The Developmental Economics of Baby Markets: Why the Decline of the Digital Art Market is Temporary

Jul 27, 2021 by: Gregory Ayvazov

2021 has been quite the roller coaster year for the NFT art market. Incidentally, the phrase is usually used metaphorically to signify volatility rather than the literal landmarks that populate amusement parks. In case of the NFT art market ‘roller coaster’ applies both metaphorically and literally: the graphs capturing the market would make for some thrilling rides. Some, such as the particularly volatile average digital artwork price at SuperRare (Dune Analytics, 2021b) more than others – Cryptopunks (Dune Analytics, 2021a), for example, have been comparatively consistently expensive since their appreciation in March. Sitting somewhere on the border between the conflated worlds of art and collectibles, Cryptopunks were in many ways the experimental beginning of ‘CryptoArt’ back in 2017 when the project launched. Today, even as the crypto bonanza has waned and the overall market for NFT art has declined Cryptopunks have been offered at a Christie’s evening sale netting $16.9 million at the auction house. The reasons for the relative stability of Cryptopunks when compared to wider platforms are multifold. For one, they’ve been around longer and due to their peculiarity have attracted a dedicated collector following over the course of years. This smaller but dedicated community of supporters is likely to give them an edge over the larger but more diffuse collector bases active at prominent NFT art marketplaces.

Figure SEQ Figure \* ARABIC 1 – Average Cryptopunk Secondary Price (2021), Dune Analytics https://duneanalytics.com/queries/42344/83385

Overall, the volatility and uncertainty of the NFT art market have naturally caused doubts about its attractiveness as an investment, its longevity and its general value proposition. This is understandable. Market volatility is difficult to deal with: it impedes the welfare of those dependent on it (for example, artists) and often complicates formulating long-term strategy which in turn hinders important decisions on investment, hiring and resource allocation. These factors are crucial for healthy economic development. 

How to make nft digital art in detail? – search in our article

One psychological fallacy that colleagues from the digital art market are likely to recognize is the human propensity for exceptionalism. To those working with a comparatively specific industry or subject the world often seems to be disproportionately focused on their field – to the extent that a stranger’s ignorance about the existence of digital art let alone NFTs may prove unfathomable. Similarly, people dealing with a narrow discipline tend to overexaggerate its exceptionalism. One may hear those passionate about their profession assert like the parent of a beloved child its absolute singularity. And it can often prove difficult to remember or recognize that while all industries have their unique traits, they also have a lot in overlap: how, after all, can something that occupies a significant portion of one’s everyday be so regular or common? 

Figure SEQ Figure \* ARABIC 2 – Foundation Average Artwork Price, Dune Analyticshttps://duneanalytics.com/queries/22879/47344

The truth is that markets for new products tend to follow a generalizable and recognizable rise-plateau-decline pattern (although, of course, with some caveats) with each stage endowed with its own structure and specificity. The theory detailing this process is aptly referred to as the Industry Life Cycle Theory (ILC) the origins of which lie in the rather peculiar intersection of economics, anthropology and biology of the early 20th century. It was in the decades at and following the turn of the century that social scientists such as Gustave Le Bon and Alfred Kroeber began to observe that social phenomena (including fashion cycles and product life cycles) tend to be normally distributed less perfectly but similarly to many biological ones (Osland, 1991).

Figure SEQ Figure \* ARABIC 3 – Technology is Culture http://www.techisculture.eu

Although the attempts to translate biological determinism to the plane of market analytics have waned, today the ILC is a thriving area of research striving to identify regularities in way industries mature with testable propositions. While the theory was originally developed for and remains mostly applied to manufacturing and is suited to explain technology-based rather than service or cultural industries it is likely to be accurate in regards to the marketplaces accommodating NFT art (Peltoniemi, 2011). That is because these marketplaces provide a platform for the creatives rather than acting as a creative agent themselves and operate a high-tech product. In other words, the NFT art market is an interesting blend of cultural and technical which may be well-suited for the theory in question. 

With this in mind, there is little doubt that the NFT art market finds itself at the nascent stage of the life cycle. One characteristic of young industries is turbulence created by frequent entries and exits of firms. Anyone tangentially familiar with the market will confirm that over the past months a staggering number of new marketplaces has appeared. The stage that the market is currently in is also characterized by diverse innovation – since throughout the early stages competitors have not yet converged on a common (dominant) design they innovate in different directions (Klepper, 1996). A good example of this dynamic is the smartphone market which originally featured wildly different products and over time has converged to a comparatively similar standard. In the case of the NFT art market, marketplaces from Async with its interactive features to galleries such as Epoch with new revenue models have introduced innovative and differing solutions. This trend is sure to persist into the future as innovative entry continues. 

Figure SEQ Figure \* ARABIC 4 – Early Smartphones https://knowledge.wharton.upenn.edu/article/as-smartphones-proliferate-will-one-company-emerge-as-the-clear-market-winner/

Another distinctive feature of early industries is its propensity for population-level learning. The shared challenge of building legitimacy for a new industry and operating a novel technology makes an early environment conducive to co-operation (Aldrich and Fiol, 1994). Technological spillovers and the importance of market-wide credibility-building means that successful entrepreneurship in the early phase of the ILC is particularly reliant upon the wider community. This insight cannot be more relevant to the NFT art sector which still faces some apprehension on behalf of collectors and investors. Since every additional firm in the industry increases the likelihood that the space as a whole will survive but also raises the degree of competition it is crucial that new entrants are sufficiently variable and complementary in the services they offer.

The large number of entrants almost inevitably leads to the decrease in prices and the subsequent rise in sales. The degree to which this is relevant to the NFT art space is debatable seeing as platforms cater to artists rather than to final consumers directly. Marketplaces catering to the same niche may however compete on commission fees. 

In the end, the decline of the NFT art market may be most effectively explained by reversing the proposition and instead attempting to account for its parabolic rise. That after all is the exceptional occurrence, not the subsequent decline. Whether the culprit is the rising prominence of crypto-wealth, stimulus checks, lack of entertainment during the pandemic or all combined it is clear that a large demand bottle-neck has been opened up. Despite the decline in sales over May and June, their volume is still orders of magnitude larger than in the preceding years. Furthermore, even though the 2020 rise is astounding it is by no means the only period of high growth for the market – the 2018-2019 year on year growth, for example, was over 100%. All this goes to show that there is significant demand for NFT art and it seems that volatility is only natural for an up and coming market.

For the sake of illustration, consider the graph detailing the growth of the cinema industry in the United States at the turn of the century. Specifically, the first three-year period when after growing ten-fold in the span of two years the industry lost half of its value. With hindsight it is clear that this was a temporary setback but in 1895 could have made for argument against the viability of the new technology. 

Throughout this article numerous allusions have been made to the ‘NFT Art Market’. But what is the NFT Art market? In this case NFTs are merely a mechanism that facilitates the ownership of digital art, an asset that has existed for decades but has been difficult to collect.

 

Figure – Total Released Length on the U.S., British and French Film Markets (in Meters), 1893-1922. https://eh.net/encyclopedia/the-economic-history-of-the-international-film-industry/

Rather than an immovable feature of the market, NFTs are indeed the technology which young industries are so fond of innovating and improving upon. 

While the technology underlying digital ownership is sure to undergo many more phases of transformation the demand for the amazing cornucopia of digital art is sure to persist. If only because history shows that as humans we are unlikely to ever want to live without art – including in the digital frontier.

Jul 27, 2021 by: Gregory Ayvazov

Further Reading:

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