Non-Fungible Token – NFT – Is it Time For an Intervention?

Let’s have a conversation about the NFT craze. In fact, it’s time for an intervention. Ether prices have benefited significantly from the rise of the non-fungible tokens (“NFTs”). Does that mean that NFTs actually have real value as an asset class? Theoretically there is no reason why NFTs shouldn’t hold value, but theory is just a simple disjointed mirror of reality. In this case, I can only recommend being very careful when investing in this asset class. 

So, What is an NFT? 

As we’ve discussed before on this platform, NFTs are a unique token and exist as a single entity. Each piece of “art” (or whatever you want to call it) is unique. The files that created the artwork are minted in the same way that a cryptocurrency like Bitcoin is minted. In this case there is only a single token. That unique token can be traded across a blockchain network and supposedly that uniqueness is valuable.

An ancient Chinese vase or a painting by Picasso are rare items. The difference is that they are rare because they have survived the test of time.

In the digital world these NFTs are timeless. There is no degradation that exists and instead an LCD screen’s resolution only improves through time. 

Understanding How Price is Derived

The first thing that is taught to undergraduates in their finance courses is the definition of price. The price of anything is whatever one party is willing to pay for an item and another party is willing to sell it for. It’s helpful to repeat this definition to yourself because it reframes the conversation and ultimately removes potential biases.

Does that mean that value and price are the same? The value of a Seurat painting is not the price paid at auction. Two competing parties with limitless amounts of money bidding for a French impressionist do not provide an accurate perspective of the value of that painting. The same can be said of NFTs. There are a lot of factors that play into “value”. 

Value exists across a spectrum based on utility, rarity, beauty, provenance, craftsmanship, cultural and/or historical significance. Something that has no practical purpose can have value. As a comparison, a real-world painting doesn’t have much utility and in fact certainly has less utility than an NFT. 

NFTs – A Result of Inevitable Technology Improvements

This technology is the result of the inevitability of the internet. At some point specific events on the internet were going to become historically and culturally relevant. It is easy to understand the value of such moments in human evolution. Therefore, it shouldn’t be surprising that Jack Dorsey’s first tweet became an NFT.  

Even less surprising, is Sir Tim Berners-Lee “WorldWideWeb” application. Which was the first hypermedia browser/editor, allowing users to create and navigate links between computers.

These were monumental moments in history that were rare and culturally or historically significant. I would say that these events only solidified the value of this blockchain. Just as much as Ethereum has provided a platform for these items to be valued.

NFTs are a great way to monetize these moments in the digital world. But how does this explain the massive wealth that has gone into CryptoPunks, Fidenza, Bored Apes, works by Beeple or Art Blocks and Party Penguins? 

So, how is an NFT priced accurately?

It’s important to remember the definition of price. The only thing that is similar between an NFT sale and a sale of a famous painting is that something unique and maybe valuable is sold. CryptoPunks have taken on cultural significance because they are some of the earliest NFTs that were minted. Some of them have been purchased by famous athletes and cultural figures. They have become relevant in the public’s consciousness because the popularity of certain figures has been leveraged.

Otherwise, they are just 8-bit jpgs that anyone can download within seconds of a Google search. It is up for debate, as to whether or not these subjects can be considered rare. It should be noted that there are 10,000 of them in what seems like a significant windfall for their creators at Larva Labs. I’m genuinely surprised they stopped at 10,000.

A limited-edition pair of Nike sneakers also has a similar level of rarity. Somehow, they are significantly cheaper than a CryptoPunk NFT. Indeed, cultural significance can be engineered on the fly and as an investor you may have an opportunity to change the value of an asset simply because you have the right connections to someone with a large Instagram following. 

So why did these specific pieces fetch such high prices? I think it’s important to understand that this phenomenon is volatile and full of speculation.  

Be wary of the hustle.

As an investor, I’d be very wary committing funds towards any specific work of art without very clear reasoning why it is unique and culturally significant.

If you are an art connoisseur, then this space can be a fantastic exploration of what your tastes are in digital art. While I’d imagine there are far cheaper ways of discovering what you like online. Your money should bring you happiness and I cannot fault how large of a check someone receives for their work. However, it is important to be cautious as an investor. 

There are many online commentators in the space who will discuss these NFTs to bolster the value of the items in their own collections. Without them actually caring about the art. Be wary of the hustle. 

Non-fungible tokens are a broken asset class with numerous rabbit holes one can fall into.

There are NFTs that are focused on minting the utility of game mechanics (called the “Loot project”) and monetizing specific items in a game. This ignores the fact that the game doesn’t exist yet and they are just minting the functionality of some possible game in the future.

To give you a poor analogy – it would be like me trademarking the right blinker mechanic on a car that hasn’t actually been made yet. This space is full of new innovative ideas that sometimes can be really cool but not always worth actual currency. 

Cryptos or NFTs. What About Both?

I think the real question for an investor is whether you’d rather have the ether, or the rights to the NFT.

In a crypto market where you’re seeing massive growth and adoption, it’s puzzling that people would prefer the NFT rather than the ether. Particularly when the cash flow is so uncertain. If you believe in the long-term potential of cryptocurrencies, then you would value the currency more than the NFT. Unless cashflow was part of the utility formula.  

As a last example, Artist Matt Furie, the creator of Pepe the Frog has been battling to control the use of his art.  It Is clear his work is culturally significant and if he can monetize it to generate a cash flow stream, then the use case for a Pepe the Frog NFT would make a lot of sense. Otherwise, keep your ether.