The rise of non-fungible tokens (NFTs) – a form of digital provenance – in the past year has been so meteoric that Collins Dictionary named NFT as its word of the year for 2021.

Eye-watering auction prices paid – including a record $91.8m price tag for Pak’s The Merge on 2 December – saw NFT trading volume total more than $23 billion last year.

However, senior market analyst at OANDA, Jeffrey Halley, says NFTs are reaching peak hype, and their success has come as a result of people being conditioned over the last two years to buy almost anything – something he calls ‘buy everything hype.’

Halley likens NFTs to a game of musical chairs. And he warns that it will be the owners of the NFTs who will be left with empty pockets when the music stops.

NFTs are intrinsically linked to cryptocurrency. But crypto investing has taken a hit – despite being increasingly talked up, the currencies have lost 1.4tn in a couple of months.

Halley said market signals surrounding NFTs and crypto are surrounded with warnings right now.

A recent advert by actor Matt Damon for the Crypto.com exchange trumpets their promise, but is a good example of a red flag.

“When you see people like this promoting things that are completely out of their expertise zone that’s always a warning sign from an investment point of view.”

“What I’ve noticed over the decades is that when certain people or certain companies get involved in certain areas of the market it’s what I call a ‘leading reverse indicator’. It’s usually quite a good indicator that we’re near peak hype and at the top of a market.”

Halley said short and medium term global economic movements are not likely to play in the favour of crypto and NFTs.

In particular, he expects the growth of inflation to have an impact, and for the Federal Reserve to start normalising interest rate policy.

“What we’re seeing is quantitate easing being withdrawn, stopped or even reversed, the Federal Reserve has indicated that it will start running off its balance sheet later this year if the recovery continues.”

That could start to put the brakes on demand for some assets, and will mean the market patterns we’re seeing right now won’t continue long, he said.

“Now, you could pretty much buy anything and it would have gone up in price, even a used car – which just shows how dysfunctional the market has been. And a lot of this is down to this enormous tsunami of quantitate easing money that has flooded the world from the central banks, pushing up asset prices everywhere and making some investment decisions that would otherwise seem quite odd seem quite normal.

“I suspect cryptos are one of those, and we’ve seen the same thing in New Zealand with the Reserve Bank cutting rates to zero, and quantitative easing pushing up house prices and other parts of the economy too.”

He describes the pattern we’ve been in as a “hype cycle”, but it’s about to peak.

“We’ve seen them in the past, we haven’t seen one quite like this for maybe 20 years. I have to think back to the ..com era when I last saw hype like this in the market.

“Interest rates are zero around the world, so saving rates – you get zero for your savings. And when that occurs the money naturally flows to anywhere, looking for some sort of return that is better than zero.”

That means more buyers willing to spend freely.

NFTs record value digitally and can be traded, but each one is unique. They are ownership tokens representing physical or digital things.

Some NFTs represent things like shoes or clothing that is designed to only exist online.

Is this the future, or folly?

Halley warns the non-tangible nature of these NFTs carries its own inherent risk.

“This is complete folly – you can’t use it… why would you buy something you can’t use.

“I think this is approaching peak hype. If you want to live your live in the virtual world – I certainly wouldn’t be spending money to create my avatar in there – but sure enough people are, even real estate is transacting in these metaverses.

“We’ve been conditioned over the last two years to buy things and they’ll go up in value – anything at all, I think what we’re seeing here is fast money. If the music stops and you’re holding it, you’re going to loose all your money.”

NFTs and crypto aren’t the only area set to be affected as the market adjusts out of this cycle, he said.

“This buy everything hype powered by zero percent money flooding the system around the world has caused a lot of valuation distortions, and frankly it’s thrown financial sense out the window in many asset classes.

“Nothing goes up forever. I think in the short term the threat of higher interest rates – particularly from the Federal Reserve which is now sounding very hawkish – will cap gains.”

“But going forward into the medium term I think what we’re going to have to get used to is not so much the buy anything trade, where you just bought anything and closed your eyes and waited for the profits to roll in.

“We’re going to see a lot more two-way volatility in stock markets through 2022, investing is very much riding out these bumps … what’s important is not to get caught up in the short-term noise.”