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NFT boom another sign of ample liquidity

March 03, 2021

bar chart depicting "Crypto Art Volume By Month" from January 2020 to February 2021

Source:  Crypto Art Data

Interest in the nonfungible token (NFT) market has exploded in recent weeks, thanks in large part to the sale last month of Nyan Cat, a piece of digital art that was an internet meme nearly a decade ago, for $570,000. There have been several other eye-popping transactions in the space over the last several months, including the Punk 4156 character collection going for $1.2 million and Beeple’s Crossroads netting $6.6 million. Of course, the NFT world is not limited to digital art; blog posts, tweets, and NBA highlights have been among the attention-grabbing sales of late. It is important to note that the buyers in most of these cases are not acquiring copyrights, trademarks, or exclusive use of the asset in question, but rather an original copy backed by a blockchain-derived assurance of authenticity.

There are two key takeaways here. Structurally, the mainstream embrace of the NFT market is by extension a sign of the blockchain’s rising stature. It is not much of a leap to imagine that distributed ledgers will play an increasing role in the years ahead in facilitating not only asset purchases, but also real economy transactions such as business formation, corporate financing, and lending. Perhaps more interestingly, the swift ramp-up in this market is also yet another cyclical sign of an overflowing liquidity environment and an investor class that is exceedingly willing to put capital to work.

This is evidenced in the collectibles market more generally, as well as in NFTs specifically. Note, for example, the sale this week of Winston Churchill’s Tower of Koutoubia Mosque, which at $11.5 million more than tripled its high-end estimate, or the recent prices commanded by Wayne Gretzky ($1.3 million, up 177 percent from the prior sale in 2016) and Mickey Mantle ($5.2 million, up 81 percent since 2018) rookie cards. And with ample liquidity inevitably comes excess. There are undeniably large segments – if not the entirety – of the NFT market that would qualify as speculative, as would the interest in GameStop, other meme stocks, and the dimmer corners of the cryptocurrency world.

Euphoria stages develop in virtually every cycle, but this one is coming unusually early. The tech and housing bubbles of the 1990s and 2000s both peaked roughly one year before the respective economic expansions that underpinned them came to an end and both were frothiest in their latter stages. The accelerated behavior in this cycle, then, can be read in one of two ways. It could be that the late-cycle behavior of recent months is in fact a signpost that the cycle is nearing an end. This would require a catalyst, however, and the driver behind every end-of-cycle event in modern history – the Fed – continues to indicate unequivocally that it is not even close to beginning such a process. More likely, the emerging signs of excess at such an early stage in this cycle are a hint of things to come. As the Fed keeps rates at rock bottom levels, quantitative easing continues, fiscal stimulus is ramped up, the labor market tightens further, and lending standards inevitably ease, it is to be expected that liquidity will only continue to deepen and that markets of all stripes will remain extremely well bid. This cycle, still less than a year old, has already produced its share of entries for the history books and it remains a very strong bet that there will be plenty more to come before it runs its course.


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Paul Volcker


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