January 31, 2022

Making Sense of the $40B NFT Market

Brian L. Frye on why NFTs aren’t so novel after all
Credit: Marcel Duchamp, Monte Carlo Bonds, 1924
Now Reading:  
Making Sense of the $40B NFT Market

What if everything we thought we knew about financial markets was wrong? Everyone has always assumed that the value of a share reflects the value of the business it represents. It stands to reason. Why else would anyone value securities?

And yet, in 2021, people traded more than $40 billion dollars worth of NFTs. Why? An NFT is literally nothing. When you buy an NFT, you get a unique cryptographic token, with no intrinsic value. Sure, NFTs typically represent nominal “ownership” of a work of digital art. But NFT owners don’t usually “own” the works represented by their NFTs in the conventional sense. NFTs rarely convey copyright, and so most NFT owners don’t really own anything other than their NFT, and whatever meaning people ascribe to it.

NFTs are nonsense. Why would anyone pay anything to own what amounts to a cryptographic receipt for a work of digital art that’s available to the public for free, let alone millions of dollars? Sure, there’s a sucker born every minute, but suckers expect the moon, not an IOU. After all, George C. Parker sold the Brooklyn Bridge, not the Hess Triangle.

But NFT enthusiasts are delighted to pay millions of dollars for the right to say they “own” an 8-bit sprite or an anthropomorphic ape, even if they can’t do anything with it, other than jazz up their social media profile. It’s bananas. What do they think they’re buying, what are they actually buying, and what does it mean?

Maurizio Cattelan, Comedian, 2019

I don’t know why everyone is so surprised and confused by the emergence of the NFT market or its rapid growth. I’m not. The NFT market is exactly the same as any other financial market. It only seems different because we haven’t rationalized it yet. If the NFT market persists — and there’s no guarantee it will — everyone will eventually take it for granted, just like they do every other financial market. Unless, just maybe, NFTs make people ask what those markets are for, what those markets value, and whether those markets are valuable. 

The NFT market is ridiculous. So what? Markets don’t have to make sense in order to work. After all, the NFT market is essentially identical to the conventional art market. An NFT of a work represents ownership of the work, and the value of the NFT depends on how much people value the work. Or to be more precise, the value of the NFT depends on how much people value “ownership” of the work, whatever that means.

The conventional art market works the same way. Sure, if you buy a painting or sculpture, you get the painting or sculpture. But that’s irrelevant. The art market doesn’t value the object you own, it values what the object represents. What you are really buying is an entry on an artist’s catalogue raisonné. From the art market’s perspective, a painting or sculpture is simply a dirty canvas or lumpy rock that represents a catalog entry. Paintings and sculptures have no intrinsic market value. Their value depends entirely on the value of the catalog entry they represent. Of course, if the painting or sculpture is damaged or destroyed, it may affect the value of the catalog entry. But that’s just a function of artistic transubstantiation. The intangible catalog entry is reified into a tangible token.

NFTs are exactly the same, but without the metaphysics. When you buy an NFT, you are buying the catalog entry in the form of a cryptographic token, rather than in the form of a painting or sculpture. But the mechanics are the same. Just like a painting or sculpture, an NFT is worth whatever someone is willing to pay for it. And what they value is a catalog entry. A token is a token, whether it takes tangible, intangible, or cryptographic form.

Mitchell Chan, Digital Zones of Immaterial Pictorial Sensibility, 2017

So, is it irrational for NFT collectors to value cryptographic tokens that represent ownership of works of art? Yes. But it’s also irrational for art collectors to value paintings and sculptures that represent ownership of works of art. And it’s irrational in exactly the same way. The problem is that art isn’t worth anything unless people agree it’s worth something. Problem solved, people do agree that art is worth something. In fact, sometimes they think it’s worth quite a lot.

Typically, valuable art takes the form of paintings and sculptures. But recently, it’s started to take the form of NFTs. What’s the difference? There isn’t one. The NFT market looks absurd only because it’s new. The conventional art market is every bit as absurd, we’ve just gotten used to it. So much so, in fact, that we often use the market price of an artwork as a heuristic for quality. Everyone wants to see the Mona Lisa because it’s supposedly the most valuable painting in the world. But when we look at the Mona Lisa, we see an entry on Leonardo’s catalogue raisonné. It’s a conundrum. By making art valuable, we make it impossible to see, even as we encourage people to create it.

NFTs were inevitable. After all, the art market has been trying to liberate itself from tangible objects for decades. All it needed was a plausible medium.

Conceptual art came close. It consists of ideas, rather than realizations. When you buy a work of conceptual art, all you get is a certificate memorializing your ownership. Anyone can perform a work of conceptual art, but only the owner can perform the “authentic” version, at least according to the artist. A conceptual art certificate is essentially an analog NFT. It conveys notional ownership of an abstract idea, but has little or no legal significance. Who cares? If the art market recognizes a certificate as a valuable asset, it doesn’t really matter what the law thinks.

