Update: This article was originally published in the spring of 2022. The crash in value in cryptocurrency and NFT values over the following months has born out many of my doubts about the viability of NFTs in their current form. It will be interesting to see if the NFT market recovers and stabilizes into a more sustainable model.
Over the last year or so, I’ve received an increasing number of questions about NFTs from readers of RedDotBlog and from the artists with whom I interact. While some of my readers are deeply involved in the NFT market, minting and selling artwork on the blockchain, most are only vaguely aware there is something out there called an “NFT” and have heard some artists are getting rich creating and selling them. This vague knowledge can leave artists feeling uncomfortable, wondering if they are missing out on a significant opportunity to further their art career and cash in on a new trend in the art world.
I understand this unease because I have felt it myself. I pride myself on keeping up with both the art market and technological advances, so the advent of NFTs seems like something that should be right in my wheelhouse. This being the case, I have to admit I feel just as mystified by the whole business as many of my readers.
For the last several years, I’ve been fending off questions about NFTs with a mystified shrug. “I don’t understand the fuss,” I would say, and “NFTs are interesting, but they have nothing to do with my business.”
However, I’ve come to realize that sticking my head in the sand and resting on an ignorance defense is silly. I try to take a reasoned approach to understanding every aspect of the art market, and it’s time to understand better NFTs and their potential impact on the art world.
I’ve spent the last several weeks diving into NFTs and cryptocurrency, and today I want to share what I’ve found. Spoiler: I remain highly skeptical of the viability of NFTs for most artists, but I now feel I can better articulate my skepticism.
So if you’ve wondered about the NFT market, read on, but you better strap in; this is going to be a wild ride . . .
First, we need to understand at a basic level what an NFT is, and from my perspective, this isn’t necessarily an easy concept to grasp. You can think of NFTs as titles of ownership of digitized assets at a basic level. These digital titles get stored on the blockchain.
Okay, that actually might not make it any clearer.
Let’s approach this from a different direction and try to understand it from the perspective of the real-world art market. Imagine that you have created a piece of artwork, a painting, for example, and decide to sell it. You place the artwork in a gallery where a client sees it, falls in love, and decides to purchase it. They pay the gallery for the artwork, the gallery owner writes a receipt, the client takes the artwork home to enjoy it, and the gallery owner sends you a commission check. A sale has occurred! The client has the artwork, you have received payment from the gallery, and the gallery has retained a percentage of the purchase price for acting as the vendor.
A client may have several reasons for being willing to pay hundreds, thousands, or tens of thousands of dollars for the artwork, but the main reasons are that the client is attracted to the imagery in the painting and is excited to own an original work of art. Even though the client could have paid far less to purchase a print of your artwork, the client finds value in owning the original.
Suppose the client decides, in the future, to re-sell the artwork. In that case, the receipt the client received from the gallery could help prove ownership of the painting, but even if the client has lost the receipt, possession of the original work of art will, to an extent, serve as its own proof of ownership.
We can all understand this model because we are accustomed to this process, even if there is some mystery involved in figuring out what art is worth and how a buyer might resell the artwork in the future. At the end of the day, if someone is willing to pay the price, the artwork receives an implicit value, and a sale occurs.
Digital art has made this equation complicated. When a traditional artist creates a work of art, the original works of art are fundamentally unique. While the artist might repaint the same image, the resulting artwork will never be identical to the original. Sculptors who mold and cast their work can reproduce their creations in an almost identical form. However, due to the physical limitations of mold materials, sculptors limit the number of castings they produce.
Digital artists face no such limitations. A digitally created work of art can be recreated and copied precisely, and an infinite number of copies can be created and disseminated with no discernible difference from the original.
The traditional art market has built value around the exclusivity and scarcity of original works of art. While some artists have successfully created value around their work despite the theoretical lack of scarcity of digital artworks, conveying ownership of digital artworks has always presented a conundrum.
