A reader recently said to me: “I’ve invested the proceeds from the sale of our flat in NFT art. Now I’m scared at the prospects of telling my wife that in a few months’ from now, we should either be looking for a home in Southern France or a homeless shelter.”
A bubble only looks and feels different if you’re standing on the outside jealous of missed opportunity and profits. Those on the inside see a different world – they’re benefitting from irrational, soaring markets. Or even better, they’re able to find a new bubble to inflate inside an existing one.
The latest speculative bubble brought to you by Bitcoin and its underlying blockchain technology is NFT art – non-fungible tokens that are applied towards art and collectibles. Non-fungible goods are unique and authentic registers of a limited-edition collectable item, such as a rare baseball card or a numbered art print. They supposedly cannot be counterfeited, making them a form of currency attached to the value of the object.
When you buy or sell NFT art, you don’t own content or a work of art; rather you own the rights to the unique token on the blockchain. You don’t control the rights to its replication or distribution. Although people have long used art to store value, crypto easily extends the concept into digitised and tokenised art, making it efficient to also transfer value. It represents an advanced and modern platform for investing in art and using it in the same way that someone might trade gold, stocks or bitcoin.
To date, NFTs have generated billions of dollars of turnover: one NFT – Everydays: The First 5,000 Days, by the American digital artist known as Beeple – recently sold at Christie’s for almost US$70 million. Indeed, according to data from the NFT platform CryptoSlam, people spent more than $1 billion on digital assets in April alone.
Crypto art has been around for about five years, but for many speculators outside of the crypto world, NFTs exploded out of nowhere. The bubble is being inflated by a number of speculative factors that include the pandemic, the wild growth in bitcoin prices and institutional acceptance (as companies such as Tesla buy and validate bitcoin). Homebound investors armed with the latest trading platforms have nothing better to do in a pandemic than chase new trends in chatrooms: the next bitcoin; decimating hedge-fund short sellers; or foraging for the next bubble.
In the background, artificially low interest rates have created their own quiet desperation, as many investors break prudent rules to drill for returns. Yet the phenomenon is also a generational event for millennials, one that defies and excludes older generations who fear new frontiers that will either change everything. Or nothing.
Speculations – or “madnesses of crowds” – take hold when a bubble that appears can bridge the subtle nuance between what people want and what they truly want. Investors can easily convince themselves about intrinsic value after buying a fake painting. Desperation means that the more you pay for it, the less inclined you are to doubt its authenticity. And you’ll wear desperation like a cheap cologne.
NFTs are likely to be overinflated at some point, because so much money, speculators and producers of NFTs are supplying and rushing into this space. Digital tokens work on the same principles as their crypto- currency relatives. They can’t be duplicated, they can be easily verified and authenticated on the blockchain, and they’re are immutable. Yet this is no way to be sure they’ll maintain their intrinsic value over time. Value is currently only driven by scarcity.
As with any speculative frenzy, the key to success and not being burnt by a chaotic collapse is to buy and sell early. Bubbles will necessarily shame investors, because they’ll either suffer the regret of buying too late or selling too early. The main weakness of bitcoin and NFT is that buyers and sellers still reference them to fiat currency like US dollars, rather than holding them as a separate, reliable store of value and method of transfer.
So if you aren’t an ardent collector of art, but only seeking quick financial returns, then much due diligence is required to sort through the ocean of NFTs to find a segment that suits your risk appetite and interests. Finding a reliable, credible issuer of NFT art and collectibles that isn’t flooding the market to merely mint money for itself requires thorough investigation. And understanding the secondary-market liquidity for your NFT is important for your exit.
Just as when buying any art, you must assume that almost everything in NFT will become worthless and only a small group will appreciate over time. And that group will only include art that has been authenticated with real historical value and importance.
While collectors dissuade punters who are purely interested in making a quick return from buying NFT art without a genuine interest a segment of collectibles, most are seeking the ground floor of the next bitcoin. You should generally invest based on skill rather than luck, but if you must depend on luck, then prepare yourself accordingly.
NFTS may be the future of art investment and collection, but the avalanche of capital pouring into this field will eventually spawn a shake out of speculative excess before it gains legitimacy.
This story first appeared in Prestige Hong Kong.