Non-fungible tokens, blockchains that you can buy but cannot spend
Note: This article on NFTs represents the opinion of the author. It should not be construed as financial advice or the position of WorthPoint®.
NFTs: The Rise of the Crypto-Grifters
Dealers, what do you do when you overpay for a collectible? Most of us will display the item and hope to sell it for enough money to make a profit. Sometimes that takes a while. I have seen dealers keep an item for years, waiting to get their price.
This method of doing business is called “the greater fool theory.” The gist of it is that if you were foolish enough to overpay for an item, eventually an even greater fool will come along and pay you more for it.
Currently, the NFT “collectibles” market is operating on the greater fool theory. According to a research project using data from NFT marketplace OpenSea, only about 19% of NFTs have been resold after the initial purchase. As a result, lots of folks are buying them, but few can resell them. Meanwhile, their owners watch the prices drop.
Jenna Pilgrim, a co-founder of the NFT rights management platform Streambed, believes this is because the laws surrounding NFTs are rarely explored. In an article for BlockWorks.co, she says: “This, unfortunately, leads undereducated buyers to buy an NFT with the hope of it appreciating in value, and then being unable to sell it.”
Yes, some are making a killing in the market. But most aren’t. MarketWatch, in their April 2021 report, says:
“NFTs themselves are actually well down from their highs, with a 70% drop in average price since February. Perhaps this is less the bursting of a bubble than a “weeding out” of gimmicky tokens now that the initial hype has begun to die down.”
On September 23, the BBC quoted David Gerard, author of Attack of the 50 Foot Blockchain:
“There are some artists absolutely making bank on this stuff… it’s just that you probably won’t…The people actually selling the NFTs are “crypto-grifters…The same guys who’ve always been at it, trying to come up with a new form of worthless magic bean that they can sell for money.”
In the same article, former Christie’s auctioneer Charles Allsopp added his two-cents worth:
“The idea of buying something which isn’t there is just strange…I think people who invest in it are slight mugs, but I hope they don’t lose their money.”
When you buy an NFT, what are you getting? Let’s start our discussion with something we already know—antiques and collectibles.
If you bought a first edition of The Great Gatsby, it would be yours. The seller gets all the money you paid, and you get the book. The seller gives up all claims to ownership, and the book physically changes hands.
You can take your book home, touch it, read it, sell it, restore it, or give it away. It’s all yours. You can enjoy pride of ownership, bragging rights, and the sensory pleasures of holding a vintage book. You also get the satisfaction of having invested in an asset with a proven track record. What you can’t do with your book is reprint it and sell copies because you don’t own the copyright. The copyright holder retains that right.
Creators own the intellectual property rights to their work. If they want to sell one as an NFT, they must first create a smart (digital) contract that defines these rights. It is stored on a blockchain (a distinct type of database). The contract is referred to as a “token” because it represents the asset. The token is not the actual asset. Since the asset is unique, the token is unique. It is non-fungible, meaning that it cannot be replaced by another identical or mutually interchangeable item (because there isn’t one). Hence, it is a non-fungible token or NFT.
When you buy an NFT, you are buying the specific set of rights outlined in the contract and nothing else. Neither the token nor the actual asset is ever in a buyer’s possession. The asset can be viewed in their digital wallet (or another screen). Still, it cannot be altered, photographed, or publicly displayed. The owner can brag about it, but so what? Popular digital works are all over the ‘net. An expensive NFT is no more accessible or enjoyable to its owner than anyone else on the planet. Anyone can find a free image of the original NFT, copy it, and share it with their friends.
Creators are free to do whatever they want with the original (except resell it; they gave you that right). They can reproduce it and make derivative works from it. There is no scarcity.
Worse, if you do sell the NFT, you don’t keep all the money. There are brokerage fees, and—get this– the creator gets a cut every time it’s resold, forever (it’s in the contract, baby).
NFTs are alternative investments, not collectibles
It’s nearly impossible to research NFTs without seeing them linked to the word “collectible.” What is collectible about them? They are no more collectible than stocks. They are bought to be resold at a profit.
I’m reminded of a story attributed to Abraham Lincoln, in which he asked:
“How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn’t make it a leg.”
Calling an NFT a collectible doesn’t make it collectible.
What makes something collectible? Listen to a collector speak about his passion for about five minutes, and you will know. For some, it is a quest for nostalgia. Objects bring back feelings of belonging and strengthen ties to the past. Others express admiration for hand-craftsmanship or history. All will speak of the thrill of the hunt and their driving curiosity about the objects of their affection. Pride of ownership is apparent. Many enjoy socializing with others who share their interest. Collectors’ clubs abound.
There is nothing new about collecting. It’s old-school. It’s not going away. It’s estimated that about 40% of Americans collect something.
Also, blockchain technology and NFTs are not going away. NFTs already encompass objects of all sorts, from shoes to real estate. Some say that in the coming generations, blockchain technology will become the backbone of our financial system. That’s the way it is. That’s the new normal.
Wayne Jordan is WorthPoint’s Senior Editor. He is the author of four books: The Business of Antiques published by Krause Books, Antique Mall Profits for Dealers and Dabblers, Consignment Gold Rush: the Ultimate Startup Guide and Relocate for Less published by Learning Curve Books. He is a regular contributor to a variety of antiques trade publications. He blogs at sellmoreantiques.net.
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