Thursday, 2022 December 8

China’s once thriving digital collectibles sector takes hit amid over-saturated market

Is Chinese technology giant Tencent is planning to shut down its digital collectible platform Magic Nucleus? According to media outlet Jiemian News, it seems to be the case. The platform was launched less than a year ago, in August 2021, as part of the innovation arm of Tencent PCG (Tencent Platform & Content Group).

However, business is operating as usual, a representative from Magic Nucleus told reporters from the China Times. The delay in the launch of new collectibles, they claimed, was due to preparation for a new version of the app and upgrading the current user experience. Magic Nucleus did not explicitly deny the rumors of its shutdown, however.

Has the bubble burst?

The story of China’s NFT boom began in June 2021, when Alipay and the Dunhuang Art Institute released two NFT payment code skins. At one point, the prices reached over RMB 1 million.

Two months later, Tencent launched Magic Nucleus as an NFT trading platform and renamed NFTs “digital collectibles” due to legal reasons.

The Magic Nucleus platform enjoyed soaring sales in February and March 2022, with most digital collectibles selling out almost immediately after launch.

With market sentiment as optimistic as it was, Magic Nucleus soon became the largest digital collectible platform in China. Several others sprang up in its wake—data shows that February 2022, there were less than 100 digital collectible platforms in China, but as of July 2022, the number has grown to 681.

However, since April and May, market sentiment has started to shift from enthusiasm to pessimism. “From conversations, we can tell that no one is buying anything because it’s currently unprofitable,” Huang Kai, the manager of Digital Collectible Ship (a WeChat social media account that posts information about digital collectibles), told business media outlet Geek Park. “With the number of new users dropping, and the number of new platforms still increasing, we are beginning to see a trend where the products can’t be sold, even on larger platforms.”

According to Jiemian News, during the early days of Magic Nucleus, the first batch of 300 limited-edition Thirteen Invitations (a famous interview program) vinyl NFTs sold out within seconds. In contrast, the past month has seen slow sales for many of the platform’s digital collectibles. For instance, 20,245 units of “Digital Masterpieces: Calligraphy Aphorism Screens by Master Hong Yi” and 8,206 woodblock prints from the Shizhuzhai Painting Manual, released by Magic Nucleus on June 21 and June 17, respectively, remain unsold.

Magic Nucleus used to release digital collectibles once a week, sometimes even twice a week, but no new digital collectibles have been launched on the app in the last two weeks.

As the overseas NFT industry enters a bear market, the domestic market is inevitably affected. For Tencent, if digital collectibles are not selling and the company cannot launch a secondary market function due to policy risks, this may mean the end of the road.

 The hype of digital collectibles

Why are digital collectibles so popular? Ah Ze, director of a digital collectible platform, observed that 80% of the early buyers of digital collectibles came from the same groups of people who typically buy coveted items like shoes, Chinese liquor Moutai, and tickets to resell at a much higher price. “They realized this was profitable, and they already had a large customer base,” he said.

This soon attracted the attention of the black market. A member of a cybersecurity team told us that they had observed a sharp increase in the number of products on the black market this year in correspondence with the increase in the popularity of digital collectibles.

There are even advanced practices in place to increase the hype, and therefore the prices, of NFTs. Activities on NFT trading platforms are monitored in real time, and tables of information are shared and updated daily. The buying and reselling of NFTs are done by computer programs. These practices, while very profitable, are illegal.

The truth is, many digital collectibles have little real-world value, and are not aesthetically unique. Sun Quan, an employee of an Internet company involved in digital collectibles, believes that companies selling digital collectibles are just jumping on the latest trend. “They saw everyone else doing it and wanted a share of the profits, but it’s not meaningful,” he said.

Sun discovered that some companies would go to a digital collectible platform, or vice versa, to discuss strategies for driving up the prices.

These strategies are undertaken by both parties for mutual benefit. Investors take chances, believing they can earn a profit by reselling digital collectibles. A non-exclusive digital collection of horse ink paintings by Xu Beihong, a famous Chinese artist, can be sold at a unit price of RMB 128, with a turnaround time of mere seconds. “What you’re actually buying is just a picture. To put it bluntly, these companies are earning an ‘IQ tax’ by exploiting people’s ignorance. It’s all meaningless,” he added.

“An industry that depends on unhealthy promotion is unsustainable,” said Huang. “To avoid more speculation, people in the industry are calling on the nation to regulate the industry such that the continued resale of digital products is possible without over-hyped and over-inflated prices.”

“But this depends on national policies,” he continued. “I’m concerned that the government will issue a one-size-fits-all policy and block the circulation of digital collectibles for all, just because of the actions of a few. That would be a devastating blow to the industry.”

There is still hope. According to state media, government institutions hope to use digital collectibles as a means to promote traditional culture, and encourage culture and creativity in the digital space.

Should Magic Nucleus shut down, it would be the closing of this six-month-long chapter for digital collectibles, and perhaps the opening of a new one. After such a revelation, perhaps the industry will reevaluate the value of digital collectibles. The world needs to think about the true role digital collectibles can play in the artsculture, and our everyday lives.

This article was adapted based on a feature originally written by Zhao Weipeng and published on Geek Park (WeChat ID: geekpark). 36Kr Global is authorized to translate, adapt, and publish its contents.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted content published by 36Kr.com, the largest and most influential tech portal in Chinese language.
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