It’s hardly halfway into 2021, and people have already spent billions on NFTs. Non-fungible tokens make up this year’s most coveted asset class—blockchain-based tokens that are cousins to cryptocurrency. However, unlike the latter, where there can be millions of the same kind of coin, NFTs are unique and one-of-a-kind assets.

By owning an NFT, you become the sole owner of the token—an immutable, irreplicable, but transferable ownership—making them perfect for branding virtual files. These tokens have brought revolutionary changes to the digital art industry. Memes are selling for just a hair under $500,000. Artworks are in the market for millions. Luxury fashion houses are joining in on the hype. NFTs have transformed the internet—but are they here to stay?

The Circular Economy Between NFTs And Cryptocurrency

There’s only one thing that NFTs and cryptocurrencies have in common: they’re both tokens minted on a blockchain like Bitcoin or Ethereum. However, they’re completely different asset classes and serve different purposes. Whereas BTC, Bitcoin’s native coin, aims to be a digital currency used in transactions, NFTs are one-of-a-kind products that can be purchased and sold with crypto. From videos to memes, gifs, and artwork, any digital file can become an NFT with the help of the Ethereum blockchain, which has built the ERC-721 standard and the ERC-1155 standard for non-fungible tokens.

As an artist, you can visit an online marketplace and put a piece of artwork up for listing. Upon paying the processing fee with ETH (or Ether, Ethereum’s native coin), your file will immediately turn into an NFT. This simple and highly accessible minting process requires no programming work on your end. In exchange, all fees are paid with ETH, and all purchases are also paid with ETH or the native coin corresponding to the blockchain that the marketplace supports. This transaction process essentially creates a liquid economy for cryptocurrency, hence why it’s so relevant in the conversations surrounding digitization.

Speculation And The Risk of A Bursting Bubble

In October of 2020, Beeple—a digital artist who has become the face of NFTs—sold a 10-second video render for almost $67,000. In February of 2021, the same artwork was resold for $6.6 million.

The astronomical rise in value was unprecedented in that there were no particular factors that would have logically caused the NFT to go up in price by tenfold. NFTs inherently hold speculative value—no market standard regulates or limits the pricing of each asset, hence why they’re circulated in a free market, where the current owner states their price. This arrangement may sound familiar because it mirrors the practices in the fine arts industry. If you want to purchase a painting of a cloud, then you must pay the price the artist dictates. Except the industry has gone digital, empowering a new wave of contemporary artists and collectors.

However, the all-too-impressive growth of the NFT sector has struck fears over the possibility that this trend is simply a bubble—one that’s about to burst. An economic bubble occurs when the price of an item spikes in a short period but is unable to hold its position, so the value eventually plummets just as quickly.

The average price of an NFT has already dropped by 70%—partially because more artists are selling their work for a lower price and partially because collectors are being more careful about dropping thousands of dollars into this venture. Whether or not it’s about to burst is a debate—which side do you believe in?

How NFTs Stormed The Digital Art Ecosystem

Amid all the talks about the colossal value of the NFT industry, it’s important to understand how they came to light in the first place and why artists and collectors had so openly welcomed them into the world.

NFTs have been around for years. Early renditions included CryptoKitties, a one-of-a-kind trading and breeding platform featuring cat PNGs. The platform made millions at its peak—and avid fans are still enjoying the psychedelic furries today. Its popularity had a lot to do with gamification, making blockchain technology feel a lot less intimidating to newcomers. In fact, the cats were so cute and the mechanics so simple that anyone could easily join in with an Ether investment.

Fast forward to today, and both aspects are still driving factors for NFT’s popularity. Apart from being able to empower the gaming economy—which ESPA is doing with NFT and gaming integrations—they are also able to empower independent artists. Beeple’s revolutionary $69 million sale was a signal flare that there is hope for the industry and small-scale artists to grow, motivating creators to join the speculative playing field.

Roots of Speculation

Various factors are driving NFTs to jump in value. First, amid a growing tech boom and the lack of government trust reinforced by the pandemic, there’s been a massive migration in interest from the tangible world to the metaverse. People are now looking for alternative investments to transfer their wealth onto. Cryptocurrency is one option—that’s why the coin market has been at an all-time high since Q4 of last year.

On the other end of the scale, NFTs were the perfect subjects for obtaining true scarcity because, unlike crypto, there’s only one of each NFT in existence. Collectors have historically used art as a store of value; NFTs simply brought the same concept to the virtual sphere. To a certain degree, people have assigned a monetary value to assets that they can’t possess in the real world. The concept in itself is so new and out-of-this-world that it’s bringing colossal levels of interest in NFTs—subsequently causing their rise in value.

Despite NFTs’ explosive success in 2021, speculative assets have always struggled to maintain their position at the top. The crypto market saw some of the worst bubbles in 2017—there’s a possibility for the same to happen today. Are you confident enough to brave through the risk of volatility—or do you prefer to play it safe by embracing more tangible investments?