Cryptocurrencies collapsed in a spectacular digi-crash last month and, by association, so did non-fungible tokens (NFTs). So are they still worth buying and why is the technology behind them so important? Jane Phare reports.
It didn't take long for the bottom to fall out of millions of crypto-maniacs' digital wallets. It wasn't a slow slide - more like a 48-hour collapse followed by a rapid plunge to the bottom of the metaverse.
Almost overnight, billions of dollars were wiped off the value of thousands of cryptocurrencies, including "mainstream" ones such as Bitcoin and Ethereum. The proud owners of cartoon-style pets and pop-culture avatars, bought mainly with Ethereum (ETH), were left sobbing into their virtually empty digi-vaults after realising their non-fungible tokens (NFTs) weren't worth the blockchain they were written on.
Headlines screamed "Crypto crash" and "Wall Street giant issues stark NFT prediction" as conservative financial advisers who had previously warned against wild speculation and "pyramid schemes" worked hard to keep the I-told-you-so smirks off their faces.
But still they invested, fuelled by celebrities jumping on the NFT blockchain including socialite Paris Hilton, Madonna, actor Reese Witherspoon, singer Katy Perry and rap artist Snoop Dogg. Someone paid US$450,000 to buy an NFT of a plot of land next to Snoop's metaverse residence, Nike created a virtual sneaker NFT, and brands like Gucci got on board.
If you're still stuck trying to work out what an NFT actually is, it's just a collection of digital data, whose ownership can be recorded using what is known as blockchain technology, allowing it to be bought and traded. That data could be just about anything digital - an image, a video or a sound file, for example. Many popular NFTs take the form of digital art, like the Bored Ape collection of cartoon-style images of monkeys. Depending who you ask, NFTs are either the future of the art market, or a very efficient way of throwing away your money.
The reasons behind the crash were many, depending who you talk to: inflation, war in Ukraine, the pandemic, an over-saturated market, and increased regulatory scrutiny of crypto. Some even blame billionaire Elon Musk for mocking NFTs on Twitter.
Whatever the reason, what investors want to know is what happens now? Will the millions of crypto crazies who forked out good money for pet rock gifs and marginal cartoon characters have done their dough? The answer, it seems, is yes and no.
Those who invested in quirky NFTs that were little more than a picture or a dodgy cartoon should probably have put their money in the bank at 2 per cent interest. But others who are deeply immersed in the digi-world say NFTs with blue-chip pedigree will survive the gold-rush mentality. Although prices fell by as much as 50 per cent, they're still worth thousands of dollars.
They talk (for hours) about the metaverse, of (digital) communities, decentralisation and the authenticity of the blockchain. They believe NFTs with good pedigree – think Bored Ape Yacht Club, Doodles, World of Women, CloneX (owned by Nike) and even New Zealand's own FLUF World 3D bunnies - will make the cut, much as Amazon and Google rose from the digi-ashes of the dotcom bubble when it burst 20 years ago.
There's little doubt that the digi-world of crypto and NFTs is highly speculative. Even those involved commercially with NFTs will admit that. Like any new technology there will be those that crash and disappear, and others that take off. They say this crypto winter will pass too, leaving the fly-by-night speculators behind while the true digital warriors go on to build a better and brighter future.
This technology – a new way to secure virtual property and digital ownership - is here to stay, so watch this metaverse space, they say. It will be part of our future, much like YouTube, Facebook, Zoom, Instagram, Twitter and buying clothes online became part of everyday life.
Building the bunny business
The Herald spent more than a week trying to track down one of the brains behind Kiwi company Non-Fungible Labs, which created the 10,000-strong NFT bunny community Fluf World. With little response; it was assumed the Fluf World designers had stuck their despairing heads down a rabbit hole somewhere in the metaverse.
Not so. Co-founder Aaron McDonald apologised – flat out, staff down with Covid, in between flights. He had a few minutes to talk before leaving for San Francisco. McDonald is among those who don't seem too worried about the crash. Yes, the value of Ethereum is down so Fluf World bunnies are less valuable right now but he's more interested in engagement on the platform, and that's growing.
"We're seeing an increase in active wallet users, people who are participating in using the assets."
