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We’re delving well outside of regular programming today to discuss the most nascent, volatile, and head-scratching craze to hit investing circles in recent memory: NFTs.
NFTs have been confounding many investors while making others very rich for roughly the past year now, with the craze truly set off by the $69 million sale of the piece “Everydays — The First 5000 Days,” by the artist known as Beeple last March. For those who need a refresher on the technology, I’m going to steal Anne Marie’s definition:
Non-fungible tokens (NFTs) are the digital counterpart to trading cards, comic books, and even high-brow, gallery art. Creators or brands produce digital pieces (visual art, animations, video clips, tweets, etc) which they upload to marketplaces powered by the Ethereum blockchain for a small fee. Once the art is “minted” on the blockchain, it establishes an unalienable record, detailing price, ownership, and transference — this prevents the file from being digitally replicated. Even if an artist creates a visually identical piece, they will have dissimilar digital signatures. From a collector’s point of view, this eliminates the need for authenticators and protects owners from forgeries. However, an NFT doesn’t mean the image can’t exist elsewhere on the internet or be shared, it simply acknowledges that this is the original file and that all others are copies.
Since this definition almost a year ago, NFTs exploded. In fact, the market for digital collectibles reached a value of between $22 billion and $41 billion in 2021 depending on who you listen to. The same sources valued it as low as $100 million in 2020. This becomes even more amazing when you realize that the ‘traditional’ art market was valued at roughly $50 billion in 2020.
The growth has been powered by collections such as The Bored Ape Yacht Club and Cryptopunks, whose most sought-after pieces can reach values in the millions. In fact, just last week the CEO of the blockchain infrastructure company, Chain – Deepak Thapliyal – set the new record for the highest amount paid for a CryptoPunk. Thapliyal acquired CryptoPunk #5822 for 8,000 ETH (worth about $23.7 million).
Here’s the fella in question:
Unfortunately, without an NFT to match, this punk does not make this article worth 24 million quid.
What’s the Catch with NFTs?
As with any new and exotic investment opportunity like this, excitement and speculation have been rampant. The fact that it has permeated the world of music, movies, and sport doesn’t exactly help matters either. A-list celebs who have become involved in NFT projects include Reese Witherspoon, Stephen Curry, and Eminem, and there are many, many more. In fact, it’s surpassed manscapers and eyemasks as the number one influencer shill on Instagram. I’ll let Jimmy Fallon and Paris Hilton decide whether this is a good or bad thing for the industry:
Where the money goes, however, bad actors follow, and nowhere has a marketplace been more welcoming and accommodating to nefarious activities than this one. With foundations in both scarcity and exclusivity, along with eye-watering price appreciation, it’s not difficult to see why. People are dying to get into a profitable project, and this enthusiasm falls right into the hands of scammers.
The scam du jour at the moment is known as a rug pull. This occurs when the founder or developer of an NFT project collects money from participants to initiate and mint a new collection. They are usually accompanied by great fanfare and promotion, however, the developer never delivers on their promises. Instead, they stop backing the project, take the money, and run, sending the value of the NFTs to zero.
According to the Financial Post, rug pulls took in $2.8 billion in crypto tokens in 2021, and there are no signs of slowing down in 2022. The most high-profile scam so far has been the Frosties rug pull, in which its 8,888 NFTs lost almost their entire value overnight. The project had raised $1.3 million up to that point when users suddenly realized that the website, Discord channel, and its Twitter account had vanished, and the creators had withdrawn the funds.
On a smaller scale but still deserving special mention is the Doodle Dragons rug pull. This was an NFT project in which all profits were supposed to be donated to the WWF and other endangered species charities until a last-minute change of heart from its developer. They signed off with this delightful Tweet to its user base before pulling the rug:
“Actually f*** that. Our charity will instead now be … my bank account. cya nerds.”
And it’s not just rug pulls investors have to be worried about. Just last week, $1.7 million worth of NFTs was stolen from the popular marketplace OpenSea in a coordinated phishing attack. You must also keep your eye out for counterfeit or plagiarized collections, bidding scams, pump-and-dumps, catfishing, masquerading support staff, and suspicious pop-ups too, just to be safe.
