Nov 9, 2021
If you Googled “Fungible,” Read this Article.
NFTs due to their insane valuations have garnered insane press. On the day of my first NFT release (my John McAfee interview), I wanted to share my thoughts about the phenomena. I make youtube videos, and am non-technical, if you want some good semi-technical articles on check out Andrew Steinwold’s history of NFTs.
One of my favorite lines ever comes from the movie “The Big Short.” It’s in the final scene where Michael Burry writes his resignation letter to his investors after his “short” against the real estate bubble turned out to be correct. The line reads as follows:
“People want an authority to tell them how to value things, but they choose this authority not based on facts or results, but they choose it because it seems authoritative and familiar.”
Nowhere is Burry’s phenomena more present than with NFTs. NFTs, Non-Fungible Tokens, have become huge today because of the insane prices that some of them have been selling for. Larva Labs’ Cryptopunks project has had several of its individual NFTs sell for millions of dollars. Twitter is filled with NFT profile pictures. Athletes, tech rockstars, and rappers are all flexing their NFTs-and many are creating projects of their own. For some, this is a sign that we are in a huge financial bubble that is about to pop. For others, it is a chance to get in on the next wave of a financial revolution.
So, is this value just totally based on viewing Venture Capitalists, tech founders, and celebrities as authoritative? Or is this technology the start of the next stage of capital creation and allocation?
Will the real value of NFTs please stand out?
What are NFTs?
The best way to view an NFT is a stamp on an individual blockchain. These stamps are used to show ownership of specific digital files: pictures, gifs, youtube videos. Each stamp is unique and there exists only 1/1 of that stamp on the respective blockchain it is minted on. As Frieze writes
“Most NFTs function like certificates of authenticity, only they rely on the cryptographic protocols of the Ethereum blockchain for their authority instead of an official paper document. This high-tech token is unique and proves your ownership, but the thing you own — usually a JPEG, GIF or MOV — remains as copyable as ever.”
The most common blockchain that is used is Ethereum, the second-biggest cryptocurrency. Major projects like Cardano, created by the co-founder of Ethereum, Charles Hoskinson, and Solana, backed by famed Venture Capital firm Andreeson Horowitz, aim to disrupt Ethereum’s present dominance. All three cryptocurrencies have gone up insane amounts this past year due to NFT’s.
Value of NFTs
The value of NFTs to me can be summarized with these five arguments.
- Legacy-You will be able to exert ownership on a singular nonperishable (like art), non-fungible (like money or gold), distinctly unique item for perpetuity. Like forever, forever. An NFT will in theory last longer than dynasties, like the 3000-year-old Egyptian Empire. In theory, an NFT stamp on the blockchain will last thousands of years in the future, beyond even humans living on earth. When you buy an NFT, it will forever be attached to your identity. Generations of your family will be able to tell what your interests were and how much of a baller you were at the time.
- Prestige- A fundamental aspect of human nature is the desire to have wealth that stems from age. In France, this was known as Nobility of the Sword: the noblemen whose influence derived from their ancestors fighting in the Crusades. They were seen as more important than the then wealthier than the Nobility of the Robe: the aristocrats whose status was obtained from “bourgeoisie” commerce. It is this sentiment, Gatsby’s desire to be “old money” that is fueling serious NFT investments.
3. Perks- There are perks! The Bored Ape Yacht Club (BAYC) is one of the biggest NFT projects, with Steph Curry famously adopting his Ape as his Twitter profile picture. Having a BAYC NFT gives you access to mega “elite” and “exclusive” events. Recently, I was at NFT.NYC conference. BAYC members were able to hang out with celebrities like Steve Aoki and Logan Paul, cut lines at major NYC clubs like TAO, and be invited to exclusive networking events and yacht parties.
4. Patronage- Hand in hand with the idea of perks, is the idea of patronizing your favorite artist. My NFT of my interview with John McAfee is going live today, and whoever ends up buying it will help me be able to continue to create content. Right now, artists, musicians, and internet celebrities are giving away greater access to themselves as part of their NFT packages. This can in theory appreciate. If I end up becoming the next Joe Rogan, the value of my first NFT will go up a lot! From a romantic perspective, this is the coolest part about NFTs. A chance to support your favorite up-and-coming artist and also cash in on them blowing up.
