Many strange things happened in the global economy during the depths of the COVID-19 pandemic, but few as curious as the NFT boom of 2021.

Barely anyone knew what a non-fungible token (NFT) was at the start of that year. By the end of it, more than $40 billion (€36.6 billion) had been spent on blockchain-recorded digital assets and artwork. That made the sector almost as valuable as the global art market itself.

If 2021 was the boom, then 2022 was the bust. In January 2022, the market reached its dizzying height but by September of that year, trading volumes had fallen by a gigantic 97%.

The NFT crash was part of the wider cryptocurrency sector wipeout, which saw an astonishing $2 trillion loss of value.

So, are NFTs simply dead, or is there some kind of future for them?

In early November 2023, OpenSea, the largest NFT marketplace, announced it was laying off half its workforce. Then there was a bizarre event at a promotional event in Hong Kong for the "Bored Ape Yacht Club," one of the best-known NFT collections. Dozens of people reported "severe eye burn" after attending the event, which featured heavy use of ultraviolet lighting.

None of that is good news yet there have also been signs recently of a very modest revival in the battered sector, with trading volumes edging up recently after falling steadily throughout 2023.

Crypto mania and 'clubby' exclusivity

When the NFT boom took off in the summer of 2021, Andrea Barbon was one of the many people intrigued by the potential of the new innovation.

He quickly created and sold his own collection, a set of computer-generated fractal images.

"This venture sparked in me a profound curiosity and the willingness to delve deeper into NFTs," Barbon, a finance professor at the University of St Gallen in Switzerland  and the HSG Center for Financial Services Innovation, told DW.

"My fascination with the blend of art, technology and finance that NFTs represent motivated me to study them in extensive detail, exploring their potential impact on various sectors and their role in the future of digital ownership and creativity."

From the start, many were dismissive of NFTs. Bill Gates famously said they were "100% based on the 'greater fool theory'" — the idea that one can make money through the purchase of overvalued, fundamentally worthless assets  as long as there is a "greater fool" who will come along and pay even more.

"Obviously, expensive digital images of monkeys are going to improve the world immensely," Gates joked in an apparent reference to the Bored Ape collection.

Yet NFTs took off. Perhaps the unique circumstances of the time, when the pandemic meant people around the world were spending unusual amounts of time online and at home, played a part.

Barbon says the cryptocurrency boom, in full flow in 2021, fueled excitement in NFTs while user-friendly platforms such as OpenSea made it very easy for people to buy and trade them.

Then there was the exclusivity factor, cultivated by celebrity purchases and the creation of NFT clubs.

"The allure of NFTs was further amplified by their novelty, the promise of high returns and their role as status symbols within the crypto community," Barbon said. "This combination of technological innovation, market dynamics and cultural factors created a perfect storm that propelled the NFT boom."

NFT: A bubble if ever there was one

For Barbon and his colleague Angelo Ranaldo at the Swiss Finance Institute, NFTs represented a fascinating field of study. As part of their academic research, they examined more than 15 million NFT transactions, worth around $18 billion, between January 2021 and September 2022. They came to the conclusion that the whole market represented a bubble.

"We observed a pronounced tendency for bubble-like behaviors in the NFT market," Barbon said. "This was characterized by rapid price surges, often doubling within days or even hours, followed by steep declines. These fluctuations offered significant returns for investors but also posed substantial risks."

Something else they noticed was that some investors showed an ability to consistently capitalize on the market's volatility, making significant amounts of money, while others displayed more reckless behavior.

"The market experienced inflated valuations driven more by speculative fervor than underlying fundamentals," he found.

Doubts will remain but NFTs may endure

Some NFTs have had stunning collapses in value. The Bored Ape collection for example, which became especially popular with celebrities, has lost more than 90% of its value, amounting to several billion dollars. The singer Justin Bieber and the Brazilian footballer Neymar are among those to have spent around $1 million each on Bored Ape NFTs, only to see the value all but disappear.

The fallout from the celebrity NFT craze continues to this day. This week, footballer Cristiano Ronaldo was hit with a class-action lawsuit seeking at least $1 billion in damages for his role in promoting NFTs issued by the cryptocurrency exchange Binance.

As a result, there is deep underlying skepticism about the market. But Barbon says it can still have a future, especially if its returns to its origins as a marketplace for digital artists.

"They are not just a technological novelty but a groundbreaking innovation with practical applications," he said. "NFTs have revolutionized the market for digital art, providing contemporary artists specializing in digital media a platform to authenticate and monetize their creations."

He also sees other possible uses for NFTs beyond the art world in realms like digital identity and the ownership of virtual assets.

Yet the bubble and the huge losses incurred means there will be a big question mark over NFTs for a long time to come.

Edited by: Tim Rooks