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The Flying NFT Circus
When a 22-year-old Indonesian student uploaded 993 images of himself onto NFT platform OpenSea, he didn’t expect much to happen.
“I never thought anybody would want to buy the selfies, which is why I only priced them at $3,” Mr. Sultan Gustaf Al Ghozali later told France24 in an interview.
This being 2022, the plot would play out like a Monty Python script.
The images would quickly gain social media notoriety after a celebrity chef bought several pieces. Since then, speculators have spent millions trading the selfies.
NFT mania, it seems, will need its own British Ministry.
But, Mr. Ghozali isn’t alone in his bewilderment. As corporations have muscled in on NFTs, the mood on social media has decidedly shifted from infatuation to indignation.
“NFTs F***ing Suck,” went a Tweet that co-worker Joanna Makris sent me. “You spent a month’s wages on an ugly picrew. Has it made your life any better?”
But love them or hate them, NFTs are still turning the world of digital art and collectibles on its head. For the first time, people are finding it possible to sell their digital trinkets as well as buy. So even though most NFT projects aren’t the holy grail people seek, some NFTs are still worth it.
Be Afraid of the NFT Bubble
Yesterday, I was browsing the Primate Social Society NFT collection, “The first deflationary collection of Ape Avatars.” By “burning” its total supply of 10,000 apes, the project would theoretically make each remaining piece more valuable.
Perhaps it was only a matter of time before NFTs became a speculative money grab. When daily headlines won’t stop talking about making $500,000 from a single NFT, a whole host of investors naturally start to wonder:
“Why can’t I have that too?”
Investor greed, however, also has its dark side. As highlighted by a growing parade of spams, scams and silly projects, this new technology is getting abused in ever-more ingenious ways.
Why NFTs Suck
NFTs are simple enough. By associating a digital collectible with a tradable token, the underlying asset suddenly becomes far easier to sell. Want to earn money from your digital Pokémon collection? If they were NFTs, you could.
But straightforward concepts are also easy to abuse:
Why NFTs Suck Reason 1: Zero Price Oversight.
Unscrupulous dealers have taken this a step further through “wash sales.” This tactic involves trading pieces of work to themselves for increasing values, creating an illusion of high demand and rising prices. The moment these scammers offload the piece to an unsuspecting buyer, the trading stops.
Sellers can also fall victim to pricing mistakes. In November, a missed decimal point caused CryptoPunk #7557 to change hands for a paltry $19K instead of the list price of $1.9M.
Why NFTs Suck Reason 2: Zero Copyright Oversight.
The result: an industry of bots that copy images from sites like DeviantArt and put them up for sale on OpenSea or other sites with zero upfront costs (and currently, zero accountability).
“Most of these auto-minted pieces won’t sell, but if they can use bots to list 500,000 pieces and 1% of them sell, that’s decent money with no risk or repercussions,” said noted artist and game developer Jon Neimeister.
Copyright issues extend to legitimate purchases too. Anyone buying an NFT of a Tweet has no rights to the tweet itself. Even if you spend a million dollars buying Jack Dorsey’s tweet, the copyright is still owned by Twitter (NYSE:TWTR) and Mr. Dorsey, according to law firm Norton Rose Fulbright.
Why NFTs Suck Reason 3: Zero Consumer Protections.
These scams have become so commonplace that they’re now known as “rugpulls,” a term once reserved for crypto heists. 2022 has already seen several play-to-earn NFTs abandoned by their creators, leaving investors with far less than they bargained for.
These scams have already cost investors hundreds of thousands of dollars. In October, a project known as Evolved Apes made headlines after its anonymous creators siphoned $2.7 million of investor money before disappearing. Another $1.3 million was lost this past weekend on Solana’s (CCC:SOL-USD) Big Daddy Ape Club.
Smaller cons have also proliferated. Small-time digital artists are finding their work converted into NFTs without consent, leaving buyers with an illegitimate claim to the intellectual property. And fake Discord channels have proliferated in recent months to dupe people out of their wallet passwords.
Today, 82% of Gen Z’s believe NFTs are a scam, according to a survey by market research firm Tidio (InvestorPlace’s informal Twitter poll confirmed similar sentiment). Fewer than 10% of the general population think NFT pieces are genuine investments.
And that’s a problem for NFTs in general. When digital art becomes a status symbol of overpaid Silicon Valley executives, negative sentiment towards the technology could spoil the market for everyone else.
