Would you pay half a million dollars for a picture of a rock?
Cryptocurrency entrepreneur Justin Sun has announced on Twitter that he had paid half-a-million dollars for a picture of a rock with laser eyes. It wasn’t even a good picture of a rock. It had little to no artistic merit, like most of the non-fungible tokens, or NFTs.
Whether it’s the original cryptokitties, or the penguins wearing hats, or the rocks, it is all crypto-community internet kitsch, a big inside joke that none of us are supposed to get except for the cool crypto kids.
The geeks buy and sell these “assets”, driving prices up to unsustainable heights, while the rest of us just shrug. We just don’t get it, they say.
I get it perfectly well. First, NFTs are an incredible innovation that might be more important than the cryptocurrencies they are based on. NFTs establish property rights in the digital sphere where none had previously existed. US copyright law provides for what is called the “first sale doctrine”, where it is “legal to resell or otherwise dispose of physical copies of copyrighted works”, writes Katya Fisher in the Cardozo Arts & Entertainment Law Journal.
Up until this point, no such protections existed in the digital realm, as digital copies of a work of art were considered to be fungible, and a digital first sale right could not exist with digital works due to their fungibility. If one buys a physical painting, one just buys the painting, not the rights to reproduce that painting. NFTs operate in much the same way.
SILLINESS
The interesting thing about NFTs is that they aren’t being used for that purpose, at least for now. They’re being used to speculate on silliness.
There are legitimate digital artists — David McLeod and Alberto Seveso come to mind — whose NFTs are trading well below the penguins and lo-res cats. Sure, Damien Hirst just sold a bunch of dot portrait NFTs, which have gone up tenfold, and Beeple sold his digital mosaic Everydays: The First 5000 Days for $69m, but Hirst is a famous fine artist and there has been much debate over the artistic quality of Beeple’s vulgar daily sketches.
That’s one feature of this bull market that has puzzled me: the highest-performing assets have been the dregs, stocks like GameStop and AMC Entertainment, junk bonds with negative real yields, and the 24-pixel NFTs. Instead of running out and buying the best assets, speculators are buying the worst. The WallStreetBets crowd could have easily bought Apple, but they didn’t. Financial historians will look back at this period with a mixture of amazement and horror.
Since NFTs are non-fungible, they are really just collectibles. There have been a handful of bubbles in collectibles, with Beanie Babies in the 1990s being perhaps the most famous example. The Beanie Babies implosion had no systemic effects, but what was noteworthy was that it was perfectly timed with the rise and fall of dot-com stocks.
Bubbles in collectibles tend to be synchronous with other asset bubbles, and actual physical collectibles are roaring right now, from comic books to sports memorabilia to sneakers.
But one way in which the physical collectibles market differs from NFTs is that there is a finite supply with physical collectibles. As high prices attract new entrants, new NFTs are being minted all the time.
SAVVY TEENS
My newsletter subscribers have told me stories of their children minting a new NFT for as little as $20, only to sell it for $1,000. This is being repeated thousands of times across the US as tech-savvy teenagers look to get into the game.
Jens Parsson, writing in Dying of Money: Lessons of the Great German and American Inflations, described how attitudes towards money changed in Weimar Germany: “When money was so easy to come by, one took less care to obtain real value for it, and frugality came to seem inconsequential.” The defining financial feature of 2021 is that money is so easy and speculation is rampant, just as it was in Germany in 1920.
When people are buying crudely drawn rocks for $500,000, what stage of the cycle are we in? I actually spent half-a-million dollars recently on something, too: more than 3.5ha of land close to the beach in South Carolina. Which will be worth more in 10 years, the land or the rock picture? Well, the land has already doubled in value in six months, and I didn’t need the blockchain to do it.
Dillian is the editor of The Daily Dirtnap, investment strategist at Mauldin Economics and the author of ‘Street Freak’ and ‘All the Evil of This World’. He may have a stake in the areas he writes about.