Another bubble, or why a pixel can be more valuable than Pollock.
The title of this article was self-imposed, given the topic of our discussion. And no, it is not a clickbait of any kind, nor is it a prediction of another crypto-, mortgage- or global financial crisis. Perhaps, this article would rather act as a live representation of the famous idea of “those who cannot remember the past are condemned to repeat it” (attributed to various historical figures as the authors) embedded in a quick recap of modern financial history. What we really want to discuss today is why some NFT projects are a great source of investment, while others find themselves below the imaginable level of baseboard.
First of all, as always, let us start with the very basics — what are NFTs? Not to delve into much details an NFT, or Non-Fungible Token for long, is a piece of unique data stored on some blockchain. It is typically manifested (or rather visualized for users’ sake) in the form of a picture, video, audio or a combination of these, yet not a necessary condition. While this definition is seemingly trivial for some of the more sophisticated NFT collectors, it serves a good and important point for the newcomers. And we shall get back to the definition later and take a few steps back first.
However, let’s first do a quick recap of the lessons that history teaches us in a chronological order.
- Tulip bubble
Starting off with one of the most well-known examples of human greed-driven irrationality is the instance of the Tulip bubble of the 1630s. Clearly this is not the first instance in human history, yet one of the classic examples to lay a foundational stone to the many mistakes the humankind would later make. - The Dot-com bubble
Quite possibly, as some of the more mature readers grin nervously while revisiting the so-long suppressed memories of the ‘tech bubble’ of the late 1990s — early 2000s, the younger readers are completely clueless. The dot-com bubble, as the name suggests, related to the overheating of the entire market due to excessive market speculation of the internet-related companies. Those were the times where a Win98 operating system was deemed a slick and stylish avant-garde of software engineering, so one should not be surprised that pretty much any company that had a web-site, let alone a web-operated business was considered a big deal. Eventually, as investors started to realize that some of such businesses do not match their facade with their financials — the bubble, as they do, popped, leading the markets into a great dip and forcing thousands of companies into bankruptcy. - ICOs boom and bust
While formally no financial analyst would attribute the rise and fall of ICO projects from 2015–2019 to be a massive bubble, especially that the world hasn’t gone into a great recession, the signs are still there. Although it is merely impossible to correctly gauge the amount of ICOs in this time period (lack of regulation, unofficial registration etc), one thing can be said for certain — many investors got burned. With ICOs popping in and out of every corner for every imaginable and unimaginable ideas, the official statistics suggest that over 70% of ICOs eventually died out (unofficial statistics are even more scary — over 95%). Given that every year new ICO projects raised $16-$22 billion dollars (Forbes , ICO Market Report), one can do the simple calculation of the total wealth lost. Just like with the dot-com bubble, ICO projects slowly but steadily evolved from being a ‘weird internet thing’ to becoming a formal rival for IPOs and other means of external funding. However, since human greed knows no boundaries, many of the weaker ICO projects still managed to collect substantial heaps of money bushels bags. - NFTs
And now, we all have found a new toy to mess around with — NFTs. Should we be worried, given the aforementioned track-record of our species? Well, it certainly never hurts to be too cautious. Given the definition above, NFT collections of all sort have become an integral part of the new semi-financial assets. We say semi-financial, since some have a financial component to them, yet their physical aspect also serves an entertainment purpose. So, just like with paintings in an art gallery, one could argue that those are merely investment vehicles, while many would only consider the craftsmanship of the creator. Moreover, NFTs being a part of some blockchain, can be deemed as physical manifestations of the corresponding crypto-currency. And whis raises more questions — how does one choose a suitable NFT? What are the proper ways to assess NFTs and distinguish plums from lemons?
