NFTs: A Revolutionary Technology Or A Bubble About To Burst?

People hold NFTs primarily to gain exclusive rights to digital pictures and videos and because they are status symbols. NFTs can then be sold on secondary markets, and—as last year proved—can fetch hefty returns for creators and sellers in the process.

That being said, the NFT market does have its downside risks, potentially limiting its scope for future growth. In particular, unlike physical artwork, digital artwork can be easily copied—potentially an infinite number of times.

Thus, although an NFT gives the holder exclusive legal rights to the artwork, in practice these rights are difficult to enforce due to the significant costs involved in monitoring and prosecuting NFT copyright infringements. Moreover, roughly 9% of individuals hold around 80% of the total value of NFTs, which makes the market susceptible to swings in macroeconomic conditions, as portfolio adjustments by just a few large investors have an outsized market impact. Unproven and new asset classes in the past have typically performed poorly when large economic shocks take place, such as economic downturns or rapid changes to interest rates.

When it comes to art, the value is in the eye of the beholder, but fundamentals do play a large role in shaping the market—and most theories would suggest NFT fundamentals are wobbly at best. A strong rise in global interest rates could lead to an unraveling of the NFT market, as seen through the recent correction in traditional asset classes such as equities in response to the Fed’s increasing hawkishness, with our most recent Consensus Forecast projecting three rate hikes by the Fed by the end of this year. This rapid tightening could spell trouble for the NFT market and burn many speculative investors in the process, discouraging future interest in the technology.