, earn tokens to upgrade and buy new cards by winning matches, or use them to purchase rare in-game items — all representing a real-world value.
Another popular game is Axie Infinity; the game revolves around putting together a team of 'Axies' and battling other teams to level up. As you play, you earn tokens or 'Small Love Potions' that you can use to purchase other in-game items or 'Axies'. The fascinating thing, for now, is that these love potions that you can earn (per hour) just by playing are valued at more than the minimum wage in places like Portugal, Turkey and most countries in Asia, South America and Africa. Not that we recommend quitting your day job to become a full-time Axie player, but it shows the potential these games may have going forward.
Crypto collectables have also started to find a niche and have taken off recently. The market tried in 2017 with the launch of CryptoKitties; there was even a CryptoKittie that sold for 600 ETH, the equivalent of almost $1 million at today's prices. However, there wasn't wide adoption, and it took a while for the collectables market to build-out. Fast forward to 2020, and the collectables market is starting to find its fit within the cryptoasset industry. Volumes on these markets for common collectables have now exceeded $160 million and counting.
There is now a subsector in the collectables market that is gaining tremendous momentum, collectable sports moments. A company called Dapper Labs (the company behind CryptoKitties) has partnered with the NBA to launch NFT's that represent specific moments in the league in the form of virtual cards. Sports cards' collecting is nothing new; people have collected sports cards for decades, usually representing players and special events; the medium they are delivered on has just changed. The anticipation as to how much these cards may be worth in the future is apparent though, as in the last 30 days alone, the NBA TopShot NFT market volume has exceeded $246 million with over 130 000 people trading the cards. The most expensive was a LeBron James dunk that sold for $208 000.
Many other companies could do something similar like Pokémon or Magic: The Gathering and start issuing valuable collectables, tradeable on a global market.
The digital art market has also started to find traction and acceptance within the mainstream market. We have even seen Christie's, the 255-year-old auction house, put an NFT-based artwork by Mike Winkelmann up for sale where the current bid is sitting at $3 500 000.
Digital art and its value is a contentious subject. The most common argument is that you could just download the image, and now you 'own' it. This isn't true though, you don't own the license to the image. Take the Mona Lisa as an example. You could print out a copy of the Mona Lisa or get a very skilled artist to make a near-perfect replica; you could put it up in your house and invite your friends over to see it, but you couldn't charge them to view it. That exclusive right belongs to the Louvre; they own the license and therefore are the only ones who can effectively monetise the work of Leonardo da Vinci.
We have seen other digital art collections start to gain traction as well. A notable project is that of Hashmasks. 70 artists across the globe collaborated to create 16 384 unique digital portraits. Each has its own elements or features that contribute to its rarity and perceived value, such as character, eye colour, mask, skin colour and item they may hold. They have already traded over $50 million in value, with the most expensive selling for 420 ETH.
The NFT market and what's available currently is just the tip of the iceberg. People will start migrating their intellectual property onto a blockchain where they can distribute it to a global audience. It can be argued that the market in its current form and the valuations we are at may be too high in general, but there is always value to be discovered if you look hard enough. Liquid intellectual property that can be distributed and sold to a global audience directly is one of the keys to unlocking human capital on a scale we have never previously witnessed.
Notable Articles and News Stories This Week:
Goldman Says Market Overpricing Odds of Fed Rate Hike
Goldman Sachs has said that the futures contract that are currently leaning towards a rate hike in 2022 are premature. “The earliest the Fed will start talking about tapering [of bond purchases] is late 2021, with any discussion of interest rate hikes only coming a year after that,” Goldman Sachs’ Andrew Tilton stated in a CNBC interview. The current Fed program entails buying $120 billion-a-month in bonds in order to help stimulate the economy due to the effects of the pandemic.
Read the story here
Fidelity’s Head of Global Macro Says Bitcoin May Have Place in Some Portfolios
Director of Global Macro at Fidelity, Jurrien Timmer has stated that bitcoin may have a place in peoples portfolios, taking a portion of peoples bond allocation. He even went so far as to compare it directly to gold. He also believes that the current inflationary environment favours bitcoin stating: "With interest rates close to zero – or negative – and central banks printing money like there's no tomorrow, is it any wonder that bitcoin seems to be having its day?"
Read more of what he said here
Banksy Work Physically Burned and Digitized as NFT in Art-World First
Following on from our theme of NFT’s this week there was an entering incident that took place. A group of people bought the artwork by Banksy titled ‘Morons’, digitised and then burnt the original artwork in a world first. Banksy wasn’t directly involved in the process but the person to buy the NFT will receive the official proof of authenticity from Banksy’s authentication agency, Pest Control.
Read the full story here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
If you are interested in staying up to date, please subscribe to our newsletter at etherbridge.co
This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.