Money Talks

Why the NFT Craze Is a Bubble Waiting to Pop

The latest collectible boom is fueled by speculators, not enthusiasts

If every era has its quintessential collectible, something that speaks to the historical moment and becomes a seeming route to riches, ours is clearly the “non-fungible token” (or NFT). Over the past year, NFTs — which include, among other things pieces of digital art, digital cards featuring NBA highlights, and limited-series music albums, all recorded on the blockchain — have become objects of obsession and financial speculation, fueling hundreds of millions of dollars in transactions, the biggest of which happened just a couple of weeks ago, when a 10-second video clip created by digital artist Beeple sold for $6.7 million. If NFTs have captured our imaginations, it’s because this fad fuses so many potent social and financial trends. It has a cryptocurrency angle, a virtual-reality angle, a meme angle, and it’s a social media-fueled speculative frenzy on top of it. NFTs are us.

But what are they, actually? In effect, they’re digital assets created from whole cloth. “Token” simply means that an NFT is an item on the blockchain, like bitcoin or Ethereum’s ether: its existence has been permanently recorded there from the start, and anything that happens to it — a sale, a trade, etc. — in the future will be permanently recorded as well. It’s the “non-fungible” part that really matters to the potential value of NFTs, since non-fungible means each NFT has a distinct identity, and cannot be simply exchanged for another. One bitcoin is exactly like another, just as one dollar is exactly like another, so it makes no difference which particular dollar you own. NFTs, by contrast, are all distinct “objects.”

Interestingly, though, this doesn’t mean that NFTs are necessarily unique in terms of their content. NBA TopShot is an NFT platform for the sale and trading of what are essentially digital basketball cards, featuring highlights of great plays (like this phenomenal shot block by rising star Zion Williamson). Many of these NFTs are now incredibly pricey; the Williamson NFT was recently bought for $100,000, a LeBron James dunk highlight went for $208,000, and the platform has already handled more than $250 million in transactions. And yet there are more than one of almost all these NFTs since they’re typically issued as part of a limited series, much the way artists issue a series of prints.

In the case of Williamson’s block, for instance, there are 50 NFTs in the series, all containing the exact same highlight. The only thing that makes them distinct from each other is that they each have a different number. (The NFT that sold for $100,000 was number one in the series.) If you buy one of these, you’re paying for scarcity (there are only, and only ever will be, 50 of these “cards” in the world), but not uniqueness. And, of course, buying the NFT doesn’t give you any rights to the highlight itself — anyone can go to YouTube or NBA.com and see Williamson block that shot over and over again.

There is, though, one big difference between the NFT collectible craze and collectible crazes of the past, which is that, from the start, the NFT collecting frenzy has been largely about money, and the prospect of getting rich.

That obviously makes it easy to mock NFTs as fundamentally unreal, an example of people paying huge sums of money to “own” something illusory. But you could argue that the same is true of many collectibles. If you own a first edition of The Great Gatsby, after all, the content of your volume isn’t materially different from the content in a cheap paperback version of the book. The value of the first edition derives not from the words it holds, but from its historical pedigree, and its rarity as an object. The same is true of rare sports cards — their value doesn’t derive from the pictures on the front of the cards, which are easily reproduced (and, typically, quite generic), but from the combination of history and scarcity. To be sure, there are collectibles — like, say, furniture, or classic cars — where owning them gives you access to something real that other people can’t have. But even then, the economic value of collectibles always depends on something more than the object’s use value. So in that sense, NFTs are similar to many other collectibles, even if they only exist on the blockchain.

There is, though, one big difference between the NFT collectible craze and collectible crazes of the past, which is that, from the start, the NFT collecting frenzy has been largely about money, and the prospect of getting rich. Over the centuries, there have been many different collectible booms, stretches of time where certain kinds of collectibles became enormously popular and, for a time, lucrative. The first great speculative bubble in the West, Dutch tulipmania in 1637–1638, was effectively a collectible bubble, as the Dutch became so obsessed with owning the rarest and most beautiful tulip variants that they were willing to pay the price of a home for especially rare bulbs. More recently, we’ve seen booms in Hummel figurines, Magic: The Gathering cards, Legos, Beanie Babies, comic books, and baseball cards, as well as higher-end obsessions like classic cars and vintage watches.

What these fads have generally had in common is that they were initially driven not by speculation, but by the desire to collect. These crazes were fueled by people who wanted to own these things, rather than trade them. Different collectibles became popular for different reasons, although all collecting seems to have something to do with a desire for control and order. But the point is that those reasons typically did not — at the start — include the contemplation of getting rich. That came later, as speculators and investors realized that the demand for these objects meant that if you owned the right ones, you could make a lot more money, which in turn fueled more demand, sending prices higher, and so on.

With NFTs, by contrast, it’s impossible to separate the boom in ownership from the boom in speculation. While NFTs date back at least to 2014, they first became well-known during the short-lived CryptoKitties mania of 2017, when people started spending hundreds, and eventually, thousands of dollars on digitally generated, and blockchain-recorded, kittens. While CryptoKitties started as a fun, goofy game, money was a big part of the story almost from the start.

The same is even more true of the current NFT boom. Take NBA TopShot, which is run by Dapper Labs, the creators of CryptoKitties. The platform isn’t just designed to monetize highlights by selling them as NFTs. It’s an exchange where these NFTs can be bought and sold. In other words, speculation — buying an NFT not because you think it’s cool, but because you think you’ll be able to flip it to someone else for more than you paid — is integral to the process. Of course, there are still people buying CryptoPunk avatars because they like the images, or TopShot cards because they want to own a little digital chunk of NBA history. But NFTs and trading go hand in hand.

This makes a perfect kind of sense, given that the value of cryptocurrencies like bitcoin and ether (which is used by many NFT platforms) has been driven so far largely by speculation, rather than any real-world use value. But it does have one important consequence, which is that making lots of money buying and selling NFTs may not be easy.

Academic studies suggest that collectible investing can be quite profitable — if you get in early. But one of the main reasons for this is that in most collectible booms, there weren’t a lot of investors early on. Take La Peau de l’Ours, an investment fund started in 1904 by a man named André Level with the goal of buying modern art. Level purchased more than a hundred paintings and drawings, including important works by Picasso and Matisse, and then sold them all at auction in 1914. He and his investors quadrupled their money. The reason that investment was so lucrative was because no one else was doing what Level was doing, so his competition was not other speculators, but rather collectors, making it easier for him to pick up the art cheaply.

The real winners of the NFT craze, in fact, may not be the people speculating in NFTs, but the companies and technologies enabling them to speculate.

With NFTs, by contrast, there are already so many people out there trying to buy and sell them that bargains will be harder to come by (though, of course, they’ll still exist), and the likelihood of overpaying will be higher. In the short run, it may still be easy to flip NFTs to new and inexperienced buyers rushing into the market because of all the hype. But as that hype inevitably dies down and NFTs become just another kind of collectible, it will be harder to turn a profit — simply because everyone in the market is trying to turn a profit, too.

The real winners of the NFT craze, in fact, may not be the people speculating in NFTs, but the companies and technologies enabling them to speculate. Ether, for instance, is benefiting from its widespread use in NFT transactions, which provides a new real-world application for the cryptocurrency. And while some speculators will get rich and others will end up losing money, the companies running the exchanges where these NFTs are traded may well clean up. (Dapper Labs is now raising money at a reported $2 billion valuation.) You can make money being a gambler. But in the long run, it’s much safer to be the house.

I’m the author of The Wisdom of Crowds. I’ve been a business columnist for Slate and The New Yorker and written for a wide range of other publications.

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