What Collectors Need to Know about NFTs

The art market’s fascination with non-fungible tokens, or NFTs, has reached a fever pitch over the past two weeks. On February 25th, Christie’s launched an online auction of an NFT-based digital artwork by the artist Beeple (real name Mike Winkelmann), with no estimate and an opening price of $100. The work, Everydays: The First 5000 Days (2021), ultimately sold for an astounding $69.3 million, setting an all-time record for a digital artwork and making Beeple the third-most expensive living artist at auction (behind Jeff Koons and David Hockney). In that time, another digital artwork by Beeple, Crossroad (2020), sold for $6.6 million on the NFT marketplace Nifty Gateway. The seller, Miami-based collector and co-founder of the Gallery of Crypto Art Pablo Rodriguez-Fraile, had spent nearly $67,000 to buy the work in October 2020. Its value increased more than 100-fold in that four-month span.

As Rodriguez-Fraile sees it, the current craze for NFTs (or, colloquially, “nifties”) is the result of several factors, including unprecedented interest in digital assets as millions of people around the world have spent much of the past year confined and on their computers because of COVID-19. Another set of factors has to do with the performances of financial markets over that same period, from the buoyant stock market to the value of leading cryptocurrencies including Bitcoin and Ether soaring to record highs.

“We had a very, very big influx of money into the hands of digital asset traders, in particular the people that were dealing with cryptocurrencies,” Rodriguez-Fraile said. “A lot of people made a lot of money, they have this trading mentality, and they applied some of their capital and their knowledge to this field.”

But while external and macroeconomic factors may have turbocharged the market for NFT art, the technology itself may be the most important factor.

What are NFTs?

As with so many things on the internet, NFTs may be best explained with cats. Specifically, the website CryptoKitties, which launched in late 2017 and in a matter of days saw users spend more than $1 million on its marketplace for virtual cats; many more millions have been spent (and raised) since. The key innovation of CryptoKitties (and other early adopters like CryptoPunks) was in using the blockchain—a kind of public ledger technology—to attribute NFTs to all the virtual cats on the site, thereby making each digital feline into a traceable asset with a publicly listed price and provenance. Whereas digital goods could formerly be replicated ad infinitum by simply copying and pasting them, CryptoKitties exist in finite, traceable numbers.

NFTs introduced scarcity to the market for digital assets, and now sites such as OpenSea, MakersPlace, SuperRare, and Foundation let collectors buy and sell art, typically using the cryptocurrency Ether. Nifty Gateway introduced a further innovation to the formula by allowing collectors to skip the step of buying cryptocurrency and buy works directly with a credit card.

“It was during the CryptoPunks and CryptoKitties era in 2017 that the idea for creating an online marketplace for NFTs really took hold,” said Griffin Cock Foster, who co-founded Nifty Gateway with his twin brother Duncan in 2018; the following year, another set of twins, Cameron and Tyler Winklevoss, bought the site. “One of the major issues with NFTs at that time was their inaccessibility to people outside the crypto world. We created Nifty Gateway initially to make it as easy as possible for people to buy NFTs.”

They seem to be succeeding. In February, the number of transactions on Nifty Gateway grew nearly ninefold month over month, reaching more than 75 million. In addition to pieces by digital artists like Beeple, the site also offers NFT works by artists better known for their analog works. In May 2020, Kenny Scharf released an NFT based on one of his trademark cartoon faces in an edition of 50, priced at $200 apiece. The editions sold out, and recently one fetched $4,600 on Nifty Gateway’s secondary marketplace. Scharf has released three more editions on the platform since; other recent drops have included works by the muralist and illustrator Jon Burgerman; a digital sculpture by former professional baseball player Micah Johnson, with each of the nine editions accompanied by a physical version of the work; and a series of collaborations between digital artist Antoni Tudisco and celebrity DJ (and art collector) Steve Aoki.

“Nifty Gateway’s demographic definitely skews toward younger art collectors who are digital natives,” Cock Foster said, “but the rise of crypto into the mainstream and the increasing number of high-profile artists has brought a wider population to the marketplace.”

