NFT Projects are Just SPACs

An NFT is a Non-Fungible Token, an ERC-721 is a token which trades on the Ethereum blockchain. Most not involved with NFT’s simply think we’re all spending ridiculous amounts of money on JPEG’s, but no were paying ridiculous amounts of money on tokens, those tokens can have anything attached to them, such as JPEG’s, or videos, or in game items. What makes them non fungible is that each token is unique, meaning there is only 1 of each. It is important to note that an ERC-721 is an NFT on the Ethereum blockchain and there are NFT’s on other blockchains such as Solana, however they are less relevant with most value traded on the Ethereum blockchain.

What is a SPAC

A SPAC or (Special Purpose Acquisition Vehicle) is a blank check company that is designed to merge with a private company to take it public without going through the traditional IPO process. They sell shares to investors to raise funds, then the SPAC managers look for a company that meets its stated requirements and merges with that company so that it may start trading on the stock market. SPACs are required to submit certain documents to the SEC, such as a prospectus which is meant to detail information about the SPAC, such as target company requirements, structure and management details. If the SPAC does not find a company to acquire the SPAC is dissolved and the funds are returned to investors.

How are NFT’s Being used?

While there are plenty of ways NFT’s are being used, from artists and creators owning and selling their digital art, to community driven collections, to “alpha” groups. There are many uses for an NFT; however, my focus is on NFT’s as an investment, most individuals purchase an NFT hoping it will increase in value and they can resell it, simple enough.

What causes an NFT to go up in value? I get variations of this question all the time, why is stock XYZ going up, why is Bitcoin going up, why is asset XYZ going up? The answer is simply more buyers than sellers, and vice versa for an asset price decreasing, more sellers than buyers. This is even more obvious in a market like the NFT market where liquidity is nil. NFT’s do not trade on a liquid market like stocks or even other tokens, they trade like an OTC market (Over the Counter) or like the housing market, just because you list an NFT to sell does not mean it will, there must be a buyer. This lack of instant liquidity makes it easy to move the price of a collection of NFT’s, if there are limited number of items for sale simply buying up the “floor” or cheapest listed items you can move the floor of the whole collection. Now yes there is more to it than just more buyers than sellers, any number of reasons may affect the price of a specific collection of NFT’s. However due to both the low liquidity and sometimes low supply many NFT projects can have their prices be easily manipulated with very little capital.

NFT Projects

NFT Projects are just SPAC’s, they are essentially startups that raise a large sum of ETH then find a use for that ETH (some more efficient than others). They usually release documents detailing their plans and use of ETH, called a whitepaper or also a roadmap. There are project founders and team members hoping to deliver on these promises, and if successful there can be large amounts of value created for both owners and the projects founding team, i.e., Bored Ape Yacht Club with the cheapest NFT currently priced at $170,620.32 However, unlike SPACs if a project is unsuccessful in achieving their stated goals, the ETH is not returned to the NFT owners. For most projects and founders, they get paid life changing money before ever building and delivering anything, this makes it hard to build a great product when you get paid first. It has been very easy for individuals to launch a NFT project, collect ETH and simply walk away without delivering anything, something the industry calls a “rug”. Some popular examples here are, Pixelmon which raised around $70 million and revealed art that looked like it cost $5 to produce, leaving owners outraged and feeling scammed. Pixelmon has also yet to reveal a playable video game, which they have advertised as in progress. Frosties was a NFT project that raised about $1.1 million and completely disappeared, deleting their online presence and whose founders were ultimately charged by the DOJ for fraud and money laundering. Individuals are so quick to give anonymous founders ETH in hopes of returns, but traditional investors would never give money to anonymous founders for companies in the real world. It is easy to raise funds and scam individuals in web3 and crypto, however it is also on the users to not “invest” in such obvious scams and cash grabs with their hard-earned ETH. Leave the more complex scams to Do Kwon and LUNA.

I would also like to mention some successful SPAC’s which completed their mergers and took their selected companies public such as Nikola Motors and Virgin Galactic Holdings, with both currently trading below the SPAC IPO of $10 a share.

NKLA:

SPCE:

I do not expect the current trend of NFT projects raising large sums of ETH and then attempting to build out a product to continue. With most founders realizing they are not good at running a startup, projects failing to deliver, or simply being unable to sell out as market participants become smarter with their funds. However, I would compare the current NFT market to the ICO mania of 2017–2018. While the current market bubble may have popped NFT’s are certainly not dead and will not disappear anytime soon.