Non-fungible tokens are establishing themselves in the mainstream, disrupting experts and launching valuation discussions. As with any market, buyers and sellers will ultimately be the judge.
As the debate rages over non-fungible tokens, it has become clear there are two sides. There are innovators who see vast potential, collectors and investors who are drawn in, and all manner of fans of these digital assets for a wide variety of reasons. There are also the detractors and naysayers, who speak to bubbles, valuation challenges, and bystanders who try to make facile comparisons to traditional asset classes and use words like “fad” to describe the presence of NFTs. That said, it takes buyers and sellers to make a market. I will also add this is not the first time either side’s bold call one way or the other reminds us of history repeating itself.
Tom Kennedy has been remunerated by KABN Systems North America Inc. in the past twenty-four months. He holds a Long position in Liquid Avatar Technologies Inc. (CSE:LQID) at the time of publication.
His research is intended for the sophisticated investor to assess market developments and company performance and make insights. His comments are in no way intended as a solicitation to trade in any securities. All comments are subject to Risks and Uncertainties outside of the control of the author.
Please see the Disclosure Statements at the end of document.
Non-fungible tokens: A Primer
There is now a growing body of research and analysis on NFTs, reflecting their increasing relevance. However, most people haven’t even heard of them — yet. So, I will begin with a brief Primer, leaning on postings from the site Messari.io.
NFTs are tokens that are non-fungible, meaning not exchangeable equally for anything else. A bitcoin is worth one bitcoin, but an NFT is a unique digital asset and like a diamond or a physical baseball card, no two are the same.
An NFT can be likened to a file format that conveys digital ownership of a digital asset. Similar to the Mona Lisa as a painting, an individual entity “owns” the unique digital asset
The current record for an NFT sale was approximately $69 million in March 2021 for work by digital artist Beeple. This NFT was sold at a Christie’s auction in the same manner as other traditional art, giving a sense for how NFT’s can be transacted on the high-end. There are also NFT platforms where users can create, buy, and sell NFTs.
Valuing art of all kinds is a challenge
Voice of Fire or the work of Beeples? Which is “better”? There are many factors that affect the value of art, and any collectible, the most important of which is what someone is prepared to pay for it and what someone is willing to be paid to part with it. After that, scarcity value is a core driver, ascribing more value to rarer, unique items. To make my point about value in traditional art (I’ll use the term TradArt), I enjoy the following piece. However, I cannot justify personally paying a lot of money for it. Indeed, this painting was shown upside down for a period before that error was uncovered.
Figure 1: One of the most expensive pieces of TradArt in the world.
In order to have a strong opinion, you have to know enough about NFTs
Anything that is popular will attract interest from all sides for it and against it. I think there are a couple of relevant points to that. First, this means the most likely source of a correction in valuation (aside from force majeure like fraud or negative structural changes) is simply fewer buyers than sellers. There is no method for shorting NFTs (that we are aware of!) and so the market cannot crash due to bets against it — “no bet” is the only bet to the downside. Secondly, traders of financial or valuable instruments tend to be more sophisticated and layering on those knowledgeable enough to be trading NFTs shrinks the current pool far more. A third point would be that these collectibles represent transactions between few, like-minded people.
The TradArt market, with all of its similarities, is a US$60 billion market that we know of — meaning after removing the effect of black market or under-documented activity. I will continue to attempt to compare the sizing but at the moment it appears to be hovering in the >5% run rate range, which is certainly material yet with 10–20x growth potential to hit the same size transactionally. I have to admit this is very back of the envelope math in two relatively opaque markets at very different stages in their maturity.
Figure 2: The TradArt Market Globally.
Crossing the Chasm: are NFTs reaching a material level of acceptance?
Harkening back to business academia, this does look suspiciously like Geoffrey Moore’s iconic yet simple chart, Crossing the Chasm. Doesn’t Figure 3 look like the earliest adoption period, prior to the “small chasm”? The early adopters are blockchain enthusiasts, pioneers, early users who were ready with their digital wallets and knowledge of the space. The Early Adoption segment is rounded out by Early Pragmatists and the small chasm could be a correction or lagging ecosystem changes. So, the next major phase, the real Chasm, hasn’t even begun, which is prior to becoming technological reality accepted by the masses.
Figure 4: One of the most expensive pieces of TradArt in the world.
Clear risks to watch for in the short-term
Regulation will come in many forms, which will increase volatility as actors assess the impacts.
Regulation approaches in different countries will be both co-ordinated at times and completely decoupled at others. Different countries will impose stricter pre-emptive restrictions faster (for instance, China-type systems that are quickly enacted under the mandate of protecting stability in the financial system). Co-ordinated efforts with regards to AML policy will also gain priority if trading value remains high or grows.
