Possible Speculative Bubble With Long-Term Innovation Potential In NFTs
The mainstream cryptocurrency and NFT market have witnessed the advent of a new kind of digital investment. Just like cryptocurrency Non-Fungible Tokens (NFTs) are attracting extremely high prices in sales and digital auctions. On the blockchain, NFTs are one-of-a-kind certificates of authenticity, usually provided by the producers of the underlying works or assets, which can be either physical or digital. Users can copy any information they wish from the internet; as a result, it's impossible to tell if a digital work of art, a file, or a social media post is the original or a copy. As a result, it's been nearly impossible to determine the authenticity of goods without a doubt. This problem is presently being remedied by the use of NFTs, which allow for the unambiguous declaration of digital commodities as originals. In addition, a speculative bubble also serves as a remedy to this problem since it allows for a spike in the value of assets within a defined market. ChainTechSource brings a detailed look into the speculative bubble along with its potential for long-term innovation in the NFT market. Before we could get into the specifics, you need to have a clear understanding of what is a speculative bubble and other details. What is a Speculative Bubble?
A speculative bubble is an unjustified increase in asset values within a specific industry, commodity, or asset class, fueled by irrational speculative activity that is unsupported by fundamentals. Understanding Speculative Bubble In the realm of finance, speculative bubbles have a lengthy history. The passage of time, as well as economic and technical advancements, has had no effect on their construction. In fact, technological advancements and the introduction of the internet fueled the 2001 tech bubble. Exaggerated expectations of future growth, price appreciation, or other factors that could create an increase in asset values frequently cause a speculative bubble. As more investors rally behind the heightened expectation, demand outstrips supply, pushing prices much beyond what an objective appraisal of intrinsic worth would imply. The bubble will not burst until prices return to normalized levels. This is referred to as a pop, which refers to a period of precipitous price declines during which most investors panic and liquidate their holdings. Bubbles can form in economies, stock and bond markets, and specific economic sectors. Stages of Bubble According to economist Hyman P. Minsky's book on financial instability, there are five stages to a bubble. Minsky was referring to the stages of a conventional credit cycle, but the definition may be extended to bubbles as well. 1. Displacement: When investors get infatuated with a new paradigm, such as an amazing new technology or historically low interest rates, a displacement occurs. The drop in the federal funds rate from 6.5% in July 2000 to 1.2% in June 2003 is a classic example of displacement. The interest rate on 30-year fixed-rate mortgages decreased 2.5% points to a then-historic low of 5.23% during this three-year period, planting the seeds for the later housing bubble. 2. Boom: Following a displacement, prices rise slowly at first but gather velocity as more and more participants enter the market, setting the way for the boom phase. During this time, the asset in issue receives a lot of media attention. Fear of missing out on a once-in-a-lifetime chance encourages additional speculation, attracting a growing number of investors and traders. 3. Euphoria:
As asset values surge, caution is thrown into the breeze during this moment. The "greater fool" theory—the belief that no matter how prices go, there will always be a market of purchasers willing to pay more—plays out everywhere during this phase, as new valuation measurements and criteria are claimed to justify the constant climb. 4. Profit-Taking: During this stage, the smart money begins to sell holdings and take profits, heeding warning signs that the bubble is ready to collapse. However, predicting when a bubble will burst can be challenging because, as economist John Maynard Keynes put it, "the markets can stay crazy longer than you can stay solvent." 5. Panic: A tiny event is all it takes to prick a bubble, yet once pricked, the bubble cannot inflate again. During the panic stage, asset values reverse course and fall at the same rate as they rose. Faced with margin calls and plummeting asset values, investors and speculators are increasingly willing to sell at any price. When supply exceeds demand, asset prices plummet. Potential for Innovation Despite the fact that the quick rise of the NFT business signals a bubble, NFTs have a lot of potential for innovation. Digital property rights are currently still held by platforms and their operators. In the long run, NFTs have the potential to shift these property rights from the platform to the producers, resulting in a paradigm change. The market for the creation of digital commodities can be altered by facilitating the sale of desired goods and their eventual monetization. So, how may NFTs be designed concretely? They're as diverse and unique as the works they're based on. NFTs can provide authors with a percentage of future sales proceeds, contain voting rights, or be divided into fractions that can be sold for themselves, in addition to a "basic" certificate of authenticity. For example, investors may buy tiny quantities of a (digital) work of art, and museums, shows, or organizations could use the proceeds to fund themselves. Conclusion The current gold rush mentality, as well as the potential for the NFT market's speculative bubble to burst, make it difficult for decision-makers in politics and administration to hold a fair debate regarding its introduction and regulation. Nonetheless, they should not conclude from these that future technological and economic developments should be stifled from the start due to such dangers. Instead, the parties concerned
should examine the opportunities and hazards for the economy and society in a complete, impartial, and objective manner, and support the legal, secure, and long-term adoption of NFTs.