3/12/2021 3:10pm EST
By Thomas Yeung, CFA, InvestorPlace Markets Analyst
Just three years ago, Ethereum’s (CCC:ETH-USD) first NFT craze hit the market. Collectible online cats – known as CryptoKitties – were adorable and personalizable. But unfortunately for early investors, the digital equivalent of beanie babies performed precisely like their real-world counterparts. It wasn’t long after the most expensive kitty sold for $170,000 that prices collapsed. The infinitely multiplying number of cats, paired with limited consumer appeal, meant collectors could eventually scoop up hundreds of kittens for only several dollars.
Source: Shutterstock
But Ethereum’s story doesn’t end there. Just three years later, the cryptocurrency is back.
On Thursday, Christie’s record-shattering $69.4 million NFT sale sent the art world ablaze. Never before had anyone paid so much for digital art. But regular investors should also notice one other thing: the buyer paid entirely in ETH.
“We are accepting [a buyer’s premium of] Ethereum for this purchase,” said Noah Davis, the organizer of the auction. “I feel like that’s actually the biggest deal of this whole thing, secretly.”
It’s an open secret that all NFTs are traded on the Ethereum network. All transactions are done using Ether, the cryptocurrency of the Ethereum Network, and all pieces of art have a unique Ethereum token that anyone can verify. With a real-world use that exceeds even Bitcoin (CCC:BTC-USD), Ethereum could soon eclipse the world’s “digital gold” as the cryptocurrency of choice in this brave new economy.
Ethereum Prices: Emerging from the Shadows of Bitcoin
When Ethereum went live in 2015, crypto enthusiasts (like yours truly) became immediate fans. The collaboration between programmers Vitalik Buterin and Gavin Wood was a clear departure from Bitcoin’s concept of “digital gold.” Whereas Bitcoin operates much like coins at an arcade, Ethereum’s “smart contract” abilities make it more like Apple or Google Pay. In other words, Ethereum’s system is built to track and transact unique tokens.
Most of these tokens look much like this:
0x41b459f1f57f8b043a5926e9b15446adf4f1110e:4
It’s an ERC20 code that (in this case) represents ownership of “Liberty Mural,” an artist’s online recreation of his famous Paris fresco. If you want to track the token – again, using Liberty Mural as an example – you can type the address online and see all 84 transactions as of this writing. And if you ever want to buy that GIF (and have $25,000++ to spare), confirming “Liberty’s” ownership is as easy as checking the latest seller’s wallet address. ERC20 doubles as a convenient digital certificate that NFT buyers today usually take for granted.
Ethereum’s start, however, looked a lot shakier. Back then, few people used these tokens for anything besides seemingly trivial pursuits like CryptoKitties. And when I first sold my tens-of-thousand dollars equivalent of Ethereum close to the $1,200 market peak in 2018, most people were invested in ETH for one simple reason: to make lots of money.
Even now, many people still don’t realize that Ethereum powers the entire NFT market. Many “What are NFTs” articles use Bitcoin as an illustration because the world’s largest currency is far better-known to average investors. Its $1 trillion market capitalization eclipses Ethereum’s $200 billion by a 5x margin.
But that’s starting to change. As more people start bidding on NFTs – from low-cost digital art to collectible NBA highlight reels – many of these same bidders will convert their dollars into Ether for the very first time to complete transactions. These people might never have had a reason to own Ether in the first place. But as NFTs grow in adoption, many investors will find themselves owning Ether for the first time.
First-Mover Advantage
There’s also the supply-side of the picture. Since all significant digital art auctions are done in Ethereum today, the currency has a world-beating first-mover advantage. Switching to a different ledger quickly becomes untenable as time passes.
Consider VINs, the 17-digit code that every motor vehicle worldwide gets assigned at production. (Internationally, they’re known as World Manufacturer Identifiers). Because these codes are ubiquitous, state governments and title companies use VINs to track vehicle ownership and run accident reports. Corporations have built entire industries to title-check used vehicles. No corporation, however, will find creating a VIN alternative particularly easy, since it will involve convincing everyone else to also sign on.
Meanwhile, Ethereum’s ERC20 tokens have quickly become the gold standard for tracking digital artwork ownership. The Ethereum blockchain links all $350 million of the NBA’s Top Shot NFT sales; thanks to an early deal with Dapper Labs, every single highlight reel has an Ethereum contract address.
Newer smart-contract cryptocurrencies like Cardano (CCC:ADA-USD) could try challenging Ethereum’s position. But overtaking Ethereum as the single authority on digital art ownership could also mean re-titling every existing piece of digital art that’s already been sold. From Taco Bell’s initial $1.60 set of taco GIFs to Beeple’s $69.4 million auction, a new system will need enough data from existing owners to have much real-world value.