What that means is that the owners of an NFT, such as a Fluf World bunny, are increasingly using "assets", which could include perks, opportunities, access to activities or early "drops" of extra NFTs, a little like an exclusive club.
McDonald and his team – 200 of them across three companies – are flat out building the business, doing inexplicably clever things with technology to build communities around 200,000 NFTs, of which Fluf World is just one.
That "smart stuff", as McDonald calls it, will enable the NFT holder to do things such as changing the music their avatar has behind it, collaborating with artists to do background settings for their online profile picture and generally "play" with their NFT.
As for the NFT failures, McDonald says it's important to remember that 90 per cent of start-ups in any industry don't make it.
"It's not unique to NFTs or crypto. We will see a lot of people with good intentions and even ones with good plans just not make it through because that's the nature of business."
The ones that have built good "communities" and focused on the long-term game will start to shine during the down times, he predicts. And as crypto enthusiasts like to remind non-believers, we've been this way before. Cryptocurrency has weathered four or five 80 per cent crashes in the past decade.
Pardington NFTs sold out in 24 hours
Tim Harper, co-founder of the NFT marketplace Glorious, is similarly unfazed by the digital doldrums. His company released 100 NFTs last week based on an artwork created by Fiona Pardington that features two huia birds she photographed at the MTG Hawke's Bay museum. Called Manawarahi, the NFT proved popular: half sold in the first 30 minutes, with all 100 selling by the next day.
Each NFT sold for .6ETH (Ethereum), worth about $1648 last week. If that sale had happened last November when Ethereum was at an all-time high, .6ETH would have been worth about $4440. But Harper and others in the crypto business world aren't so worried about the dollar value, just that the interest in good NFTs is still there.
He's expecting 1000 NFTs celebrating 100 years of Wimbledon's Centre Court championships to be snapped up when the ballot opens on Monday. Glorious, with the help of creative agency Daylight, has created 100 iconic Wimbledon moments for each of the 10 decades, to celebrate the history and legacy of the famous tennis tournament.
Harper says the "downturn" was not a surprise, describing it as "wonderful news" in one sense, clearing out short-term speculators.
"It sort of cleans the bottom of the pool and the quality rises."
Glorious deliberately aims for the premium end of the market for that reason, as a way of surviving in a relatively unpredictable space, he says. Luxury goods tend to be recession proof, as people become more discerning about where they spend their money.
In March, 12 NFTs of New Zealand artist Rita Angus' painting Cass sold out in seconds for 2ETH (worth about $8000 at the time). And yes, Harper says, if those investors sold their NFTs today they would lose money because of the dip in the value of Ethereum (2ETH is worth just under $5400). But they are designed to be a long-term proposition, not a quick speculation on "junk" NFTs.
"The underlying technology for what we can do to authenticate digital art and provide it with value, that is not changing," says Harper. "Adoption is only heading in one direction and that's more and more users every week."
Scott McLiver, an accountant who specialises in digital innovation and emerging technology, agrees. He thinks NFTs with pedigree behind them, those that have a community, will survive, People will start to see NFTs not just as a cartoon of an ape but technology that means an asset can be owned in digital form. That could include your driver's licence, birth certificate, or the right to eat at a particular restaurant, he says.
McLiver, who is also a shareholder in Glorious, says it's human nature for investors to over-react to new and interesting technology.
"We over value it and then there's a correction. And that correction cleans out the ones that are not sustainable. The best NFTS might become the Disneys and the Marvels of Web3 but there won't be thousands of them. There are many that will disappear forever."
McDonald and his Non-Fungible Labs team aren't going anywhere. They're hard at work on their next metaverse phase after this year launching Burrows, a 3D metaverse space where Fluf World characters can hang out with each other, party and even breed.
Burrows is a launchpad for a "bigger game experience" due to be released this year. McDonald is keeping details tight, but it will be a place where Flufsters can consume media, interact with commerce, play with friends or go to a concert.
Added to that, the company is working hard to form partnerships with leading brands, entertainers, IP and sports teams. McDonald, and others like him see the boundaries between technology, communication, media, gaming, e-commerce and finance blurring into one user experience.
