NFTs Join The “Everything Bubble”

March 12, 2021

So bonds are obviously a bubble. And stocks have never been this overvalued. US houses have never been this expensive. Cryptos have had the greatest run in financial history. And the global money supply is soaring while most fiat currencies more-or-less hold their official value, which is another way of defining a bubble.

Guess that’s it then. The “everything bubble” really does include everything.

Wait, no. A new, even stranger bubble has suddenly joined the list. Digital assets called non-fungible tokens, or NFTs, are now attracting ludicrous amounts of hot money for things of seemingly dubious value. Just yesterday, for instance:

Christie’s first NFT art auction skyrockets from $100 to top $60 million

Famed auction house Christie’s wasn’t exactly sure what kind of demand it was going to see when it announced a $100 starting price for its first-ever digital art auction by way of a non-fungible token, or NFT, in February.

Three weeks later, it had an answer worth $69 million.

A bidding war exploded Thursday to close at a final price of $69.35 million on a collage of work, dubbed “Everydays: The First 5000 Days,” from rising digital artist Beeple (also known as Mike Winkelmann.) As Christie’s Contemporary Art Specialist Noah Davis explained, nothing he’s seen before “even comes close.”

“The first 10 minutes of this sale we had more than 100 bids placed. We went from an opening bid of $100 to more than $1 million. We had bidders from seven different countries,” Davis told Yahoo Finance Live. “What’s a really compelling stat, and probably the most amazing to me, is only three of those bidders were previously known to Christie’s, so everyone else was brand new.”

That might not be terribly surprising, given how many people are still learning about NFTs and how the digital tokens function to digitize ownership of assets on blockchains. The tech has enabled verifiable digital ownership and the resale of anything from digital art, to NBA highlights that have re-sold for thousands of dollars on platform NBA Top Shot. Even the artist himself, Beeple only recently catapulted to mainstream fame after one of his other artworks, a 10-second clip of people walking by a nude Donald Trump, re-sold for $6.6 million after selling for just over $66,000 four months prior.

So why pay for digital art that anyone can view, download, or embed elsewhere for free on the internet? As Beeple and other digital artists have tried to explain: anyone can take a picture of da Vinci’s Mona Lisa, but that doesn’t prove ownership of the Mona Lisa in the same way owning an NFT attached to the art piece can. Unlike physical art, ownership cannot be proven merely by possession, which is why the public history of an uneditable blockchain presents real value for digital art that can be readily copied.

“NFTs have a lot of very interesting and unique properties,” Davis said. “It establishes scarcity, it solves for the question of authenticity testing, there’s no way to forge this artwork.”

Critics might point out that NFTs are still a bit detached from a true sense of ownership. In the case of many NFT sales, commercial ownership for works of art remain with the original artists. NBA Top Shot’s NFTs for collectible video highlights also don’t give collectors commercial rights, either (the NBA retains those.) But to many, any sense of ownership is better than none and its given rise for an entirely new way of digital artists like Beeple to make money off of previously less valuable projects.

“I know that so many people are going to feel empowered to be creative with their digital art works,” Davis said about the first Christie’s NFT auction, adding that more could follow. “We are going to have a lot more responsibility in this space to curate our content thoughtfully and to offer only the best of the best to the audience we have.”

The First 5000 Days auction, which consists of one NFT for a digital photo collage of every daily art piece from Beeple’s consecutive run of 5,000 days, closed at a final price of $69,346,250. The auction also marks the first time Christie’s planned to accept cryptocurrency as a form of payment.

A few thoughts:

The meta question here is Can a digital asset have a unique value apart from the infinite number of identical copies that can be made of it?

The answer: Intellectually, that’s a very hard sell. Clearly the market believes that ownership of one out of an infinite number of copies means something. But over time it’s likely to become clear that it means very little. Verified ownership is nice and all, but the thing itself has to have some value for that ownership to be worth anything. A video of Lebron dunking – which anyone can copy online and play back on their big screen TV – does not qualify.

Yes, anyone can buy a print of Starry Night. But there’s a fundamental physical difference between a real object and its digital reproduction, whereas the difference between an NFT of, say, the very first Tweet and the same image copied from YouTube is literally nonexistent. Whether on a screen or on a wall, they’re identical. So owning an NFT of a widely available video or image is owning nothing.

This, like so many other strange happenings in today’s financial markets, is reminiscent of the dot-com bubble of the 1990s, when anything with “dot-com” in its name was instantly revalued vastly higher – even though the suffix didn’t improve the company in any meaningful way. Those stocks were only valuable in an environment awash in so much money that large numbers of people were free to do frivolous things with theirs. When the credit was cut off, the silly bidding wars ended.

Which means — sorry to take so long to get here — the true message of NFTs is not the emergence of digital art, but rather the desperation of an increasing number of people to swap their rapidly eroding fiat currencies for scarcity of any kind. They have the right idea, but like dot-com buyers in 1999, they lack discrimination.  

So with NFTs, the important number is not what Lebron’s latest dunk sells for, but the interest rate that turns off the credit spigot. Watch the 10-year Treasury, not the art auctions, for signs that the party is ending.


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