What if I told you there was an investment opportunity where you were almost guaranteed to lose money? What if I told you that this technology allows for someone to airdrop you unsolicited d**k picks, and instead of burning them or being upset, you end up hanging on to them in the hopes that someday they are worth money? (Yes, this actually happens) Welcome to the wonderful world of Non-Fungible Tokens (NFTs).
Amara’s Law: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.
Even though I have a bit of fun in this post, it would be foolish to underestimate the effect of NFTs in the long run. Misconceptions, hype, and complete denial of reality are stifling something which could be a cool technology experiment. That’s what gets lost; NFTs are just a technology experiment. Whenever money is involved, people tend to forget that things are an experiment.
By now, you’ve probably heard of NFTs but aren’t quite sure what you get when you buy one. Don’t worry, you aren’t alone. Many people buying them don’t know what they’ve bought either. There’s plenty of information out there on what they are, so I won’t go into that here, but I would like to talk about is their value because that is a hotly debated topic.
NFTs have become the slow news day punchline for many, some for a good reason. Not a day goes by where there isn’t some NFT scam. Fakes, frauds, and scammers are all cashing in on the craze. The victims aren’t gullible rubes either; some are large corporations like Kia.
Even though I take a few of my own jabs for entertainment purposes, this isn’t a post beating up on NFTs. Just a look at where the technology is today, from the perspective of novelty and individual ownership.
What You Get
For many, it seems silly to spend money for a receipt because that’s essentially what you get when you buy an NFT today. You don’t get the copyright. You can’t reproduce the image and create new NFTs from it. The receipt is verifiable to someone curious enough to check the specific blockchain on which the NFT is minted. This is summed up in the following cartoon from the New Yorker.
Side note: Props to whoever came up with the “Non-Fungible Tolkien” joke.
If the copyright holder wants to mint another identical NFT on a different chain, they can do that. If they want to print posters of the image you bought and sell them, they can do that too; you can’t. As a matter of fact, if you wanted a poster to hang on your wall, you’d have to pay for the image again.
In non-technical terms, from the buyer’s perspective, what You’ve bought is bragging rights. Bragging rights are what people find valuable about them.
The Value of an NFT
NFTs aren’t about the artwork or artists, no matter how much someone tries to tell you otherwise. The current value of NFTs is about signaling to others that you are part of a group. There’s a hierarchy, so the “cooler” the NFT project, the “cooler” group you belong to. NFT ownership is like being in a fraternity, only in this case, the hazing comes from outsiders.
NFT ownership is like being in a fraternity, only in this case, the hazing comes from outsiders.
Determining which projects will be popular can be tricky since NFTs have a closer relationship to memes than art. You aren’t always sure why one takes off, and the other fails.
The market is fueled by two things, FOMO and sunken cost fallacy. This is accelerated through artificially built-up hype created through traditional social media platforms.
Pumping and Artificial Hype
Let’s look at a simple example NFT launch. An “artist” creates an NFT collection. Now they have 10,000 images that nobody will buy because nobody knows about them or cares. They need to create a buzz, so they make an announcement on a platform like Reddit or Discord offering to airdrop free NFTs to users, but there’s a catch.
To get free NFTs, you have to take a series of steps that involve amplifying the announcement and spreading the word on various social media channels. To others, it looks like “everyone” is talking about this NFT collection, and they buy an NFT when the project launches because they don’t want to miss out. FOMO hits both the person getting the free NFT and the buyer. Neither care about the artwork but don’t want to miss out on an investment.
Of course, the previous scenario is only if everything goes as planned. If it’s a scam, you just helped a thief steal people’s money, and of course, these scams happen all the time.
There are also PR stunts to try and draw more attention to NFTs, like the guy who took out a loan for half a billion dollars to buy an NFT from himself.
Look at the example below of a fake sale from Twitter.
These stunts are a daily occurrence and actually hurt the community instead of help.
Almost all NFTs and NFT projects lose value after the initial hype dies down. Anyone who paid an astronomically high price for an NFT will feel pretty stupid or just has so much money they won’t miss it anyway. Of course, there’s always the scenario where you may just love collecting NFT farts.