Enter the NFT, or non-fungible token. While anyone may copy a digital file, an NFT is a block of code that exists in a publicly accessible ledger (called the blockchain) and is not reproducible due to its complexity. The blockchain ledger records NFT creation and ownership transfers. By associating a digital work of art with an NFT, the owner can essentially sell ownership of their digital creation to a willing buyer. Additionally, NFTs can be set up so that each time they change hands, a portion of the proceeds go to the original creator – a great potential source of ongoing income for artists!
Conceptually, this idea of providing a mechanism to allow digital artists to monetize their creations and create scarcity around their work should open an entirely new market for digital creators, and indeed it has. Not only have digital artists begun selling their work as NFTs, but the market has also gone crazy over them, generating some eye-popping sales.
Before we talk about some of the hysteria in the NFT market, it’s worth noting that NFTs are not limited to visual art or, really, to digital creations. Enterprising individuals create and sell NFTs associated with music, manuscripts, and physical goods.
Anything tangible or digital can be associated with a non-fungible token and sold on the blockchain. It’s important to remember that it’s not the actual items being sold (though the article can also change hands); what is selling is a kind of digital title to the thing in question.
On to the NFT frenzy.
On March 11, 2021, Christie’s auction sold the digital collage “The First 5000 Days” by Beeple (artist Mike Winkelmann) for 69.3 million dollars. Beeple is a well-known, prolific digital artist who has millions of followers on social media and has seen NFTs of his work sell and resell for multiple millions of dollars. Still, the venerable auction house’s sale of “The First 5000 Days” brought new attention to the NFT market from serious art collectors and investors.
This sale also captured the attention of popular culture, bringing the term “NFT” into the common lexicon, even if it did leave the general public scratching its head.
NFT sales had totaled $82.5 million in 2020 but increased more than 200 times in 2021 to $17.7 billion!
That’s a lot of money!
While only a tiny percentage of NFTs sell for multi-million dollars, stories of artists generating tens of thousands of dollars during NFT “drops” pop up online and in news stories with increasing frequency. Online communities have sprung up for enthusiasts to share their excitement, trade tips about new hot creators, and resell NFTs community members have collected.
Mainstream art galleries are also beginning to take notice of NFT sales, with some offering sales of digital artwork NFTs alongside physical works of more traditional art media.
Galleries focused exclusively on selling NFTs have also sprung up, both in the bricks-and-mortar spaces where they display digital artworks on large screens and online.
With all of this buzz, I decided it was time to understand the NFT market better, so I decided to research the market and dip my toes into the water by purchasing an NFT to share some first-hand experience with you.
Buying an NFT wasn’t particularly challenging, but it wasn’t straightforward either. The first step was converting some money into ether, one of many cryptocurrencies. Most NFTs use the Ethereum blockchain, and most NFT marketplaces only accept cryptocurrency as payment for an NFT.
I used Coinbase to set up an account to purchase ether, about $100 worth, and then a crypto-wallet to be able to spend the ether to buy the NFT.
I next navigated to OpenSea, the largest marketplace for NFTs, and began scouring the site for an NFT that seemed appealing. With all of the hype around NFTs, I didn’t imagine this would be too hard. I was wrong.
OpenSea offers several ways to view NFTs, including featured collections, search, and categorized exploration. I started with the featured collections, tried a little search, and then ended up on the Explore page. The site classifies NFTs into several categories, including art, collectibles, music, photography, and others. I selected art and landed on a page of images I struggle to call art.
Many of the featured NFTs are, and I don’t mean to sound like a snob here, not great. The art establishment and general public have long been slow to recognize new art forms and movements. I know I’m falling into a well-established trope by questioning the artistic value of NFTs, but you can visit the art page on OpenSea and decide for yourself if I’m being overly critical.