"We're six months into a 10-year innings," he says.
'It's bleeding-edge technology'
McLiver doesn't pretend the digi-currency ride will be smooth. It's highly speculative, early technology, he says, and warns that investing in something you know little about is a bit like investing in a nephew's start-up.
"It's highly speculative in the sense that's it's bleeding-edge technology."
But, he points out, although Bitcoin has dropped from its $US68,000 high in November last year to around $US30,000 now, it was only two years ago that investors were amazed Bitcoin had reached today's level. And Ethereum is trading at the level it was a year ago.
"When traditional markets have taken as much of a repricing as we've seen, is it any wonder that a cartoon of an ape has dropped?"
He thinks blockchain technology will cause major disruption in the finance world, and that decentralised communities will benefit. Take the game Fortnite, he says. Epic Games has made billions of dollars from millions of kids around the world playing Fortnite and buying "skins" (outfits).
Under the new crypto gaming model or pay-to-earn games, players will own digital assets of the game, and early adopter gamers in particular will reap economic benefits as the game grows in popularity.
"That's a fascinating tweak to the model. It incentivises people to support the eco-system. It's already happening. The quality [of the games] aren't the quality of Fortnite yet but that will come."
He points to what's happening in New York, where entry to the exclusive Flyfish Club is through NFTs. Only token holders can gain access to the cocktail bar and seafood restaurant, and are offered culinary and social experiences as part of their membership.
And a blockchain-based golf club LinksDAO (decentralised autonomous organisation) claims it raised US$10.4m over 48 hours last January by selling NFTs to more than 9000 "members". The NFTs will give members discounts at existing golf courses and membership of a real golf course once money is raised to establish it.
Why blockchain technology is the future
The chief executive financial technology company PowerFinance, Dave Corbett, isn't remotely interested in NFTs but he is a fan of the blockchain technology behind them. He's looking to the future, using the technology to disrupt a financial market that relies on "massively old and outdated" technology.
"Wouldn't it be great to have a credit card that offset your carbon footprint as you spent money?" he asks.
That's still on the wish list but Corbett has 46 staff building technology, based on the blockchain, that will allow for rapid innovation. The company is working with an electric vehicle fleet leasing business, to produce both financial and environmental gains.
Every electrically-fuelled kilometre driven in the vehicles is measured as an "impact yield" as opposed to the negative impact of using petrol or diesel. That yield translates into an "impact asset" that is owned by someone and can be embedded in the blockchain.
"The blockchain creates the transparency you need to have property rights on those impact yields. At the moment with green financing it's very unclear as to who owns the good outcomes in the world. If no-one owns the asset, it doesn't really exist."
That green yield will be available to be purchased by someone or a company to offset their carbon footprint. Corbett says it could be a philanthropic investor who wants evidence of the impact of a major donation, and has ownership of that outcome.
Far-fetched, maybe, he says, and a little "boring" compared with Bored Apes. But he believes it's the way of the future in a world where investors will increasingly care about environmental and social outcomes.
"Eventually the market will decide which of these green assets they value and by how much. But it has to start with transparency and ownership of the impacts."
Have a little dabble
Surprisingly, financial adviser and planner Liz Koh doesn't scoff at the idea of the blockchain or NFTs. In fact, she admits to buying one, a "carbon negative" environmental artwork called Islands Of Cool, with a view to helping to cool the planet.
Koh was following her own advice: "Don't invest in things you don't understand."
She bought her NFT specifically to learn about how the blockchain worked. If crypto and NFTs fascinate you, she says, invest a small amount of money and set about learning all you can.
"Have a little dabble because it is the way of the future I think. The technology is leading us down that path and so it's probably something we are all going to have to learn about at some stage."
However Koh still describes NFTs and crypto as "speculative" and says they shouldn't be part of a core investment portfolio.
"They're high risk. You could make a lot of money out of them but also lose money."
Koh says there is a major knowledge gap in understanding the technology and she lays part of the blame on those immersed in the blockchain, and working on its development, for using too much jargon. That jargon mystifies potential investors, she says.
"For someone coming in it's almost like speaking a foreign language. And it's an absolute no-no to invest in something you don't understand."