5. Flipping- “Greater Fool Theory is the idea that, during a market bubble, one can make money by buying overvalued assets and selling them for a profit later, because it will always be possible to find someone who is willing to pay a higher price.” A lot of crypto traders have stepped into the flipping NFT game in order to make a quick buck. I always am wary of such actions but to each their own! Just make sure to do your due diligence.
Can’t I just screenshot it?
Gary Vaynerchuk (Garyvee) has a great argument against this statement. Let’s take the Declaration of Independence, which is on loan to the Smithsonian from David Rubenstein. You can go to the Smithsonian and take a photo of that document, and you can even buy an exact replica of it from the gift shop. But, you do not have any claim to its ownership. On a more personal level, would you be happy with a fake stamped autograph of your favorite celebrity? Or would you want to know that it is actually signed by the person you are a fan of?
Another big question is “well it’s just a digital file, it is not a physical thing that I can wear, drive or show off, who cares?” Garyvee again has a great response, if you own expensive items in your home no one can really see it. You either have it in your home, parked in your garage, or wearing it around your office. However, if you have a blue checkmark, or 9 million Instagram followers, or as he argues, a cool NFT wallet, that is VERY public and shows people you are a baller. NFTs are inextricably intertwined with status.
Lastly, there is an argument that this is “just a way to get tax write-offs.” I believe this is the most elementary and unnecessarily skeptical reason to dismiss new technology, akin to “bitcoin is just for criminals.” Firstly, yes while art has always been used as a means to game the tax system, that doesn’t dismiss the value, both financial and personal, that comes from art. My general principle with this is if people are dedicating their lives to something-give them their sincerity the benefit of the doubt.
Whenever there is new technology there will be schemers, the big thing, in my opinion, is to “sus out” who are the people who are stepping into this space. If its reputable people like Andreeson Horowitz, Alexis Ohanian’s 776 Ventures, and Winklevoss Capital perhaps it is something worth not dismissing at face value.
Battle of the Blockchains
Seminal to the value of an NFT is the “cryptographic protocols of the blockchain it is minted on.” In layman’s terms, this means the blockchain an NFT is stamped on determines a lot of its value. The importance of the blockchain, as Stanford professor Dan Boneh explained on Andreeson Horowitz’s podcast, is that an NFT serves as a certificate of authenticity that will last forever. Thus, the blockchain is minted on matters a great deal. If the Ethereum blockchain is part of our everyday lives like Billionaire Venture Capitalist Tim Draper and Reddit founder Alexis Ohanian say it will, then having your valuable internet file’s certificate of authenticity on Ethereum’s blockchain matters. If Ethereum has no cultural impact and turns out to be a “fad,” then having a mark of ownership on that blockchain makes no difference.
This is a great debate at the moment surrounding this. In the perspective of Solana or Cardano, Ethereum’s Blockchain is old, environmentally costly, and expensive. However, as it has market dominance, years of history, and powerful backers, right now most serious projects are being built on the Ethereum blockchain. Remember, the most important part of this digital stamp is the blockchain it is stamped on.
The Case for Cautiousness-
Good NFTs are hard work
While it seems like there are so many people who are just “making millions of dollars selling cheap photos online,” you will see that most people who get into minting NFTs are struggling to sell theirs! While there are a couple of major sales of more recent projects, usually tied to a celebrity like Grimes’, the projects that do well typically are not random. The best projects are usually done by people who have worked hard for years, without recognition for their work. Beeple is perhaps the best example of this. He shot to international fame with the $69 million dollar sale of his artwork. He has been a famous digital creator for more than a decade. The specific artwork he sold, he had worked on literally every single day since May 1st, 2007. He did this work without the expectation that it would result in a multi-million dollar sale. Other major projects, like Larvalabs’ Cryptopunks made back in 2017, mirror such longevity and sincerity during creation.
In sum-don’t think you can just come into this space with the intent of doodling a sketch and making a fortune.