Many of the NFTs on the art page are collections of digitally-created thematic avatars designed to serve as entry into an online community or online game. The best-known of these kinds of NFTs might be the Bored Ape Yacht Club. The creators of the Club have created 10,000 unique ape characters that they have sold to collectors who become members of the Bored Ape Yacht club, which the creators describe as
unique digital collectibles living on the Ethereum blockchain. Your Bored Ape doubles as your Yacht Club membership card and grants access to members-only benefits, the first of which is access to THE BATHROOM, a collaborative graffiti board. Future areas and perks can be unlocked by the community through roadmap activation.
Bored Apes are selling at incredible prices, and the concept is interesting, but I’m not sure that the artistic merit of the Apes is their primary appeal.
The success of the Bored Apes (their current market value is estimated at nearly $1,000,000,000) has led to a host of similar listings. While creative, I don’t find the concept particularly appealing, so I quickly had to learn how to ignore these kinds of collections.
I quickly learned that another category of NFT art is by creators I consider to be more interested in the idea of NFTs than the actual art with which the NFTs are associated. These NFT creators take whatever digital raw material is available to them and mint it into NFTs as quickly as possible, with little regard for any aesthetic or cultural value. I wouldn’t want to disparage anyone’s particular creation by pointing to a specific example here, but again, a quick visit to the art category on OpenSea will illustrate the point.
Finally, after scouring dozens of OpenSea pages, I decided I would simply buy the next NFT I ran across that was within my budget (I gave myself $100 to work with for this article) that didn’t seem to be too much of a gimmick.
This decision led me to happytree#0051 by user HoonyHoney. The image appears to be a digitally created nightscape. I’ll let you decide if it’s incredible art. Great art or not, the image fit my self-imposed criteria, being not too gimmicky and was priced at .001 ether, or about $3.00, well within my budget.
So I began the purchasing process. Having made countless purchases online over the years, I didn’t anticipate any complications with the purchase. I clicked the “Buy Now” button and . . .
I was greeted by a message asking me to sign in to my Coinbase wallet on my phone, and . . .
I was asked to agree to the terms and conditions of the sale, and . . .
I was informed that the network fees were currently high and that I should expect to pay between $44.00-$65.00 in network fees . . .
Wait. What? To complete the purchase on the blockchain, a purchaser has to pay a “gas fee” to the crypto miners to process the transaction. This fee seemed more than a little bit outrageous, but I’ve since seen fees range from $30 to over $600 per transaction.
I thought about scrapping the purchase but decided I couldn’t write this post unless I had indeed experienced a purchase and had become an NFT owner. I completed the transaction and spent $3.50 + what ended up being $40.20 in fees, or $43.25 to buy happytree#0051.
I suppose the fees wouldn’t have felt so ridiculous if I had been purchasing an NFT worth several thousand dollars, but no matter how you look at it, the blockchain-related fees will add up if you are actively trading NFTs.
And so, I own my first NFT, which leads to the question, now what? I can hop into my digital wallet whenever I desire and see the NFT listed there, and I can open the JPG file and gaze upon my happy little tree. While I suppose I can undoubtedly draw satisfaction from this ownership, it seems a bit anti-climactic after all the hype I’ve experienced around NFTs.
It seems pretty clear that the interest in NFTs isn’t primarily driven by the excitement of owning a digital artwork but rather by the speculative prospects of seeing an increase in value in the NFT and then reselling. I suspect my $3.50 NFT won’t be doing much appreciating, and here, I believe, is the rub for artists who are trying to decide if they should get in on the NFT craze. I suspect that for most NFT creators, it’s going to be very hard to find buyers and create the energy needed to drive up the value of their NFTs.
I see several additional challenges for artists considering entering the NFT market.
Hype is unlikely to match results for individual artists
First, most artists dipping their toes into the NFT market will be, I suspect, disappointed. While some creators and collectives are raking in large sums, the numbers don’t add up for the average artist coming into the NFT marketplace for the first time.
The headlines highlighting artists who are generating eye-popping income from the sales of NFTs are proliferating headlines, but we’re not going to get stories about the thousands of artists who are jumping in to create NFTs and aren’t seeing significant sales. This makes sense, as those headlines wouldn’t be very sexy.
