NFTs don’t make sense, but neither does Bitcoin

Someone bought this NFT for $69,000.

I vividly remember the moment I realized NFTs were a thing. 

I was talking to a friend who’s into cryptocurrency. He was regaling me with a particularly turbulent crypto tale. He’d invested $300 into an altcoin, one of the thousands of tokens not named Bitcoin or Ether, but the developer vanished. Then, after months of silence, the developer returned, revealing they had been working on the coin the whole time. That coin became the hot ticket in crypto town, and my friend’s $300 became $30,000. Just typical crazy crypto shit.  

“I’m not going to sell,” he told me. “If you hold the coin for a certain number of days, the developer gives you an NFT. So I’ll wait for that.” 

I was staggered. I knew NFTs to be nifty-but-worthless pieces of digital art, but my friend was willing to risk a once-in-a-lifetime jackpot to get one. Then he explained that someone had bought an NFT for 800 ether, or $1.2 million, the week before.

Ah. 

Non-Fungible Tokens, or NFTs, are digital products whose authenticity has been certified on a blockchain. It can be pretty much anything digital: Kings of Leon are selling tokens that give owners access to their new album. A gif of the Dogecoin cryptocurrency mascot (pictured above) sold as an NFT for $69,000, and Christie’s last week auctioned a digital art NFT for $69 million.

This is where “non-fungible” comes in. A fungible asset is one that’s interchangeable with others of its kind — like money. There are 1.8 billion $50 notes in circulation, and all of them are worth $50. Assets that are not fungible, like houses, cars or paintings, are not interchangeable, and are valued on a case-by-case basis.

At this point you’re probably confused, and maybe even beating yourself up for not getting it. But actually, there’s nothing to get. It’s incomprehensible that clips, memes and gifs are selling for six figures, seven and even eight figures. Know what else is incomprehensible? Cryptocurrency, but that hasn’t stopped it from becoming a trillion dollar market

Just because NFTs are crazy doesn’t mean they won’t be around for a long time.

NFTs and you

There are a few reasons people are buying NFTs. 

NFTs are all about ownership. Take Jack Dorsey auctioning off his first tweet as an NFT: Everyone can see that tweet, but only the person who buys its NFT will own it. That ownership will be certified unchangeably on a blockchain, which is a digital ledger that records transactions for all to see. It’s the difference, NFT buyers will tell you, between having a print or an original painting.

Others buy NFTs because they believe in the technology. One of the dominant criticisms of cryptocurrency is it’s a solution searching for a problem. Some are flocking to NFTs because they’re true believers in blockchain. They see Non-Fungible Tokens, which are proof of ownership, as a real-world application of that technology.

There’s something to this. What NFTs really do is create scarcity. It’s artificial scarcity, but that’s nothing unusual: Nike and Kanye West created artificial scarcity when they decided to only produce 200 Yeezy Red October sneakers, which is why that particular pair of sneaker runs over $10,000. When the Kings of Leon released their new album as a $50 NFT, they only made it available in that form for two weeks, essentially making a blockchain-powered limited edition.

So the simplest way to think about NFTs is as collectibles. Just like a small group of people are willing to drop six figures on a mint-condition, first-edition Charizard, there’s a small group of much richer people willing to pay eight-figures to “own” a piece of digital art — even if you or I can freely see that art with a quick Google search. 

Sometimes, NFTs are completely silly. A NFT of the Bad Luck Bryan meme sold for $36,000. Othertimes they’re less so. You may have seen Christie’s, a high-end art auctioneer, sold an artist’s NFT for $69 million. On the face of it, that sounds like the height of insanity. But it’s not that much crazier than, say, a blue canvas selling for $40 million at a similar auction. 

But what is less ambiguously bad about NFTs is their environmental impact. Blockchain technology is extremely inefficient. Cryptocurrencies are created by powerful PCs that mine blockchains, done via the solving of increasingly complex equations. This process means that more carbon emissions come from Bitcoin mining than the entire country of Switzerland.

NFTs are similarly costly to produce. Spurts of energy will be exerted when an NFT is minted, and then again each time someone buys that NFT since its ownership change is reflected on the blockchain. The sale of a set of NFTs recently consumed 8.7 megawatt hours, reports Wired.

That’s a lot of energy. The average US household consumes 10.6 megawatt hours — per year.

Confused? You should be

Even with that explanation, it’s galling to see NFT sales in the headlines. Someone recently spent $20,000 on a NFT clip of Logan Paul opening a pack of Pokemon cards. It’s hard to see that and not wonder, at your core: Why?

There’s a precedent for this in cryptocurrency, the blockchain cousins of NFTs. Cryptocurrency markets don’t make sense, so in a way it makes sense that NFTs don’t either. Both are born out of speculation. 

The first Bitcoin was mined in 2009, but it took a few years for the cryptocurrency to become the headline grabbing craze it is today. Ethereum, the second biggest cryptocurrency, was launched in 2015. In many ways it’s more important than Bitcoin. Right now, Bitcoin is like gold in that all you can do with it is buy it or sell it, but developers use the Ethereum blockchain to build other coins and applications. NFTs are one such application: Most Non-fungible Tokens are written on the Ethereum blockchain. 

As quaint as it sounds, the cryptocurrency world went agog when Bitcoin first hit $1,000 back in 2013. It’s around then that the quest to find “the next Bitcoin” became an obsession on both sides of the community: Developers wanted to make the next Bitcoin, punters wanted to find it early and mint their fortune. In the years since, with Bitcoin now hovering around $50,000, that impulse has only grown stronger. 

The cryptocurrency market operates similar to a stock market. There are thousands and thousands of tokens to buy. Some replicate real-world financial tools — there are tokens that work like hedge funds or lending platforms, for instance — while others claim to work faster or more reliably than Ethereum. Some, like the famous Dogecoin, are billion-dollar memes.

beeple-christies.png

A piece by the artist Beeple was sold at a Christie’s auction for over $69 million.


Christie’s

Cryptocurrencies have yet to find meaningful real-world applications, so at this point it’s all speculation. But that hasn’t stopped hundreds of altcoins from becoming incredibly valuable, and making thousands of people rich in the process. 

I recently saw a cryptocurrency explode from 27 cents to just over $75 in less than three weeks. That’s 275x profit if you bought the low and sold the high. A Tesla investor would have seen similar gains if they bought in at its all-time low and sold at its all-time high — 11 years later. 

NFTs, like cryptocurrency, are all about speculation. Just like people buy a useless cryptocurrency for $50,000 strictly for the purpose of selling it at $100,000, people will buy an NFT of Homer Simpson meshed with Pepe the Frog for $38,000 just because they think they can sell it later for more.

And they can. Someone did buy that NFT — and sold it later for $320,000.

So no, NFTs don’t make sense. But cryptocurrency has shown that a trend doesn’t need to make sense in order to grow exponentially every year. We’re probably witnessing a NFT bubble right now, and like Bitcoin in 2017 that bubble will probably burst — but don’t expect that to kill NFTs for good.

My friend never got his NFT: The developer vanished again. And while he was waiting, his $30,000 crashed back down to around $500. He won’t be the last person to lose a car’s worth of money chasing NFT dreams.


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