Explainer: As international market for it booms, what determines the price of an NFT artwork?

Digital flex.

FP Staff June 10, 2021 15:45:16 IST
Explainer: As international market for it booms, what determines the price of an NFT artwork?

Christie's auctioned off a digital collage by an artist Beeple, whose real name is Mike Winkelmann, for nearly $70 million, in an unprecedented sale of a digital artwork that fetched more money than physical works by many better known artists. (Christie's via AP)

This July, the Prinseps auction house in Mumbai is set to open their new season with an offering of non-fungible tokens (NFT) artworks by the Bengali modernist Gobardhan Ash and Oscar-winning costume designer Bhanu Athaiya's fashion sketches. The NFT auctions will be hosted directly on Prinseps' own platform and minted on the Ethereum blockchain.

The move piggybacks on an international boom in the NFT art market, which broke into the mainstream when a digital art piece (Everydays—The First 5000 Days) by Beeple sold at auction for nearly $70 million this March. The transaction made global headlines and buoyed already-mushrooming interest in these kinds of digital objects that have captured the attention of artists and collectors alike.

A month before that, this February, another one of Beeple's artworks Crossroads sold for $6.6 million, while Kevin Abosch's Forever Rose sold for $1 million.

But what exactly determines the value of an NFT artwork? And how sustainable is the market? Let's take a look. But first,

What are non-fungible tokens, again?

In economics jargon, a fungible token is an asset that can be exchanged on a one-for-one basis. Think of dollars or bitcoins — each one has the exact same value and can be traded freely. A non-fungible object, by contrast, has its own distinct value, like an old house or a classic car.

Cross this notion with cryptocurrency technology known as the blockchain, and you get NFTs. These are effectively digital certificates of authenticity that can be attached to digital art or, well, pretty much anything else that comes in digital form.

At the moment, these tokens are being used to solve a problem central to digital collectibles: how to claim ownership of something that can be easily and endlessly duplicated. One purpose of NFTs is that they can be used to trace an object’s digital provenance, allowing a select few to prove ownership. In the broader picture, it’s a way to create scarcity — albeit artificial — so that you can sell something for higher prices thanks to its scarcity.

“All the time, money and effort you spend in your digital life, you can create value for that,” says Chicago fund manager Andrew Steinwold, who started an NFT fund in 2019, in an interview with The Associated Press. “You have property rights in the physical world. Why don’t we have property rights in the digital world?”

How is the price of an NFT artwork determined?

An NFT is worth what someone is willing to pay for it, which can be a lot if the NFT is made by a well-known artist and the buyer is a wealthy collector, explains Dragan Boscovic in The Conversation.

According to Boscovic, “Turning something as ephemeral as a tweet into an item that can be sold requires two things: making it unique and proving ownership. The process is the same for cryptocurrencies, which turn strings of bits into virtual coins that have real-world value. It boils down to cryptography.”

While the notion behind the concept was to help artists, The Economist points to several drawbacks. One, the rise in NFT values might be a symptom of a broad crypto-enthusiasm, and could quickly collapse. And since the expense of producing NFTs is low, the supply can potentially be huge. A creator can also change an image even after sale, undermining their worth and creating uncertainty around them.

But despite the risks involved, many see NFT artworks as a new form of investment, in turn driving up their prices. In 1843, Bo Franklin discusses how the buyer of Beeple's Everydays seemed more interested in the work's financial potential than its artistic value. "Vignesh Sundaresan, the cryptocurrency investor based in Singapore known as MetaKovan who bought Everydays, boasted that it is “going to be a billion-dollar piece someday”... MetaKovan runs an investment fund that has already bought up other NFTs, including many issued by Beeple. The high price MetaKovan paid for Everydays also pushed up the price of other Beeple NFTs. That made MetaKovan’s fund even more valuable."

So, is this a bubble waiting to burst? While many indicators point to that, it's too early to stop the bidding.

With inputs from The Associated Press.

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