“Extra, extra, read all about it; artist enticed by hype to create NFTs doesn’t sell anything!”
I suspect this headline would represent the experience many artists are having as they begin minting their artwork into NFTs.
I’ve found it difficult to find statistics on NFT sales for the broader market, but taking some sample data from NonFungilble.com, an online reporting service that tracks NFT activity, we can see that on a sample week the week ending May 3, 2022, there were $369M in total sales.
That’s a lot of green!
We see that those purchases were spread out over 98,000 transactions. So the average purchase price was about $4,000. That’s not bad, and if I knew I could generate $4,000 for each NFT I produced, I wouldn’t be writing this article; I would be minting NFTs!
However, those numbers seem to obscure what’s happening in the NFT market. Those sales include primary sales, the sale of an NFT by the original creator, and secondary sales. More importantly, much of the value listed here is generated by what I consider to be hype NFTs – Bored Ape Yacht Club, Moonbirds, Crypto Punks, etc. The top 20 sellers generated $359M worth of sales over 11,479 transactions.
Transactions outside the top 20 sellers generated an average of $210.21 per sale. Not quite as motivating. Even less so if you were to calculate in the top 100 sellers. Beyond those top 100, the average sale is negligible.
And we haven’t even considered all of the NFTs minted but not finding buyers. Despite scouring the internet for statistics, I couldn’t discover how many NFTs are created each day, but if you want to watch NFTs being born in real-time, you can hop onto opensea.io at https://opensea.io/activity?search[eventTypes][0]=AUCTION_CREATED . While I was watching, during the middle of the day on a Tuesday, hundreds were minted every minute, thousands every hour. Most list for a few dollars, and many, I suspect, will never sell.
The market is sure to cool
While advocates of NFTs are bullish on their future, I’m skeptical that the runup in values we’ve seen over the last few years will continue. NFTs are experiencing a boom that is partially driven by their novelty. The NFT market provides a fun new way to achieve a sense of ownership over intangible digital goods.
The proverbial fear of missing out may also drive it. We’ve all heard the stories about early investors in cryptocurrency and NFTs becoming fabulously wealthy. Current buyers are likely trying to take advantage of early adoption. Investors could continue to see increases in the value of their NFTs as more investors enter the marketplace. Still, there are a finite number of potential NFT buyers in the world, and as we get closer to that number, investment is going to start to slow. Once investors realize appreciation is declining, we could experience a significant decline in the NFT market, with the value of many NFTs crashing. Like any other good, an NFT is only worth what someone is willing to pay for it.
We get a hint of this danger in the tale of the NFT created with Jack Dorsey’s first tweet. In 2021 Sina Estavi, a crypto entrepreneur bought the NFT for $2.9M. A year later, Estavi tried to sell it for $49M, promising to donate half of that to charity. The NFT was offered at auction, but by the time the auction closed, the highest bid for the NFT was 0.09 ETH or about $277 at the current exchange rates.
Ouch!
A lot of money is pouring into the market, and that may continue for the foreseeable future, but if resale prices falter, I anticipate buyers will become more cautious, and sale prices will come back to earth.
The NFT market favors hype
NFTs offer an excellent mechanism for digital and traditional artists to tap into a global audience and sell digital originals or digitized versions of their art. A quick perusal of the top-selling NFT collections will show that classical and contemporary art aesthetics have very little to do with what is selling. Don’t get me wrong, some intriguing artists are generating NFT sales, but are Bored Apes and Moonbirds art? You’ll have to decide that for yourself.
Whatever our opinion of the artistic quality, I found very little imagery that struck me as artistically exciting while exploring OpenSea.io. When I found interesting artwork, it didn’t seem to be garnering bids or generating sales.
Finding buyers/market saturation
Ultimately, it seems advocates for NFTs are promising something that they will have a hard time delivering for NFT creators. The implicit promise appears to be that it’s easy to create NFTs, and artists will find a new source of sales and, potentially, fabulous wealth.
