Why people are buying crypto art and sports memorabilia for thousands of dollars

The cryptocurrency world is abuzz with talk of digital collectibles, unique virtual tokens that can represent anything from art to sports memorabilia.

People have been paying hundreds of thousands of dollars for these NFTs, or non-fungible tokens. One investor, Sheldon Corey from Montreal, Canada, told CNBC he paid $20,000 for one of thousands of computer-generated avatars called CryptoPunks.

CryptoPunks isn’t a new phenomenon — it was released by developers Larva Labs in 2017. But it’s boomed in popularity lately, generating $45.2 million in sales volume in the last seven days alone according to the website NonFungible, and inspiring a broader “crypto art” movement.

CryptoKitties, one of the original NFTs, generated $433,454 in sales in the past week, according to NonFungible. The digital cats, which were developed by a start-up called Dapper Labs, were once so popular they clogged up the network of digital currency ether.

NBA Top Shot, a platform created by Dapper Labs in partnership with the basketball league, attracted $147.8 million in sales in the last seven days, according to NFT data tracker CryptoSlam. The service lets users buy and sell short clips showing match highlights from top basketball players.

The increased momentum for these tokens comes as bitcoin and other cryptocurrencies have rallied significantly in recent months, and at a time when people are spending more of their time indoors due to coronavirus restrictions.

NFTs are non-fungible tokens — meaning you couldn’t exchange one NFT for another — that run on a blockchain network, a digital ledger that records all transactions of cryptocurrencies like bitcoin.

The difference with bitcoin and other tokens, though, is that each NFT is unique and can’t be replicated. Each one accrues value independently. Crypto investors say NFTs derive their value from how scarce they are. They’re stored in digital wallets as collectors’ items. Beyond art and sports, people have also found uses for NFTs in virtual real estate and gaming.

Nadya Ivanova, chief operating officer of BNP Paribas-affiliated research firm L’Atelier, says collectible digital assets can be thought of as a better version of an MP3 file. Musicians have struggled to profit from their work in the digital age, and Ivanova says some are turning to NFTs to prove ownership of their work and find an additional source of revenue.

“It’s allowing content creators to actually own the property rights for what they create, which allows them to profit from it in different ways which they can’t do with physical art,” she told CNBC, adding that crypto art is the strongest growing subsection of the digital collectibles market.

The total value of NFT transactions tripled to $250 million last year, according to a study from NonFungible and L’Atelier. The number of digital wallets trading them almost doubled to over 222,179, while some traders were able to make profits of over $100,000.

“We’re seeing a new generation of traders within the NFT market; people who are digitally native looking for digital native asset classes outside of established asset markets,” Ivanova said. “These are people who have amassed reputation and wealth and want to invest it in purely virtual assets like NFTs.”

Ivanova says the NFT market has been maturing. Famed auction house Christie’s auctioned an NFT-based work of art created by Beeple, a well-known digital artist who has created videos and graphics for celebrities like Ariana Grande and Justin Bieber.

An NBA Top Shot video highlight featuring LeBron James recently sold for a record $208,000. But sales can be volatile — NBA Top Shot and CryptoPunks trades have dropped in the last 24 hours, according to NFT data tracker CryptoSlam.

The surge in prices of these virtual items has led to fears of a repeat of speculative crypto mania. It’s reminded some investors of the initial coin offering, or ICO, bubble in 2017, when multiple start-ups issued new digital tokens to raise money. Barely any of the ICO projects exist today, and some even defrauded investors out of millions of dollars.

There are some parallels with the ICO frenzy — for example, celebrities like Lindsay Lohan and Mark Cuban have recently sold NFTs.

“We had a very similar moment in 2017,” Billy Rennekamp, lead developer at blockchain software firm Cosmos, told CNBC. “Every gallery was considering an NFT. Every blue chip artist was considering it. But there was just too much risk when the market dropped and it was embarrassing to be involved in NFTs when the prices dropped.”

“I wouldn’t be surprised if we go through another entire bull market and bear market,” Rennekamp added.

Still, the firms behind these tokens don’t think it’s a fad.

“NFTs are here to stay,” Caty Tedman, head of partnerships at Dapper Labs, who spearheaded the NBA Top Shot project, told CNBC. “Flow will be the blockchain to enable mass consumer adoption. The future is now.”

NBA Top Shot now has over 100,000 active collectors and has made $215 million in sales to date, Tedman said. It’s working on a digital collectibles game based on the UFC mixed martial arts league and has also attracted the backing of Warner Music to develop NFTs for music fans.

“The billions spent on Fortnite skins point to the importance of our online lives and personas, and how valuable they are to people,” Matt Hall, co-founder of Larva Labs, told CNBC.

“What NFTs offer are a formalization of digital ownership, and a way for that ownership to be permanent beyond the life of any one company, game or platform.”

Hall said that Larva Labs doesn’t take any fees from users of its marketplace — though it does pay blockchain processing fees. “We are CryptoPunks owners just like everyone else,” he added. “So, as the overall market rises, those that we own get more valuable as well.”

The cheapest “punk” available on CryptoPunks is currently worth $36,000, Hall said. Larva is working on a successor to CryptoPunks, Hall added, without elaborating on the company’s plans.