Crypto assets: The ‘unreal economy’ is thriving

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Crypto assets: The ‘unreal economy’ is thriving


  • Sales of digital assets known as non-fungible tokens have soared 2,500 per cent this year
  • Investors are making thousands trading these crypto products, which proponents say could soon form an integral part of the real economy

£57,000 for a virtual flower. £71,000 for a digital basketball card. £1m for real estate in a video game. It’s not just bitcoin. People are investing thousands in a whole range of digital assets with even more dubious value.

From tweets to digital artworks, exclusive ownership of online content is now being sold through the same blockchain technology that underpins cryptocurrencies. Collectively referred to within crypto communities as non-fungible tokens, these pixelated assets are drawing record demand just as the price of bitcoin soars to new highs. The most successful NFT traders are apparently making profits of almost $500,000 (£355,293) in a single year, with some individual portfolios now worth in excess of $1m.

According to data provider NonFungible.com, the market has seen sales of more than $304m since mid-2017. But after remaining relatively stable for years, the amount of money flowing in has rocketed in recent weeks. In the year to date, $150m-worth of NFTs have been sold, almost 2,500 per cent more than during the same period last year.

“It’s just crazy, the past few months,” says Dan Kelly, chief executive of NonFungible.com. “It has just exploded. There’s a lot of mainstream appeal coming in now.”

Like bitcoin, the popularity of NFTs has been boosted by endorsements from celebrities and high-profile institutions. This week, Christie’s will become the first major auction house to sell a digital artwork on the blockchain. Earlier this month, a 13-second video clip of basketball star Zion Williamson sold for $100,000; the man who bought the video – one of hundreds created by the NBA as a sort of virtual trading card – told ESPN it could eventually increase tenfold in value. That’s despite the clip also being free for anyone to watch on YouTube.

This boom in digital assets will only add to the sense that markets are growing increasingly detached from the real economy, which has been suffering the full impact of the Covid crisis. Over the past year, demand for tangible assets like oil has fallen to new lows, consumer spending has stagnated, and redundancies have reached record highs as the pandemic lays waste to businesses. Rental incomes have dropped as offices and high streets shut down, while previously lucrative residential markets around the world are also facing a drought in sales as the crisis prompts an exodus from large cities.

The virtual real estate market, on the other hand, has never been livelier. Earlier this month, cryptocurrency news site Decrypt reported that the most expensive NFT ever had been sold: nine plots of digital land on Axie Infinity, a blockchain-based game where players rent out property to each other. The virtual estate reportedly changed hands for 888 ether (a cryptocurrency), then equivalent to $1.5m.

“We’re witnessing a historic moment,” the anonymous buyer wrote on Twitter (US:TWTR). There are rising “digital nations with their own systems of clearly delineated, irrevocable property rights. Axie land has entertainment value, social value, and economic value in the form of future resource flows”.

The unreal economy, in other words, is thriving.

Star Trek, Nintendo and virtual forex markets

All this may seem like make-believe to the traditional investor. But the crypto craze actually has its roots in fantasy fiction.

Authors dreamt up the concept of electronic money long before the first cryptocurrency was created by Natoshi Sakamoto, the pseudonymous inventor of bitcoin, in 2008. Neal Stephenson’s 1995 science fiction novel, Diamond Age, imagined a post-scarcity economy dominated by encrypted currencies. In his 1999 book, Cryptonomicon, the protagonists set out to create an anonymous online banking system using digital gold.

The idea behind the blockchain – a historic record of transactions that ensures cryptocurrencies and NFTs cannot be duplicated – was also preempted by authors who had to explain why characters didn’t use their magical or technological powers to create infinite supplies of money. The currency used by the capitalistic Ferengi villains in Star Trek was impervious to the TV series’ ubiquitous “replicator” machines. Coins conjured out of thin air in the Harry Potter universe would soon vanish.

