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The Disruptive Strategist: The resurgence of NFTs?

NFTs are beginning to regain popularity, supported by increased competition in the marketplace and well known brands leveraging the technology to build deeper customer relationships. GAM Investments’ Pieran Maru discusses the future of NFTs.

16 May 2023

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Non-fungible tokens (NFTs) hit mainstream attention in mid 2021 to 2022 with eye catching multi-million dollar auction sales and the embrace from luxury brands. So what has happened since then? As a refresher, NFTs are tokens that represent ownership of unique assets secured by a blockchain. They are mainly used by creators and companies to monetise digital collectibles, but they also have interesting use cases, which are discussed further below. The latter half of 2022 saw muted NFT activity during the ‘crypto winter’, compounded by the numerous scandals in the crypto space. However, this swiftly turned around at the beginning of this year with NFT trading volume up 137% for Q1 20231.

Chart 1: NFT trading volume and sales count

 
Source: DappRadar Dapp Industry Report Q1 2023.

A contributing factor for the turnaround was the increased competition in the marketplaces to trade NFTs and increased number of blockchains supporting NFTs. OpenSea, once the undisputed leader in the NFT marketplace, has been surpassed by newcomer Blur, which now holds over 70% of the market share. One factor of Blur’s extraordinary gain is its financial power through the promise of future airdrops of its native token. However, just as users migrated to Blur, they are likely to switch platforms offering a better financial incentive. Recent reports suggest Amazon is expected to release an NFT marketplace this year without having to own cryptocurrencies directly to buy. Amazon’s venture would not be surprising given that CEO Andy Jassy has stated previously that he expects “NFTs will continue to grow significantly”2. The platform could likely leverage and partner with Twitch game streamers, utilise its Prime Day to promote NFTs and possibly link NFTs to physical goods delivered by Amazon.

Although NFTs are most associated with artwork, several companies have begun to embrace this space to build deeper customer relationships. Recently, Salesforce rolled out an NFT management platform that allows brands to create NFT loyalty programmes and connect directly to its customers, allowing it to obtain first-party data. One company at the forefront of leveraging this use case is Starbucks. The company recently launched its Odyssey experience to selected members – an extension of the Starbucks Rewards programme where NFTs serve as an access pass to immersive coffee experiences and exclusive merchandise. Members can deepen their knowledge of coffee though challenges and interactive games while for the first-time members can connect with each other too. Another company also utilising NFTs is Ticketmaster, a name perhaps conventionally thought of as an ideal candidate to be displaced by blockchain technology through decentralising ticketing systems. Ticketmaster is currently working with artists to leverage an NFT-gated ticketing service that allows artists to reward their fanbase holding specific NFTs, allowing exclusive access to upcoming shows and being able to connect directly with their community. By having less competition from scalpers and bots, the odds are higher for true fans of the artist to obtain pre-sale tickets.

So where does the future lie for NFTs? In the near term, we expect to see a moderated uptake of companies utilising NFTs, given the ‘year of efficiency’ for tech companies. Meta recently wound down its NFT project for Facebook and Instagram – ending its tests of selling and minting NFTs, as well as being able to share them across the platform. While Disney and Snap have also parked their Web 3.0/metaverse teams. Further, the regulatory and tax landscape is still early and evolving. Most recently, the US Treasury Department and the Internal Revenue Service requested feedback for upcoming guidelines on the treatment of tax on digital collectibles, in line with other collectables such as any work of art or coins. Their recent notice raised the extent to which a digital file may constitute a “work of art” and how the owner of an NFT who may receive additional rights or assets due to ownership should be treated.

Important disclosures and information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

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