NFTs: Next big thing or just a bubble?
Exploring the hype and risks of Non-Fungible Tokens
You have probably heard about Reddit’s new favorite trend, NFTs, but what exactly is an NFT, and is it really the future of investing? A Non-Fungible Token, or more commonly known as an NFT is a form of data in the form of audio, picture, or video. Most NFTs are easily reproducible but using blockchain technology, an owner of an NFT is able to prove that he is the owner of the artwork. Think of it as a digital version of a piece of art or a sports card. Because of the funny and interesting-looking NFTs floating around the internet, it is easy to see how and why this gained traction in a fast-moving world that likes to hop from trend to trend. Some of these NFTs sell for ridiculous prices such as Beeple’s Everydays: The first 5,000 days, which sold for a record $69.3 million1. Many other NFTs have sold in the millions, but is this price justifiable?
While many people buy NFTs to add as a collection, a large number of NFTs are bought with the expectation that the NFT market will continue to rise to eventually sell it for a higher price than what it was bought for. The problem with this investment strategy is that NFTs have no true intrinsic value. Their worth is entirely based on speculation. Unlike a share of a stock that is backed by the assets and fundamentals of the company or a bond backed by the government reserves, there is no asset that supports the price of the NFT. What this means is that if the NFT market were to crash, there is nothing preventing the free fall of its price to 0. Adding onto that, an NFT is a noninterchangeable asset meaning that it can not be traded, only bought and sold. One can spend millions on an NFT and end up stuck with a worthless asset, something very unlikely to happen with more traditional investment assets such as gold and real estate. 2
A bubble in economics is defined as an asset that is selling for much higher than its intrinsic value supports due to high speculation. Some examples of this in history include the Dutch tulip bubble, the dot com bubble, and the housing bubble of 2008. Does the NFT market show any signs of being the newest addition to this list? The answer is a resounding yes. At the beginning of 2021, the NFT market was valued at only $23 million. Within 4 months, the market rose a mind-blowing 1785% to $432 million. May 3rd was when the market peaked, with $102 million worth of transactions in one day. The following week there was $170 million worth of transactions. By the end of May, this number had dropped nearly 90% to $19.4 million a week. Adding to this, economist Jiang Zhou explains why he believes the NFT market will continue to crash citing “When I say the crash is inevitable because, at the micro-level, the crash is determined by supply and demand forces. The demand side(investments) for NFT is finite, while the supply is infinite.”3 In short, because the supply greatly overpowers the demand, once demand slows down and the market is flooded with more NFTs, there will be no force supporting the NFT’s wild valuations.
The way NFTs are secured adds an extra level of caution. Due to the nature of the blockchain technology that NFT utilizes, the money used to buy and sell NFTs is nearly impossible to trace. To add to this, most NFTs are bought with crypto such as Bitcoin and Ethereum which further complicates tracing the money. This means that if someone has dirty money, they can buy and sell an NFT and make their money completely untraceable.4 This is a large problem that is likely to be addressed by the government in the coming months. If regulations were to be placed on NFTs, the NFT market would be even less desirable.
What is my stance on the NFT market? While I believe in taking risks in life, I also believe in making smart choices. I personally would not buy an NFT but the verdict is out for anyone to do what they believe is right.
Beeple Sold an NFT for $69 Million
https://www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million
Understanding the Value of NFTs
https://medium.com/@changhugo/understanding-the-value-of-non-fungible-tokens-nft-49d2713bdfc4
The NFT Market Will Crash Soon, it is Inevitable
https://b-topmining.medium.com/nft-market-will-crash-soon-it-is-inevitable-33762e58156f
Crypto NFTs Are Said to be Used for Money Laundering: 3 Things to Know