Art itself
Clearly, the very first thing that one would see is the art itself. Since most of the NFTs are presented in the form of an image (we consider GIFs the same), the closest comparison would be to paintings. Some paintings cost millions, while others are just some sketches or even scribbles on a piece of a napkin that you doodle to a boring phone call. Nevertheless, if enough people like what they see — the demand and the acknowledgement are a matter of time (we shall not consider the question of mass exposure and treat all projects the same for simplicity). The better, the more creative and the more extravagant the art is — the more attention it would, arguably, receive. In the end, we have seen all styles and themes of paintings over the course of humanity and have finally reached the ‘modern art’ with some abstract splashes of paint, which nevertheless can cost substantial amounts of money. Those abstract pieces of art are sometimes highly valued not due to the complexity or the skills necessary, but rather because of the exclusive nature of them. Moreover, most of the modern art collectors simply enjoy the realization of being a part of this exclusive club, being surrounded by like-minded achievers and private-jet club members.
Utilitarian functions of an NFT
Beneath the artistic layers of contrasting shades, lore and one-of-a-kind golden skins lies the other side to the coin — the utilitarian value. Unfortunately, this gets left out very often, since, let’s face it, we first judge a book by its cover without even looking at the table of contents. However, this should be at least on par with the artistic value of any NFT.
- the blockchain of the associated NFT is the first thing to consider. If a certain blockchain is weak, lacks technological novelty, wide adoption, has an incompetent developers team, etc. — all associated projects built on this blockchain are going to struggle. So, learning about the blockchain itself should always be the starting point. (Why Theta Network?)
- the project behind any NFT collection is the logical continuation to the previous point. This is where, as promised, we recall the definition of an NFT we gave in the beginning of this article. If a project lacks depth of thought, planning, development or struggles to deliver, it would inevitably slide into a pit. Generally, it is good to consider the following things: the project’s goals (targets, ideas etc), the roadmap (both planning and delivery), relations with the community (the owners should care about their supports and be in touch), giveaways, promotions and DeFi elements. All these take some time to research, but are absolutely vital if one seeks to find good NFT projects. A great gestalt of such elements is the deterministic force that makes the project, thus the NFT’s valuable.
- if the previous points are indeed great and stand out, we can imagine a single pixel of an NFT to be worth more than Pollock’s paintings. Is it wrong? Not at all, as in this case we are effectively comparing apples to…well, not even oranges, more like apples to pencils. Both are great and are good to have, depending on your goals. Back in the day, before the digital era when company shares were physical colorful notes of stock certificates, nobody questioned the designs of those.
So, given the above, we know two things. An NFT can be worth your investment in two cases. The first is if you only consider it as an art-project (nothing wrong with it!) and you actually like the art; and don’t we all like shiny things? The second is a financial asset approach — you consider the fundamentals of the project and the blockchain themselves, while the art is not so important at all. Obviously, if both conditions coincide — bingo, you should get your hands on it.
It is important to remember that either of the approaches is absolutely acceptable. Some of us collect NFTs as a hobby, just like philately. Others of us are here only for the financial benefit. Either is good, whatever floats your boat and hence no NFT-shaming should exist. All-in-all, some love BMW M3 for its performance, while others like that it’s red and has comfy seats.
There are plenty of NFT projects already, with many more to come in the near future, no doubt. So, are we in for another bubble then? Perhaps at some point, but not yet. While from the inside it might look as an overwhelming selection, from the financial standpoint the market is still in its infancy. In fact, NFTs are still just a phenomenon, just like the creation of Satoshi Nakamoto was once. Should we consider doing something to avoid a potential bubble then? Perhaps an entry tax, or having a regulatory body to audit the new NFT projects? Surely we can have those, which would merely act as red-tape for many great potentials, not to mention, would directly defeat the purpose and the spirit of crypto- blockchain- and NFT- communities altogether. Instead, we should strive to deliver higher quality of projects as a community of creators and to be cautious as a community of collectors. The laissez-faire NFT market with adequate creators and wise collectors would auto-regulate itself and most likely correct any imperfections before they turn into another financial bubble. At least we can hope for this and do our part by sharing the projects we love, spreading the word about great blockchains and self-educating. Let’s make the NFT market great together!
Sources:
Where Did The Money Go? Inside the Big Crypto ICOs of 2017
Dutch Tulip Bulb Market Bubble
ICO Market Report 2018/2019 — Performance Analysis of 2018’s Initial Coin Offerings
Investment world is one to be careful about with bubbles bursting left, right and centre
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