Soaring Prices for Enjin, FLOW and Rarible Reveal Risks of 'NFT Marketplace' Tokens

A $6.6 million digital token representing an animated clip of a graffiti-covered Donald Trump lying face down in the grass. A $1 million batch of 34 “digital collectibles” known as CryptoPunks. A $69,000 dogecoin-inspired digital token representing a pixelated cat image.

The price tags for these “non-fungible tokens,” or NFTs, might seem daunting, inaccessible or downright ridiculous to the average person.

That's why some cryptocurrency traders, rather than buying NFTs directly, are buying digital tokens affiliated with the marketplaces that have popped up for trading NFTs. This way traders can bet on the NFT industry’s growth without having to go all-in on some sky-high priced digital artwork or trading card.

Investors think these tokens “can serve, in a way, as index bets on the growth of the NFT marketplaces they power,” said Alex Gedevani, research analyst at Delphi Digital.

NFT frenzy

According to Messari, a data provider for cryptocurrency markets, the 10 biggest digital tokens that are associated with NFT platforms have returned in a year-to-date price range from about 60% to 900%.

The FLOW token, of the Dapper Labs-backed Flow blockchain, which powers the digital collectibles platform NBA Top Shot, is up 79% just in the past seven days to a market capitalization of $1.1 billion, according to CoinGecko. (Last week, some 10,631 packs of basketball videos hashed to the Flow blockchain sold for a record $1.05 million.)

And in a sign of just how frenzied the trading action has become, the ENJ token, from a startup company called Enjin, shot up 50% to surpass a market valuation of $1 billion. CoinDesk reported that Enjin planned to roll out two new product offerings focused on NFTs. ENJ is listed on big cryptocurrency exchanges including Binance and FTX, and there’s even derivatives contracts that can be used to bet on the price.

The outsize price gains offer a reminder of just how speculative cryptocurrency markets have historically been, with fast profits possible alongside steep risks.

“Since NFTs are going through a hype cycle, that naturally raises the price of assets similarly associated with NFTs,” Mason Nystrom, research analyst at Messari, told CoinDesk. “We've seen this happen in previous cycles with Ethereum competitors, decentralized finance (DeFi) tokens, and so this type of market reaction is pretty common.”

Even some NFT industry executives are agog at how rapidly the token prices are zooming. They characterize the binge as partly driven by a fear of missing out, or FOMO. For instance, the WAX token, WAXP, has tripled this year to a market value of $175 million.

“It starts with the consumers or the token holders being uneducated about how the growth in the NFT ecosystem is going to benefit different blockchains, and which blockchains are going to benefit the most,” said William Quigley, co-founder of Worldwide Asset eXchange, an NFT marketplace. “So if you're not doing that kind of work, you're really just randomly throwing money based on the press releases you've read.”

Rationalizing the pump

Most NFTs are digital tokens created atop the Ethereum blockchain network under special-purpose standards known as ERC-721 or ERC-1155. Because they’re unique, their value is more subjective and their worth is in the eye of the beholder.

The platform tokens, by contrast, use the more common ERC-20 or other similar token standards on non-Ethereum blockchains. They’re more widely distributed and traded, so their fair value is determined by the market. Many of them are listed on exchanges so the pricing is more transparent.

What are they? That requires more research. They might seem like stocks in a company but they’re really more akin to in-house “utility” tokens that might benefit from increased trading volumes on a given platform, or as “governance tokens” that might offer holders a say in the rules of the marketplace and, perhaps eventually, a share of the payouts.

Read More: What Are NFTs and How Do They Work?

For example, both Rarible’s RARI and WAX’s WAX tokens are governance tokens for the respective NFT trading platforms, where token holders can earn rewards from trading fees while voting for the platform’s upgrades. Enjin’s ENJ, on the other hand, is a utility token of Enjin, which requires ENJ as collateral to issue new fungible or non-fungible items on the gaming platform.

From an investor’s perspective, evaluating individual NFTs such as CryptoPunks – collectible characters with proof of ownership stored on the Ethereum blockchain – requires experience and knowledge, said Nystrom at Messari. Collectibles, sports – one has to know what one is getting into.

Investing in NFTs “requires an investor to be precisely right – similar to betting that a bitcoin payment company will succeed – rather than just directionally correct like betting bitcoin will succeed,” Nystrom added.

Read More: Single Buyer Splurges $1M in Ether on CryptoPunk Digital Collectibles

With many of these tokens being built on ERC-20 token standard, they also offer much more liquidity, and as a result, “it is much more accessible for larger capital allocators rather than NFTs,” according to Delphi’s Gedevani.

Risks rise as prices skyrocket

“It's important to be cautious as NFTs are an early-stage asset class and things are getting frothy,” Gedevani said. “There's a lot of NFT issuance that will be coming onto the market going forward.”

With the skyrocketing appreciation of many of these tokens, the pressure of any near-term sell-off is also high.

Flow, for example, has a very low circulating supply, with many investors having bought the token at a very low price.

“We'll likely see some short-term sell-off once tokens start vesting especially considering both institutional and retail investors are up many multiples since they had really low initial purchase prices – $0.1 per Flow – in some instances like the CoinList Auction,” Nystrom said.