Get rich quick? NFTs build a business on bragging rights for COVID-euphoric investors

At this time last year, the world was in the grip of a deadly pandemic. I’m surprised by how easy it is today to forget its dramatic impact. Countries accounting for half of world GDP were quarantined. In just one month, consumer spending in the U.S. dropped by one-half, and defaults and forbearances in the U.S. quadrupled. The San Antonio Express reported on a 10,000 person food line. The unemployment rate increased from 3.5 percent in February to over 19 percent in April.

But then, as work-at-home investors put their Covid-19 fears aside, they started a wave of recovery that led to a market euphoria—fed by ever more speculative and risky investments.

Welcome to the roaring and risky 20s
The resilience of the stock market has emboldened individual investors who now have a hunger for risky high-growth investments. From piling into Tesla, pouring into cryptos, and pulling one over on hedge funds in the Game Stop short squeeze, those on the ascending path of our K-shaped COVID recovery are up for risk.

There’s a feeling of invincibility among many individual investors and new exotic ways are emerging for them to speculate and find profit through increasingly uncertain assets. We’ve seen this in high-value purchases by collectors. For instance, last month The New York Times reported on StockX, a trading platform for sneakers, where a pair of Nike Dunks sold for $33,000.

Sneakers are just one collectibles market that’s hot right now. 2021 has also seen a boom in sports card trading. Want to know why someone would pay $5 million for a baseball card? Spoiler alert: It’s the belief that someone else will pay more. Combine sentiment, greed, and just a hint of scarcity, and those with gains from other speculative markets will climb aboard something new. That’s what NFTs are, a bubble fed by the proceeds of earlier speculations.

So what are NFTs, really?
If you own a car or home, there is a physical title filed away that says who owns it, and that record gets updated if it’s sold. It’s easy to image how blockchain, a secure public ledger, could keep track of who owns physical or digital goods.

That’s what NFTs do. They are blockchain ledgers that record the ownership of digital assets and enable buyers and sellers to exchange them directly. The abbreviation NFT stands for non-fungible token, suggesting that—, just as the deeds in the title office aren’t’ uniform and all of the same value—, that entries on this ledger are non-uniform too. Big money is being spent for these digital titles to some downright whacky assets. So, we’ll look at some notable sales and then get a handle on how this works or goes off the rails.

NFTs: Foolish fad or a new asset class to own digital culture?

Sports:
Non-fungible tokens or NFTs move investors from collecting physical items to tokens conferring ownership of digital assets. In these cases, the ownership documented is of a file, but not the intellectual property it contains. In February, a highlight clip known as a “moment” showing a LeBron James dunk sold for more than $200,000. Over at CNBC @TJHuddle reported this blockchain-based marketplace saw more than $150 million in sales from NFT highlight clips just during the final week of February.

From NBA Top Shot

Pop Culture:
Also in February, internet sensation Nyan Cat sold for about $590,000 on a two-week-old auction site called Foundation. It wasn’t the .gif file that was sold, which can be found everywhere online, but an entry of ownership on Ethereum blockchain, which established its scarcity. hat’s the rub: How scarce is NFT ownership of something that is free and already all over the internet?

Music:
This week the Wall Street Journal has covered NFTs daily. Yesterday’s piece on the music industry reported that “from June through Friday, some 29,800 NFTs involving musicians have generated $42.5 million in primary sales, with an average per-unit transaction value of $1,427.”

From Bloomberg TV

The same WSJ coverage featured Electronic music artist Justin Blau, who made a tokenized release of his three-year-old album “Ultraviolet”. The release grossed $11.6 million including a single purchase of an NFT, $3.6 million. In a frenzy where buyers race to be early in on trends, it’s awesome to be a seller.

Art:
Last week, news of an art auction that started at $100 and ultimately sold a digital file by an artist known as Beeples for $69.3 million stirred debate in both the art and investment worlds. Suddenly friends who are artists and musicians began mentioning to me that rights to their digital works were for sale in marketplaces using NFTs.

Crossroads artwork by the artist Beeple sold as an NFT for $6.5 million

If your art is somewhere near the intersection of social media and crypto-culture, and you have fans eager to affiliate themselves with your work, then NFTs may be a way to gain revenue and connect better with part of your audience.

As I’ve noted, selling into a frenzied market can be an amazing opportunity. But in such circumstances, caveat emptor counts extra for buyers.

Buyer beware: The Tinker Bell effect
Tinker Bell asserted that if you believe you can fly, you can. By extension, The Tinker Bell Effect suggests that a willing buyer’s enthusiasm is all it takes to substantiate a good’s value. As long as new, more generous buyers can be found – that river of belief can make anything a treasure.

This appetite for synthetic scarcity may be a vexation of late-stage capitalism. Once their essential needs are met, people may simply wish for things others cannot have, to show they’re special. Herbert Marcuse, the author of One Dimensional Man, held that advanced industrial society creates these false needs to tie people to production and consumption. Can there be a need more false than the desire to own a claim to an asset beyond one’s control?

NFTs build a business model on bragging rights
There’s a common phrase for earning an asset you can’t monetize, bragging rights. This phrase used to connote an activity driven by passion and for fun. NFTs have essentially build a business model around bragging rights. The more one pays for bragging, the greater their bragging will be.

Monetization must happen before commoditization
Typically, luxury brands take on investment (monetization) first; then over time, they drive growth by reducing exclusivity while lowering their margins to gain mass appeal. This is a recognized pattern in everything from North Face jackets to prestige brands in higher education.

NFTs take the reverse path, by taking something easily distributed, or already available freely and then selling what amounts to conferrable bragging rights. As they use elements reminiscent of other bubbles that have enriched investors (think collecting art meets Bitcoin), buyers may pile in for awhile. But after the speculative fervor subsides, those who don’t sell early may end up with ‘nothing burgers’.

Not everyone will agree with me on this right away, and that’s okay. Because I still have this rare and very special token for the copyright of a certain bridge in New York — just imagine the bragging rights. ;>

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