Everyone’s got a Different Cost of Acquisition
The NFTs that are selling for these big numbers may have inflated prices due to the present bull market. However, not everyone’s skin in the game costs the same! If you have been investing in cryptocurrencies since the early 2010s, then your cost per Ethereum token is DRAMATICALLY lower than someone who is getting into crypto now. For example, Mahbod Moghadam, the “gonzo Rap Genius” founder, now working on helladoge.com, is rumored to have invested $69,420 (a troll amount, 69=sex act, 420=reference to marijuana) dollars into Ethereum at around 1 dollar per coin. Each coin at the time of writing this is now worth ~$4700. Thus, when someone who is like him buys an NFT for however much ETH it costs, he isn’t spending the present market value of that digital asset, rather he is spending an amount that should be seen as tied to his dollar per Eth purchase years ago. Vignesh Sundaresan, who bought the Beeple NFT, has been invested in Ethereum literally since its founding. He outbid another long-term crypto investor, Justin Sun. Vignesh’s true cost of that NFT is more likely in the thousands to tens of thousands rather than 10s of millions.
Whales and Expansion of Markets
Whales Whales Whales
As NDTV reported, 80% of NFTs are owned by Ethereum whales. Ethereum Whales are like Mahbod Moghadam, Justin Sun, and Sundaresan who own enough Ethereum that their individual trades could change market conditions. The whale phenomena is rooted in something called the Pareto Principle, where 80% of the consequences stem from 20% of the causes. This is very reflective in the whole world of Crypto, where there usually is a majority of the wealth of a cryptocurrency is held by creators, first movers, exchanges, and very rich people like Anthony Scaramucci who has a lot of investor money to move around.
Whales need to be seen as architects of the NFT boom. In economics, you want expansion of markets for companies to sell their products. With crypto, you need an expansion of use-cases and wallet holders (users). So while Vignesh could just have cashed out his $69 million dollars for just the cash, he created a media frenzy when he bought the Beeple artwork. In doing so, he helped spark this present NFT craze, and in doing so attract millions of new people to crypto. He expanded the market and public interest of cryptocurrencies by giving value to this use case. A product of this? His own Ethereum will likely be worth more. Also, as per the art world’s economics, that Beeple asset will likely go up in value over time as it was newsworthy and the first big NFT sale.
The big takeaway from this idea should be that people who own the most amount of NFTs are these Ethereum Whales. I don’t believe that this is because they want to horde, but rather I think it is because they want to convince YOU that it is a good investment and use case for Ethereum technology. This doesn’t mean that it is something to dismiss NFTs on completely. In fact, most assets follow the Pareto Principle. We know that the United States’ wealth is disproportionately held by a small group of people. Bill Gates, an individual, owns the majority of the USA’s farmland.
Should I invest?
If you have Cash
If you are someone who is well off and looking to diversify into high-risk high-return crypto adjacent assets, then this can be a great way to see some amazing returns! I had Anthony Scaramucci on my podcast in August of 2020. Not long after, he started personally interviewing a lot of crypto people like Michael Saylor and the Winklevoss twins. He then took a bet on Bitcoin, much much riskier at the time. That paid off handsomely a year later. So, do your own couple of months of due diligence, have conversations with the ballers in the space, and then you will be set to make an educated gamble.
Remember the value of NFTs should be seen as being intertwined with internet culture. So, an NFT of something that is valuable in the real world, ie a non-internet savvy celebrity, may not carry the same value as something with internet clout like the Nyan Cat meme.
If you have Clout-
The musician 3LAU famously sold his NFT for $11 million dollars earlier this year. However, what few people see is that had multiple unsuccessful drops prior to his big one. A business school dropout, he actually networked a ton to get plugged into the NFT scene before his big drop.
If you are reading this and you either have or you know someone who has an internet community, get or urge them to get involved! It may not result in a 10 million dollar NFT sale, but tokenizing your content will help increase your revenue and hopefully reward your true fans!
If you have neither-
If you are just starting out in your career, I personally believe that you should hold off on investing in NFTs. Rather, focus on either building your capital or building your clout. Capital will allow you to get involved with a serious NFT project, like one that is backed by a major company like Yuga Labs. Clout, that online comes from building a brand around your interests, will allow you to build a base of support for your own projects. It also will help you get your foot in the door, like 3LAU, and make connections with the “movers and shakers” in the space.
To Conclude-
NFTs are the rockstars of the investment world. At the intersection of technology, art, culture, and finance they’re rightfully attracting a lot of attention, both the good and bad kinds. If its premise works out, NFTs will revolutionize how we invest/store wealth, support our favorite creators, and most importantly how we earn our livings.