Towards the end of the 20th century, digital money came one step closer to reality with the invention of online video games, which allowed players across the globe to interact within expansive alternate universes. Micro-economies soon formed, although currencies in these games have often been less resistant to foul play. Last year, Nintendo (JP:7974) was forced to slash the interest rate at Animal Crossing’s Bank of Nook by 45 basis points, after players tweaked the internal clock on their devices to receive decades-worth of compounded interest.

Virtual economies spilled over into real-world markets when players realised they could sell their online winnings for cash. An alternative forex market was born on eBay (US:EBAY), where fictional coins were traded for fiat money. The demand for pixelated swords and elixirs also spawned a commodities exchange on the site. At its peak, the industry was estimated to turn over hundreds of millions a year, with more than 100,000 so-called gold farmers said to be working in China. But faced with concerns about fraudulent trading, eBay decided to ban the selling of “virtual items” in 2007.

‘The next frontier’

The arrival of blockchain has now breathed new life into the industry. By shifting regulation of transactions to this open-source technology, players have claimed control of the virtual financial system from the likes of eBay and Nintendo. Community-built games have proliferated, as have trading platforms for NFTs.

One game, CryptoFlowers, lets users build their own collection of virtual flowers; the most expensive plant is on sale for 50 ether, equivalent to £56,788 at today’s exchange rates. Decades after the USS Enterprise faced off against the Ferengi, Star Trek actor William Shatner launched his own range of digital trading cards and sold them as NFTs. In 2017, the most popular blockchain, ethereum, was jammed by a bottleneck of demand from the game CryptoKitties, in which players trade cryptocurrencies for cartoon cats.

“NFTs are the purest form of the virtual economy. [These assets are] created and consumed completely virtually,” says Nadya Ivanona, chief operating officer at L’Atelier BNP Paribas, a research subsidiary of the French bank.

A report produced by NonFungible and L’Atelier identified 55 blockchain wallets that made a profit of more than $100,000 from trading NFTs in 2020. The biggest gain made by a trader was $465,898, while the most profitable individual sale was an avatar in Axie Infinity, which changed hands for $121,382 – representing a 1079 per cent return on the seller’s initial investment of $10,291. NFT trading has become an “extremely profitable business”, the report adds, with investors experiencing “unprecedented performance” in 2020. 

With such large returns up for grabs, some high-profile investors are now entering the market; heroes of the Reddit investment crowd Chamath Palihapitiya and Mark Cuban, who owns the NBA’s Dallas Mavericks team, have been bigging up digital assets across TV and social media. Palihapitiya told Bloomberg this month that he was building a “fairly sizable portfolio” of NFT art and trading cards, which he described as “the next frontier” of digital assets. Cuban, who has reportedly sold ownership of one of his tweets as an NFT, also says he is buying virtual basketball cards.

But proponents of NFTs think digital assets will ultimately have a much bigger role to play in the wider economy, beyond the limits of speculative investing or trading virtual kittens.

“What if a 21-year-old college graduate could use the €250,000 of virtual assets they have accrued as collateral for a mortgage?” asks a separate report published by L’Atelier. “What if a single mother could use the income that she earns from renting digital real estate to buy groceries?” Could the virtual economy eventually become the real economy?

We will know NFTs have become mainstream when we stop talking about them, suggests Ivanova. Enthusiasts are predicting this technology could become part of everyday life when NFTs are used to register physical items like luxury goods or artwork on the blockchain. Nike (US:NKE) has already bought the patent to make “CryptoKicks”, a blockchain-backed shoe. 

“Speculative value often gives way to real value,” says Ivanona, pointing to the growing involvement of “conservative industries” like the arts sector. “Lines [between the virtual and physical worlds] will be blurred more and more as we move forward.”

Techno fantasy or the future of the real economy? For now, most in the investment establishment would not recommend betting a considerable part of your savings on Star Trek collectibles or CryptoFlowers.

“If you are basing a financial plan around it that is probably quite concerning. If you’re spending a couple of quid, that is fine,” says Laith Khalaf, financial analyst at AJ Bell. “I don’t see this kind of activity replacing those more traditional real assets any time soon. Mainly because those real assets have a real function in the real economy.”



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