Nike and Adidas Are Dipping Toes Into the NFT Market. The Sneakerheads Are Into It.

NFTs are digital assets—art, videos, anything that can exist digitally—that are tradable but not “fungible,” meaning they are unique and can’t be exchanged for an identical asset. A dollar or barrel of oil is fungible, a piece of art or a home isn’t. For brands like Nike or Adidas, NFTs could take the form of a collectible digital sneaker or one that an owner might actually wear in the virtual realm—say, in a video game or in the metaverse. In some cases, an NFT comes with both the digital shoe and the right to a future delivery of a real one, serving as a kind of tradable ticket for the physical product.

Nike made a big step in that direction last month when it acquired RTFKT (pronounced “artifact”), a startup that creates NFTs of sneakers and other collectibles. Early NFT drops have been successful: Both Under Armour and Adidas’ debut NFTs last month sold out quickly, with Adidas selling $23 million worth within hours. Those that own Adidas’ “Into the Metaverse” NFTs, which cost roughly $765 at debut, are now selling them for more than $2,500 on NFT marketplace OpenSea. Under Armour’s virtual sneaker collection Genesis Curry Flow NFTs fetched $333 at initial sale last month and are now priced anywhere from $551 to over $15,000. Eye-popping returns are nothing new in the sneaker market, of course. Air Jordans that had a $65 price tag in 1985 fetched $20,000 last year on resale platform StockX.

NFT skeptics abound but, when it comes to a highly sought, expensive item, a digital one stored on the blockchain is far easier to authenticate, transfer and to sell than a shoe or a painting. Perhaps more importantly, while brands don’t get a cut every time a sneaker is resold, they can do so with NFTs because royalties can be baked into a blockchain. RTFKT, the virtual sneaker creator that Nike acquired, takes a 5% cut of every sale (and re-sale) of an avatar and 10% for all other products, including virtual shoes.

That royalty structure alone probably makes NFTs worth exploring for the likes of Nike, which could use tokens as a way to pre-sell physical products. That is already the case for Adidas’ debut NFTs, which offer the holder virtual wearables and also the right to redeem them for free exclusive physical products: a hoodie, a tracksuit and a beanie. Channeling sales through NFTs also would allow companies to take a direct slice of the fast-growing sneaker resale market, which was estimated to be worth at least $6 billion globally as of 2020, or about the size of Nike’s revenue in China circa 2019. Cowen estimates that the resale market could reach $30 billion by 2030. And of course the NFT market itself is growing furiously: In 2020, just over $100 million worth of NFTs changed hands. Last year Chainalysis estimates that grew to $44.2 billion.

There seems to be a natural demographic overlap between typically young sneakerheads and those interested in NFTs. In a survey conducted in April by CivicScience, those between the ages of 18 and 24 displayed the most familiarity with the NFT space, with 14% saying they had invested in NFTs and 18% saying they were interested in doing so. But that overlap cuts both ways: Real-world budgets are limited and the virtual world might merely cannibalize sneaker demand.

Virtual sneakers won’t weigh apparel brands down with inventory or supply chain snags. They do come with other risks, though. Some NFTs are sold on energy-intensive blockchains that charge wildly varying “gas fees” for each transaction. NFT buyers might also face surprise tax liabilities in the future. And digitally savvy crowds also are harsh critics: As much as a great product can garner hype, a shabby-looking one can quickly get “canceled.” Erinn Murphy, analyst at Piper Sandler, also points out that brands will have to think about how quickly they can scale scarcity in the digital realm. Roughly 5% of Nike’s products are “hype,” or limited releases, according to Piper Sandler estimates.

Nike rules the world of physical sneakers, but that doesn’t guarantee digital dominance where companies like Yuga Labs, the creator behind the top-selling Bored Ape Yacht Club NFT collection, rule the roost. It isn’t enough to sell an exact replica of the physical sneaker, hoodie or handbag in the virtual world, says Akash Nigam, chief executive officer of Genies, an avatar technology company whose platform allows users to dress their avatars with digital wearables. “You have to break boundaries—the gravity and physics of the real world,” he says. For brands, that probably means a lot of revenue sharing and partnerships in the interim.

The virtual world promises real money. It also comes with its own set of rules.

Write to Jinjoo Lee at jinjoo.lee@wsj.com