Naysayers will exist for all kinds of reasons.
Anything this exciting will cause experts of all kinds, from influencers to thought leaders, to have an opinion. I’m reading dozens of them. These are intelligent, innovative people who are accustomed to fast change and cyclical developments.
Going back to the TradArt example, many people balk at prices that others find reasonable. Also, as I said earlier, in order to be a legitimate naysayer one would need to do a certain amount of homework on the asset class. Simply expressing that one doesn’t understand something doesn’t make it a farcical investment. There is no question the risk profile of NFTs is on the higher end, but I would argue owning anything with the aim to trade it short term comes with enormous risk as well. Remember, fraud is fraud and can affect the local corner store or the largest investment bank. Arguably there are elements of enhanced security and title with NFTs than many traditional collectibles.
NFTs will bear the risks of the broader markets generally, and cryptocurrency and technology markets. This includes headline risk and customer confidence in blockchain protocols.
I believe two things are here to stay. First, digital assets are only going to keep finding use cases, including and beyond art. Second, the unpredictability of NFT prices and volume volatility will continue to be very high, as buyers continually reassess their measures of scarcity, future values, and market acceptance.
© 2021 Thomas Kennedy. All rights reserved. See Disclosure Statement
Disclosure Statements: Please view the Disclaimer
This report has been prepared on behalf of Liquid Avatar Technologies Inc. and it’s subsidiary, KABN Systems North America Inc, effectively “Liquid Avatar” or the “Companies” and is confidential and proprietary. It does not purport to contain all the information that a prospective investor may require in connection with any potential investment in the Companies or related program(s). You should not treat the contents of this report, or any information provided in connection with it, as financial advice, financial product advice or advice relating to legal, taxation or investment matters.
This report does not include all available information in relation to the business, operations, affairs, financial position or prospects of the Companies. No representation or warranty (whether express or implied) is made by the Companies or any of its shareholders, directors, officers, advisers, agents or employees as to the accuracy, completeness or reasonableness of the information, statements, opinions or matters (express or implied) arising out of, contained in or derived from this report or provided in connection with it, or any omission from this report, nor as to the attainability of any estimates, forecasts or projections set out in this report.
This report is provided expressly on the basis that you will carry out your own independent inquiries into the matters contained in the report and make your own independent decisions about the business, operations, affairs, financial position or prospects of the Companies. The Companies reserves the right to update, amend or supplement the information contained in this report at any time in its absolute discretion (without incurring any obligation to do so) without any obligation to advise you of any such update, amendment or supplement. The delivery or availability of this report shall not, under any circumstance, create any implication that there has been no change in the business, operations, affairs, financial position or prospects of the Companies or that information contained herein is correct after the date of this report.
Neither the Companies nor any of its shareholders, directors, officers, advisors, agents or employees take any responsibility for, or will accept any liability whether direct or indirect, express or implied, contractual, tortuous, statutory or otherwise, in respect of the accuracy or completeness of the information contained in this report, for any errors, omissions or misstatements in or from this report or for any loss howsoever arising from the use of this report. Any such responsibility or liability is, to the maximum extent permitted by law, expressly disclaimed and excluded.
This report does not constitute, or form part of, any offer or invitation to sell or issue, or any solicitation of any offer to subscribe for or purchase, any securities of the Companies, nor shall it form the basis of or be relied upon in connection with, or act as any inducement to enter into, any contract or commitment whatsoever with respect to such securities. Under no circumstances should this report be construed as a prospectus, advertisement or public offering of securities.
This report may contain reference to certain intentions, expectations, future plans, strategy and prospects of the Companies. Those intentions, expectations, future plans, strategies and prospects may or may not be achieved. They are based on certain assumptions, which may not be met or on which views may differ and may be affected by known and unknown risks. The performance and operations of the Companies may be influenced by a number of factors, many of which are outside the control of the Companies. No representation or warranty, express or implied, is made by the Companies, or any of its shareholders, directors, officers, advisers, agents or employees that any intentions, expectations or plans will be achieved either totally or partially or that any particular rate of return will be achieved.
Given the risks and uncertainties that may cause the Companies actual future results, performance or achievements to be materially different from those expected, planned or intended, you should not place undue reliance on these intentions, expectations, future plans, strategies and prospects. The Companies do not represent or warrant that the actual results, performance or achievements will be as intended, expected or planned.
The information contained in this report includes some statement that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our and their management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The Companies seek Safe Harbor.