Sol LeWitt, Wall Drawing #49, 1970

Unfortunately, conceptual art was a bust. The problem was that collectors still wanted to show off tangible objects. Clients and guests were more impressed by a Warhol on the wall or a Picasso on a pedestal than a LeWitt in a drawer. Even conceptual artists made concessions to the market by granting collectors permission to create physical representations of their supposedly conceptual art. Does the drawing on the wall elide the concept it represents? Who knows, but it sure is easier to sell.

NFTs solved the problem of conceptual art by enabling the creation of a new market. First, they appealed to collectors who valued digital art for its own sake and who didn’t care about (or even want) a physical object. And second, they gamified the art market by enabling people to buy and sell NFTs in a large, automated, transparent online marketplace. Apparently, that’s all it took. Could people have sold ownership of digital artwork before NFTs existed? Sure! In fact, they did, or at least they tried to. But almost no one was interested. NFTs didn’t change the nature of the market, they just reduced transaction costs. But more often than not, that’s the most important kind of market innovation. You don’t have to do something new, you just have to do it better.

Ok, but wait. Most NFTs don’t look like art. After all, the art market trades in Leonardo and Michelangelo, but the NFT market trades in CryptoPunks and Bored Apes. Surely, you can’t equate, or even compare the two. Why not? The art market doesn’t care what people value, anything will do. If collectors demand old master paintings, the market will provide. If they want giant balloon dogs, that’s fine too. Christie’s was more than happy to sell Beeple’s NFT for $69 million. Who cares what it looks like if people are willing to buy it. If collectors want NFTs, artists will make NFTs and galleries will sell them, no problem. And if collectors want video game sprites and graffiti-inspired cartoons, that’s what they’ll get. The art market doesn’t care, it’s in the business of selling, and it doesn’t really care what it sells, so long as it can convince collectors to buy. Anyone who tells you otherwise is either a liar or a fool.

It doesn’t end there, however. If the NFT market and the art market are both markets in nothing, why does anyone invest in either? After all, no matter what they say, art collectors are definitely investing in art. Nobody spends millions of dollars on a dirty canvas or lumpy rock unless they think they will be able to resell it for more, no matter what they tell you. It doesn’t mean they don’t love the work, it just means they also hope to make money. The same goes for NFT collectors, in spades. When they buy an NFT, they hope to resell it for a profit, or at least to have the option. They may be delusional and the market may collapse overnight, but it’s absolutely the marginal incentive.

Andy Warhol, Catalogue Raisonné

Maybe it’s all a house of cards, ready to topple any moment. I don’t know. The art market has been around awhile, and it seems to be doing fine. In fact, most people seem to accept art world valuations of art at face value, and even use them as a proxy for quality. And why not? If price communicates information, why shouldn’t it communicate information about artistic merit, or at least the consensus assessment thereof, to the extent the general public even cares.

Likewise, why shouldn’t the price of Punks or Apes communicate the same kind of information? If the market says it’s valuable because people like it, who am I to argue? Maybe that’s all it means for artwork to be valuable, at least in the sense markets care about.

And really, how is that different from any other market in abstractions? We assume that securities reflect the intrinsic value of businesses. So the stock market is like a computer, consuming all of the public information about a business and producing a price that reflects the sum of that information. We’ve believed it for a long time. Is there any reason to think it’s true? It looks increasingly implausible.

Tell me, why are GameStop shares valued at $140? It currently has no real business, and no coherent plan to have a business in the future. Why is Trump’s media SPAC valued at hundreds of millions of dollars? It has never done anything and offers no explanation of what it will ever do. But those are easy examples. The incoherence is more pervasive. Why are Tesla shares valued at over $1000? It seems like a fine, if peculiar company. But the share price is absurd, totally unrelated to its actual business. More troublingly, the same is true of companies like Google, Facebook, and Amazon. We can tell ourselves that the stock market is crunching information. But what information? It doesn’t seem to be information about companies, but rather about what they mean and might mean in the future. In other words, it looks an awful lot like a market in semiotics, adjacent to business reality, reflecting it only through a glass, darkly. Maybe people are just investing in the future of the market, and their belief that other investors will continue to like Musk, Trump, Google, Facebook, Amazon, and so on.

If that’s true, is the NFT market really so implausible? People are investing in Punks and Apes because everyone else is. Might as well be Picassos and Warhols. Or maybe Koons and Basquiat, if you prefer. The point is, the market exists, the money is available, and people want to invest in something. Maybe it doesn’t really matter all that much what the market values, so long as investors are willing to swallow whatever the market says. If you call certain NFTs “blue chip” enough times, maybe it becomes true. After all, it worked for paintings and sculptures. And it seems to work for securities as well. 

Maybe the market has been looking for new products for a while now. Maybe the explosive growth of the NFT market suggests that it has found one. For better or worse, we’re bound to find out sooner or later.


Brian L. Frye is the Spears-Gilbert Professor of Law at the University of Kentucky College of Law. His scholarship focuses on copyright, art law & legal history, amongst other things. He is also a conceptual artist.