The world of cryptocurrency is full of conversations about digital collectibles, unique virtual tokens that can represent anything from art to sports memorabilia.

People paid hundreds of thousands of dollars for these NFTs or non-fungible tokens. An investor, Sheldon Corey of Montreal, Canada, told CNBC that he paid $ 20,000 for one of thousands of computer-generated avatars called CryptoPunks.

CryptoPunks is not a new phenomenon – it was released in 2017 by developers Larva Labs. However, recently it has been gaining popularity. According to the website NonFungible, the company had sales of $ 45.2 million in the last seven days alone and inspired a broader “crypto-art” movement.

Digital avatars listed on the non-fungible token platform CryptoPunks.

Ryan Browne | CNBC

CryptoKitties, one of the original NFTs, had sales of $ 433,454 for the past week, according to NonFungible. The digital cats, developed by a start-up called Dapper Labs, were once so popular that they clogged the digital currency ether network.

NBA Top Shot, a platform developed by Dapper Labs in partnership with the basketball league, had sales of $ 147.8 million in the past seven days, according to NFT data tracker CryptoSlam. This service allows users to buy and sell short clips that show game highlights from top basketball players.

The increasing momentum for these tokens is due to the fact that Bitcoin and other cryptocurrencies have grown significantly in recent months and at a time when people are spending more time indoors due to coronavirus restrictions.

What are NFTs?

NFTs are non-fungible tokens – that is, you can’t swap an NFT for another – that run on a blockchain network, a digital ledger that records all transactions in cryptocurrencies like bitcoin.

However, it differs from Bitcoin and other tokens in that each NFT is unique and cannot be replicated. Everyone collects value independently. Crypto investors say NFTs derive their value from how rare they are. They are kept in digital wallets as collectibles. In addition to arts and sports, people have found uses for NFTs in virtual real estate and games.

Nadya Ivanova, chief operating officer at BNP Paribas-affiliated research company L’Atelier, says digital collectibles can be considered a better version of an MP3 file. Musicians are struggling to benefit from their work in the digital age, and Ivanova says some are turning to NFTs to prove ownership of their work and find an additional source of income.

“It allows content creators to actually own the ownership of what they create, which allows them to benefit in different ways from what they cannot do with physical art,” she told CNBC, adding that crypto art the fastest growing subsection is the digital collectibles market.

According to a study by NonFungible and L’Atelier, the total value of NFT deals quadrupled to $ 250 million last year. The number of digital wallets they were traded on nearly doubled to over 222,179 while some traders were able to make profits in excess of $ 100,000.

“We are seeing a new generation of traders in the NFT market. People who are digitally native and looking for digitally native asset classes outside of the established asset markets,” said Ivanova. “These are people who have amassed reputation and wealth and want to invest it in purely virtual assets like NFTs.”

According to Ivanova, the NFT market has matured. Famed auction house Christie’s auctioned an NFT-based artwork from Beeple, a well-known digital artist who created videos and graphics for celebrities like Ariana Grande and Justin Bieber.

Crypto mania

An NBA top shot video highlight starring LeBron James recently sold for a record $ 208,000. However, sales can be volatile – NBA Top Shot and CryptoPunks trades have declined in the past 24 hours, according to NFT data tracker CryptoSlam.

The rise in the price of these virtual items has led to fears of a repeat of speculative crypto mania. It reminds some investors of the first coin offering (ICO) in 2017 when several startups issued new digital tokens to raise funds. Hardly any of the ICO projects exist today, and some have even scammed investors out of millions of dollars.

There are some parallels to the ICO frenzy – for example, celebrities like Lindsay Lohan and Mark Cuban recently sold NFTs.

“We had a very similar moment in 2017,” Billy Rennekamp, ‚Äč‚Äčlead developer at blockchain software company Cosmos, told CNBC. “Every gallery thought about an NFT. Every blue chip artist thought about it. But there was just too much risk when the market fell and it was embarrassing to be involved in NFTs when prices fell.”

“I wouldn’t be surprised if we went through another whole bull and bear market,” added Rennekamp.

Still, the companies behind these tokens don’t believe it’s a fad.

“NFTs are here to stay,” Caty Tedman, director of partnerships at Dapper Labs, who led the NBA Top Shot project, told CNBC.

NBA Top Shot now has over 100,000 active collectors and has had sales of $ 215 million to date, Tedman said. It is working on a digital collectible game based on the UFC Mixed Martial Arts League and has also been sponsored by Warner Music to develop NFTs for music fans.

“The billions spent on Fortnite skins show how important our online lives and personas are and how valuable they are to people,” Matt Hall, co-founder of Larva Labs, told CNBC.

“What NFTs offer is a formalization of digital ownership and a way for that ownership to last beyond the life of a business, game or platform.”

Hall said Larva Labs does not take any fees from users of its marketplace – even though they do pay blockchain processing fees. “We are CryptoPunks owners like everyone else,” he added. “As the overall market grows, those we own become more valuable.”

The cheapest “punk” available on CryptoPunks is currently worth $ 36,000, Hall said. Larva is working on a successor to CryptoPunks, Hall added, without going into the company’s plans.