Now, that said, some people have made money on NFTs, but they typically sell them shortly after buying or receiving them. To take this a step further, a recent study published in Nature found that the top 10% of traders account for 85% of the transactions and trade at least once 97% of all assets. This is a shell game, not a vibrant community of collectors.
Scams and Illegal Activities
Criminals find the NFT craze lucrative, and not a day goes by where someone isn’t ripped off. The current market is full of scams and illegal activities. Wash trading, rug pulls, money laundering and many scams are a daily occurrence and will continue into the foreseeable future.
Not About Artists
Everyone likes to say NFTs are about art and artists, but this evidence doesn’t line up. You create a couple of templates and then let some code create 10,000 permutations. People then buy them with the hopes of flipping them. I’m not saying that an 8bit image or even a computer-generated image can’t be art, but what I am saying is there isn’t any appreciation for art or the artist in the current ecosystem. Refer back to the previous Nature article about the ecosystem.
People buying NFTs think of themselves as investors, not collectors or people who appreciate art. Investors are showing off that they bought something, not showing off the artwork.
On the flip side, most people consuming art, buy it for a purpose. They want to show it on their wall and don’t want to be their own art dealer.
New Promises, Same Problems
In the old days, artists hated the gatekeepers. The gatekeepers were the obstacle holding them back from the masses and success. Today, the gatekeepers have mostly disappeared, and musicians can freely publish their music on platforms such as Apple Music, Spotify, YouTube, and a whole host of others alongside famous artists. The same platforms exist for other types of artists as well. The barriers between artists and consumers have all but disappeared. Success still hasn’t come, now comes the promise of NFTs. New platform, same problems.
The unspoken reality is the vast majority of user-generated content, both creative and non-creative falls in the range from not good to pure garbage. This is an astronomical uphill battle if you are a diamond in the rough. The fact that the content is poor won’t stop people from giving you a platform and making money from it. Dreams rarely turn a profit, but selling people on their dreams has always been profitable. The chain and marketplace always make money, the artist, not so much. Artists still have a lot of heavy lifting to do.
Dreams rarely turn a profit, but selling people on their dreams has always been profitable.
NFTs don’t solve the most significant challenge for most artists. If you are a well-known artist with a following, getting a larger share of proceeds from streams and sales is attractive, but you’ve already passed the most significant hurdle. Most artists would rather have exposure than money. In the case of musicians, they freely give away their music in the hopes that people will listen. These artists are in the “trying to build a following” stage, not the “maximize profits” stage.
As an outside observer, one of the biggest things irking people about NFTs is the complete denial of reality in the ecosystem. Fanatical collectors are willing to lose family members or even wish another pandemic upon the world, all so that their NFTs will rise in value.
It would be foolish to dismiss NFTs completely
It would be foolish to dismiss NFTs completely. NFTs are a technology experiment, and like most technology experiments, the initial iteration often doesn’t resemble the end result. I think this is what frustrates me about the current state of NFTs. It’s all hype, but the technology actually has some pretty cool use cases.
If you look at what NFTs are, it’s not hard to see how they could be a utility with additional value. So, NFTs will morph into a value add vs. a thing of value.
Companies are already experimenting with these concepts. A couple of unique examples are Nike with their CryptoKicks or something like TechStyles for the resell market. We’ll see more of this experimentation from companies in the future.
New Revenue Streams
Even though NFTs aren’t about art, NFTs do create new potential revenue streams. Companies who want to launch NFTs may commission people to create NFTs for product launches and other promotional activities. This type of work will increase, and today you can even find people on Fiver who’ll create these NFT collections for you.
If Kia wants to launch an NFT to go along with a new vehicle, they’ll need someone to help them with that, either on staff or as a contractor. Just don’t rip them off this time 🙂
Whether you are all in on NFTs or all against, it’s good to keep Amara’s Law in mind. The next couple of years will be interesting to see where NFTs head. We’ll see a transformation of the original concept into more value-added technology, so please, don’t talk your parents into converting their retirement savings into a pixelated image.
Shout out to the @CoinersTakingLs Twitter account for some of the example tweets used in this post.