The site https://web3isgoinggreat.com/ is keeping a timeline of all these nefarious activities and it makes for grim reading.
Early Adapters v.s. Newcomers in the NFT Space
So, what has been done to police this activity?
Not much really.
The general consensus is that this is the price of admission to live in the decentralized utopia of crypto. In fact, here are some quotes from experts gleaned from an article titled ‘NFT Scams Are Everywhere. Here’s How to Avoid Them”:
- “Just because a celebrity endorses a project or creates it, does not mean it’s going to survive.”
- “It’s best practice to assume everyone is a scammer until proven otherwise.”
- “The reality is it’s a new frontier and if you don’t understand, don’t do it. If you’re not willing to lose, don’t play.”
- “… you can’t stop people from trying to scam you. Because this is a completely open system with no safeguards on — by design — we’re going through that early growth phase. It’s not fully professionalized yet. It’s not fully trusted… Nefarious individuals are just going to take advantage of less-educated people.”
Not exactly a welcoming place for a beginner it seems. However, this attitude touches on two foundational aspects of crypto as a whole.
The first: there is no oversight. To be decentralized means to exist without policing, without an overarching authority figure or rules and restrictions governing the dos and don’ts. This is not to say that every crime goes unpunished, but in a world in which the technology is so far beyond both the reach and comprehension of regulators, you’re going to have to make some pretty big headlines to draw scrutiny. In fact, the chief executive of the United Kingdom’s Financial Conduct Authority has come out and said that victims of crypto scams should not expect the government to compensate them after losing their money. It’s the Wild West out here, with the accompanying Gold Rush to match.
The second: crypto is a tiered society. We must remember that early adopters of cryptocurrency have seen wealth creation over the past decade unlike anything in our history. While many are idealists like Vitalik Buteren — one of the founders of Ethereum and an outspoken advocate for a decentralized financial system — others fall into the category of Crypto Whales, those who hold enough to manipulate the valuation of currencies through their transactions. And if those are the whales, that makes us newbies who came rushing in recent years the krill.
Donning our tinfoil hat and rewinding back to last year and the sale of Beeple’s ‘5000 Days’ piece, it’s easy to get a little conspiratorial. I’m not saying that this is what happened, but if you were a crypto whale with money to burn, how would you create excitement and enthusiasm towards a new industry that will vastly increase the value and application of your own personal fortunes? An eye-watering sale worth $69 million, backed by the legitimacy of Christie’s sounds like a great way to do it.
The buyer, Vignesh Sundaresan, AKA MetaKovan, is a Y-combinator alum and the founder of the Metapurse NFT project: “a crypto-exclusive fund that specializes in identifying early-stage projects across blockchain infrastructure, finance, art, unique collectibles, and virtual real estate.” Sounds like someone set to benefit from the growth of the NFT market. The fact that up until October 2020, 5 months before the sale, the artist’s most expensive print went for $100 feeds into this theory too.
The sale brought NFTs into the mainstream, making them stylish, and — seemingly — safe, with advocates ranging from Tom Brady to Justin Bieber. I just can’t get over the feeling that it feels slightly coordinated. In bringing in the everyday investor to the world of NFTs these early adopters have expanded and legitimized their industry, making themselves vast amounts of wealth in the process, while the newcomers are fed to the wolves.
Is the NFT Market a Bubble?
Before I get cast out as the old man yelling at a cloud, I want to say that I am not a bear per se. I am bearish of a lot of the practices that go on in this world, seemingly unabated, but I do think there are some truly remarkable advances being made too. The blockchain has unbounded potential and there is true innovation in features like smart contracts and proof of ownership that goes well beyond its current use — interestingly, bubbles and innovation go hand-in-hand.
However, one can not deny the glaring abuses too. As a new investor who may be experiencing FOMO right now, I urge you to tread carefully. Speculation has run rife and valuation is based on the greater fool theory as much as any intrinsic value. One can speculate on the reasons for buying a Bored Ape or Cryptopunk for a seven-figure sum, but it stands to reason that appreciation of the art is low down the list.
The NFT market is showing all the signs of a bubble, don’t be around when it pops.
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Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.