On March 11, 2021, Beeple sold an NFT of a digital work of art for $69 million, sparking worldwide controversy and thousands of blog posts asking: "What is an NFT?"
Although the initial art NFT bubble has burst, the sector is far from dormant. From digital art to virtual real estate to tokenizing real objects, NFTs are on track to revolutionize how we buy, sell, and trade assets.
New use cases, emerging technologies, and the beginnings of mainstream adoption continue to shape the industry in 2023. Whether you're a seasoned NFT investor or a curious newcomer, read more about our predictions for this fascinating and rapidly evolving market sector.
Prediction 1: Increased Regulation
In 2020-2021, the popularity of art and collectible non-fungible tokens (NFTs) surged, with artists, musicians, sports teams and celebrities creating the foundational markets. Even after the bubble burst, speculative investment in NFTs continued. In conjunction with evolving cryptocurrency regulations, governments and regulatory bodies are taking notice of NFT investments as well.
One avenue for regulation is taxation. In 2022, the IRS ruled that NFTs are taxable in the same way as cryptocurrencies. They are subject to regular long-term capital gains tax rates if held for a year or more. For a deeper dive into NFTs and taxes, check out ZenLedger's Paying Taxes On NFT webinar.
As with any rapidly growing market, there is a risk of bad actors taking advantage of buyers and sellers. Regulators may seek to establish safeguards to prevent these types of scams.
Increased regulation in the NFT market could have a significant impact on both buyers and sellers. Oversight and legal protections make the market safer and more appealing to wary investors. The downside of regulation is that it increases the complexity of buying and selling NFTs, potentially stifling innovation and limiting access for smaller artists and creators.
Prediction 2: Emergence of New Use Cases for NFTs
Another potential impact of mainstream adoption could be the emergence of new types of NFTs, called “utility NFTs”, representing a wider range of digital assets beyond art and collectibles.
For example, NFTs can represent virtual real estate, in-game items, or personal identity and credentials. Other evolving use cases include event ticketing, cause marketing, insurance, and reward programs.
Although governments will need to adapt current regulations to fully enable the opportunities, the real estate industry has significant potential for NFTs. NFTs could be used for escrow services and to represent ownership of a property.
Different use cases are spurring the expansion of existing marketplaces and the creation of new ones to cater to these different types of buyers and assets.
Prediction 3: Evolution of NFT marketplaces
Current NFT marketplaces include OpenSea, Rarible, SuperRare, Nifty Gateway, and many more. These marketplaces allow artists, collectors, and enthusiasts to buy, sell, and trade NFTs. AI generated art is making waves in the art NFT world, raising questions about ethics and the exact definition of “human authorship.”
In other industries, NFT marketplaces have already begun to evolve beyond art. NFTs sectors are growing for gaming, sports, fashion, collectibles, and music.
Some real estate platforms are beginning to offer fractionalized properties using NFTs, simplifying transactions and eventually allowing even smaller investors to easily participate in real estate projects worldwide.
Prediction 4: Traditional Industries and Mainstream Consumer NFT Adoption
NFTs gained significant attention in the art and collectibles world and are also starting to make inroads into the mainstream brand space. Some insiders report that Amazon will launch an NFT marketplace in April 2023.
One interesting angle about Amazon's plan is that the marketplace will reportedly not accept cryptocurrency for purchasing NFTs, only credit cards.
When the biggest retailer in the world adopts NFTs and sidesteps crypto as a requirement for ownership, more mainstream brands will likely explore NFTs to engage with their audiences and create new revenue streams.
Other ways we can see NFTs enter the mainstream include limited edition NFTs for brand merchandise, NFT-based loyalty programs, access to influencers and celebrities, virtual real estate and experiences, and intellectual property protection.
Prediction 5: Increase in Cross-Chain Interoperability
One of the major limitations of NFTs is that buyers cannot buy, sell, or trade NFTs created on a different blockchain network. This increases market fragmentation, making it challenging for buyers and sellers to find each other and trade NFTs easily.
Several projects are exploring cross-chain interoperability solutions via innovations such as cross-chain bridges, sidechains, and interoperability protocols such as Polkadot, Cosmos, and Chainlink.
Cross-chain interoperability would open up new markets for NFTs, allowing buyers and sellers to interact with a broader audience, increasing the value of NFTs, and driving innovation. With the growing demand, cross-chain interoperability solutions will likely become a critical component of the NFT ecosystem, driving innovation and growth in the space.
If you consider that just about any asset in the real or virtual world could be tokenized with an NFT, the options are almost limitless. Unfortunately, so are the potential tax-time record-keeping headaches from all those NFT transactions.
If you trade cryptocurrencies or NFTs, ZenLedger can help you organize your taxes. Our platform aggregates transactions across wallets and exchanges, computes your capital gains and losses, and auto-populates IRS tax forms to ensure you're paying the right amount. You can even identify opportunities to save through tax-loss harvesting.