2 NFTs On the Rise
But much like past manias, today’s NFT bubble doesn’t mean everything is wrong. Some NFTs also have a glimmer of hope.
RKFKT Avatar Project
In December, Nike (NYSE:NKE) made waves after announcing its acquisition of NFT creator RTFKT. To some observers, it seemed as if the apparel giant was ready to join in the corporate money grab.
But Nike is different.
Those who follow the company — or its corporate cousin Footlocker (NYSE:FL) — will know the shoemaker has a history of creating high-value collectibles. Rare sneakers can fetch thousands of dollars on the secondary market, and even regular buyers who queue at stores can flip new releases for hundred-dollar profits.
That makes Nike’s pairing with RTFKT a natural fit.
“[RTFKT] took over the internet by creating viral augmented reality videos that show off sneaker designs, wearable tech and a variety of other collectibles,” explains digital media group One37. “RTFKT is innovating the possibilities for the physical and digital fashion industry.”
The studio’s ambitious Akira Project looks to take things a step further. By creating high-quality Metaverse avatars, it could become a platform for Nike’s growing digital ambitions.
The price of entry isn’t particularly cheap — a 6.25ETH floor price means a single Clone X avatar will run you $12,500 or more. But with Nike’s reputation on the line, there’s a good chance that the suits in Beaverton, Oregon, won’t let RKFKT’s plans fall by the wayside.
Decentraland (MANA) Land
Three weeks ago, I tried playing the three largest Metaverse games. I walked away largely unimpressed.
- Decentraland (CCC:MANA-USD): “Unless you want to play a knockoff version of Minecraft or lose money in one of Decentraland’s many online casinos, you can probably pass on the game.”
- Sandbox (CCC:SAND-USD): “Bad news for SAND. With deep-pocketed development firms entering the NFT/Metaverse world, Animoca Brands will need more than reasonable graphics to keep up.”
- Axie Infinity (CCC:AXS-USD): “Axie Infinity has an inflation problem on its hands… It is pretty much a Ponzi-like scheme.”
But my hours of gameplay did unearth a diamond in the rough.
“Investors looking to truly cash in on Decentraland should consider something else: the land,” I wrote. “The limited supply of 16×16 meter plots are Decentraland’s building blocks.”
Since then, Decentraland’s land prices have withstood crypto’s “nuclear winter” better than the three disappointing gaming tokens. Prices are down 17%, compared to a 32% drop in the Metaverse tokens. Corporate buying, it seems, can help prop up a growing market:
As more corporations begin muscling in on the Metaverse, Decentraland’s land values are becoming a price hedge. No company wants to miss out on the next big thing either, and they’re helping keep these NFT prices high.
NFTs in 2022: A Modern Day Dutch “Tulip-Mania”
Imagine a world where a skilled craftsman spends a day creating a portfolio of never-before-seen work. You might imagine he or she would get paid a decent day’s wages for their efforts.
But then… what if the market was so outrageous that speculators offered the craftsman the price of a house for each piece?
Those steeped in financial history will know I’m talking about Tulip Mania, a massive bubble that inflated then burst in Holland during the 1630s.
The market started legitimately enough, with imported tulips becoming a status symbol — a sign of rising Dutch prosperity from trade with the East Indies. But as tulip prices started to surge uncontrollably, speculators found they could make small fortunes trading “unbroken” bulbs. By the “Tulip Mania” peak in 1637, talented horticulturalists could expect up to 2,500 florins for rare bulbs — the equivalent to a year’s salary.
The market would, of course, eventually collapse. Though growers would allegedly destroy tulip fields to try propping up prices, thousands of investors would lose fortunes over the now-worthless flowers.
Today, we’re seeing a similar story play out in NFTs. Collections like the Primate Social Society are “burning” NFTs in an attempt to stop price declines. And people are suddenly realizing that paying six figures for low-resolution jpeg images isn’t a particularly wise idea.
The Dutch Tulip Mania wasn’t all bad. We now take many horticultural and financial developments from the Tulpenwindhandel era for granted. Whiskey distillers still use a similar practice to finance long-maturing casks, and we’re used to carrots that are orange (rather than purple) in part due to Dutch breeders at the time.
But just like tulips, absurdly priced NFTs will eventually come down. And only then will Silicon Valley execs understand why public scorn is so well-warranted.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