Who doesn’t want easy money? Whenever I see someone promising it, however, I become very skeptical. I see a disconnect between the promise and reality of the NFT market. While the mechanism for transacting the purchase of a digital good and the record of its ownership is novel, the marketplace for selling digital goods is reminiscent of many existing online marketplaces that sell physical artwork. In this regard, selling an NFT is just like selling any other good – you have to have a willing buyer who feels that the value of the good is in line with the price.
As the NFT market launched, there was an imbalance that favored sellers. Excited buyers poured money into the market and chased after a limited number of NFTs. This activity drove the value of those NFTs up, sometimes astronomically, leading to the headlines. The resulting enthusiasm was understandable, but it has shown, it seems to me, that the NFT market is becoming saturated with creators/sellers. Because these sellers can produce digital artwork or other goods much more quickly and at a lower cost than required for physical goods, the number of available NFTs has exploded.
The biggest challenge for a creator new to the NFT marketplace is drawing attention to their work from qualified buyers. Anyone who has tried selling traditional, physical artwork online will understand the challenge.
Underscoring this point is a recent Facebook comment on one of my posts. Under the heading “I think painting is dead,” the commenter wrote
digital & Nft’s are taking the stage. It’s just another medium, without the mess. While buyers of paintings might still exist, but many artists will switch. It takes few hours to generate thousands of generated Nft’s, list them and sit back and relax. And that market is hot(I still couldn’t sell my first- but working on it).
The parenthetical in the last line reflects the experience many fine artists have in the NFT market: They think the market is exciting and intriguing, and they are breathlessly awaiting their first sale.
Time will tell how long they wait.
Environmental impact
Finally, we can’t talk about NFTs without discussing the environmental impact of creating and selling them. I’m not a climate expert, so I can’t speak to the exact ecological downside of generating NFTs or their carbon footprint. Still, a quick search online will point you to many articles with scientists decrying the energy usage required to mint NFTs.
Consensus is emerging that NFTs are bad for the climate, but I suspect that the environmental issue is a bit more complicated than some are making it out to be.
There is no doubt that the server farms employed to store and process NFT data are consuming significant amounts of energy from non-renewable sources, but this doesn’t take into account the fact that creating traditional art also consumes energy and resources. Think about the wood harvested to manufacture stretcher bars, the fuel consumed to cultivate and harvest cotton or linen, and the carbon emissions created as supplies make their way to artists’ studios and finished artwork from studios to galleries or clients.
It’s unclear if an artist transitioning from creating physical artwork to digital artwork is increasing or decreasing their environmental impact. As NFTs become more popular and widespread, we can hope that developers will also be able to make them more efficient and environmentally friendly.
With all of this in mind, you may be wondering if you should consider getting into the NFT market. If you are interested in exploring the possibility, my advice would be to learn as much as you can about the process and the market before jumping in. Unlike the stories of instant sales and fabulous income, I suspect you will have to work hard to develop a market for your NFTs and cultivate buyers.
The NFT/digital art market is in its infancy, and I think artists will be able to build successful careers on the blockchain. I also think it will be a lot more work to do so than many blockchain advocates are suggesting.
So if you are interested in building an art business around NFTs, by all means, pursue it! I encourage you to do so with your eyes wide open and your expectations tempered.
As I’ve examined the NFT marketplace, I’ve decided to take a wait-and-see approach. I won’t rule out the possibility that, at some point, Xanadu might launch a digital gallery and retail NFTs. Still, at the same time, I am very comfortable saying that, for the present, I love the business of selling hand-crafted art to collectors who will enjoy the art in their homes for many years to come.
In other words, NFTs are interesting, but they have nothing to do with my business.
Have you jumped into the NFT market? If so, we would love to hear from you. Please leave a comment below describing your experience.
Have other comments or questions about NFTs, or did you enjoy this post? Leave a comment below.. I look forward to hearing from you!