Why Christie’s is auctioning NFTs

Just as artists like Scharf could help bring different types of collectors to NFT marketplaces, Christie’s offering a major work by Beeple may entice collectors who started out buying and selling CryptoKitties to place a bid with the 255-year-old auction house. According to Noah Davis, the post-war and contemporary art specialist at Christie’s who helped organize the Beeple sale in collaboration with MakersPlace, the idea of putting an NFT on the auction block had been circulating within the firm for months.

“Following a year that forced the art market to go digital, we all felt that this was an inevitable development, even if it is a little unsettling,” Davis said. “As a mechanism, the potential that NFTs have to shift the way that we establish ownership has no bounds. I am very excited to see how artists will utilize this technology to open up a world of new creative opportunities, and in turn, I look forward to witnessing how this disrupts the art market as we now know it.”

It’s not hard to see the disruptive appeal of NFTs, especially considering their potential to address many of the longstanding imbalances of power and information that have defined the physical art market. For one, the technology ensures traceability and transparency of provenance, making information about past sellers and prices publicly available and in turn reducing the possibility of fraud.

“The way that the NFT and blockchain technology is keeping provenance has been one of the greatest components,” said Amanda Rottermund, an associate specializing in art law at Withers. “Because you as the buyer are the only one who can have it—you’re on the blockchain, you’ve got the token, you’ve got the control. That’s a great way to prevent fraud in the market.”

The format also allows platforms and individual artists to include resale royalty provisions in the rules governing the secondary markets for works. Nifty Gateway, for instance, gives artists a 10 percent royalty when their work is resold. Consequently, Beeple made more money from Rodriguez-Fraile reselling Crossroad for $6.6 million than the artist did when he originally sold Rodriguez-Fraile the work directly for $67,000.

“Digital artists are able to create these contractual rights,” Rottermund said. “Will physical galleries that represent artists who make physical artworks try to create similar agreements? Will they use the technology in the same way?”

The potential applications of NFTs in the art world seem innumerable and varied enough to give you vertigo. Some use cases are already being implemented.

Jeff Gluck, an attorney specializing in art and intellectual property issues—who has often represented street artists whose work was used for commercial purposes without their permission—is hoping that the current NFT craze can spur artists to be more proactive in asserting their copyright. Earlier this month, he launched a beta version of CXIP, a platform that encourages artists to turn their copyright registrations into NFTs. This, of course, requires artists to register their copyright in the first place. From there, artists have several options: They could sell their original work while retaining their tokenized copyright registration; bundle the two assets and offer collectors the opportunity to buy a work and its copyright; or sell them separately and monetize the copyright to their work.

“Creating an NFT for the copyright registration with CXIP adds an interactive management protocol for the IP,” Gluck explained. “You can manage ownership changes, licensing activity, and triggered events like automatic payments and rights reversions. This empowers the artist to effortlessly control, monetize, and manage their IP in ways that have never been possible before.”

The pros and cons of NFTs in the art world

For all their potential to unlock untold benefits, though, NFTs and their underlying technologies are not being embraced outright by traditional art market power players. Christie’s has no plans to accept cryptocurrency as payment for future sales, digital or otherwise. “This is up for discussion,” Davis said, “but we don’t have any future plans to announce at this point.” The terms of sale for the Beeple work originally specified that while the seller’s share could be paid in Ether, Christie’s fees had to be paid in traditional currency (the auction house has since updated its terms, and is allowing the full purchase price to be paid in Ether).

“That shows this new technology is volatile,” Rottermund said. “And I think Christie’s, from a legal perspective, is acknowledging this and they want the buyers to acknowledge this.”

That volatility may be one of the reasons the art market has been slow to embrace NFTs and the cryptocurrencies undergirding them. For instance, the U.S. dollar value of one Ether on Monday was almost $1,550; on March 8, 2020, it was $241. The art market relies on the relative stability of currencies and perceived changes in the value of artworks; imagine if the Warhol print you bought last year for $20,000 was now worth $128,000—or, inversely, $3,125—simply due to currency fluctuations.