Why You Shouldn’t Invest in Non Fungible Tokens or NFTs

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Our job is to stay on top of the latest tech trends, understand and explain them to our audience simply, assess their investability, and then figure out pure-play ways to invest in them. That job becomes a whole lot easier when you quickly realize a thesis is total shite. Take initial coin offerings (ICOs) which were an attempt by companies to raise funding without giving any equity away. Only an absolute moron would buy coupons to spend on a service or product that hasn’t been built, yet people couldn’t get enough of them.

Today, there’s another trendy investable thingy made possible by blockchain technology which people are clamoring over. They’re called non fungible tokens (NFTs), and our readers have been asking about them, so we’re going to wade through all the new terminology about “passion economies” and “middle class content creators” to see if it has any substance. The short answer is that the current manifestation of NFTs should be avoided like the plague.

What Are Non Fungible Tokens?

Simply put, non fungible tokens are a method of encapsulating a piece of digital data – a picture, a song, an image, an article, a tweet – and then selling it to someone, typically using an auction. There are a couple of high-profile examples involving people with too much money that you should gloss over. Someone bought the first tweet from Jack Dorsey for over $2.9 million, an artist named Beeple sold a piece of digital artwork for $69 million, these are just some of the get-rich-quick stories raising eyebrows.

What a $69 million JPG looks like – Credit: The Verge

We’d like to focus on a recent real-world example that highlights how NFTs are expected to be used from someone who has researched them thoroughly.

Substack is a platform that lets anyone publish a newsletter and monetize it. One of those newsletters, Not Boring, does comprehensive deep dives into startups and their business models, one of those being a fintech we’re not overly keen about. Recently, Not Boring decided to go all meta and turn the article they wrote about NFTs into an actual NFT where the 16 people who contributed to the article would reap the rewards based on their contributions.

The Not Boring ETF proceeds spread across all 16 recipients Credit: Not Boring

Here are the reasons they gave why someone would want to buy their NFT – a digital asset made up of a single article talking about NFTs which is tracked using a distributed ledger.

  • Keep it forever 
  • Flip it in a few days
  • Or hold on to it as an investment in the hopes that either Not Boring makes it big or the concept of creator splits makes it big and you own the first ever NFT of its kind, in which case its value could increase. 

Option one is like owning shares in a startup that never has an exit. Pointless. Option two is hoping there’s a greater fool out there (right now there may be one). Option three is hoping there’s a greater fool in the future.

You can’t just say something has value and it becomes so. If that’s the case, then why did this NFT sell for $5,632? That’s because the buyer is a gentleman who just started a venture capital fund and whose interests align well with Not Boring. The VC who bought the NFT gets something of real value. Says the creator of the NFT:

I’m fascinated by why people buy certain NFTs, so I’ll also record a conversation with the winning bidder and publish the podcast. 

Credit: Not Boring

Depending on the Not Boring audience, $5K to be featured on a podcast may be a fair exchange. The reason for buying a worthless lump of ones and zeroes is really all about getting exposure to the Not Boring newsletter audience of 44,266 readers. The digital encapsulation of the essay has nothing to do with the reason someone purchased it. Yet the bigger picture goes well beyond our ill-informed understanding of the next big thing to emerge out of the Silicon Valley Vatican – “the passion economy.”

The Passion Economy

Spend enough time on Twitter looking at NFT commentary and you’ll inevitably come across the usual community of advocates sharing a daily group wank over some technological trend they’ve attached themselves to. These days crypto has taken a back seat to “the passion economy,” a vision of the future where people who create stuff own it and are compensated for it. It’s pretty much what we’ve been doing here at Nanalyze for (checks watch) about 3,420 days, and we’ve only recently demonstrated traction. You can exude more passion than Fabio, but figuring out product market fit can elude even some of the best entrepreneurs.

Doing what you love and hoping the money will follow didn’t work for the gig economy, so now it’s time for the passion economy.

New platforms allow anyone to monetize unique skills – but do we really need that? Credit: Andreessen Horowitz

New consumer products are making it easy for anyone to become an entrepreneur,” says a thought piece by Andreessen, and “the ability to make a living off creative skills has trickled down to individuals at scale, helping everyday people to launch and grow businesses.” The argument is that there’s no need to hire software engineers anymore because everything a business needs comes in the form of a consume-as-you-need service.

What the passion economy incorrectly assumes is impediments like creating software are keeping down loads of entrepreneurs whose talent is being held back by the need to work a bit too hard. Most of the absolute drivel that drives eyeballs these days is just that, absolute drivel. We’re not buying this Pollyanish vision of everyone following their passions and everyone else eagerly paying for it. Check out your average Patreon user and you’ll quickly realize all these passion economy platforms are closely following the 80/20 rule, or what’s more like the 95/5 rule. All the talent from the gig economy will switch to the passion economy for better terms while the mass of people who grew up being told they were unique and special will fund the whole thing.

Passion economy promoters like to argue that all these middle-tier creators, of which there are millions producing mediocre content, should be paid for the work they put in. The audience is who ultimately pays for the content, and the type of audience drawn to mediocre content doesn’t command much advertising budget. Producing a piece of content online and monetizing is isn’t some big new idea. It’s like we’re reinventing blogging all over again, except it’s not just text, it numerous digital mediums. Most people trying to make a living on Patreon can’t. Says TechCrunch,” 4,300 out of 132,500 active creators or about 3.2 percent of its customers — is Patreon’s core focus nowadays.” That’s only if you speak the right language, because Patreon’s “content moderation team” thinks they should be the arbiters of deciding what’s published and what’s not. The passion economy won’t work unless you get out of the way and let the money talk. Should we start moderating OnlyFans next? Anyways, enough about the passion economy, let’s get back to talking about NFTs.

The New IPO

ICOs and NFTs are similar in that both offer nothing of value. In the case of an ICO, you were given tokens to spend on services and products that would likely never exist. There were actually notable guest authors on TechCrunch trying to argue that ICOs – in their orignal crummy manifestation – were a new asset class – “the new IPO,” they said. Now, the NFT is asking you to believe that a unique string of ones and zeroes attached to a distributed ledger is also new asset class. Collectables, cars, wine, and fine art are all asset classes made up of things that exist in the real world. The NFT mechanism asks you to invest in “crytpo art” that doesn’t exist and for which there is an unlimited supply. And apparently, it’s catching on.

It’s also raising lots of questions, many surrounding “the hazy definitions of digital ownership and intellectual property.” That’s according to a thought piece published this week by the smart minds over at CB Insights, which talks about how NFT transactions can also currently be prohibitively expensive. As with all most new technologies that are birthed from blockchain, the first manifestation is usually a solution looking for a problem.

While collecting crypto art sounds like a nice hobby for people with lots of time and money, we’re interested in how the underlying technology might be used in real life use cases.

Commercial Use Case for NFTs

Media happens to be a great place for the passion economy to flourish, and it also happens to provide a number of interesting use cases for NFTs. In our world, we can come up with at least one viable use case for NFTs. A very small percentage of our content is compensated content, and you would never know it. While there are many buyers, we only take on a select number of great stories to tell about companies (privately held only). Creating an article with an NFT wrapper would allow us to do quite a few things, especially if it involved some change control on a distributed ledger (this ensures what we publish stays published and never changes). Showing an ROI over time helps the buyer understand the value of our platform. When it comes to compensating our writers, we could make some cool magic happen. Every piece tracks the revenue it generates which trickles down to everyone involved who created the piece after the house gets their cut. Everything happens automagically.

For companies that solely rely on advertising, it only makes sense that each “slot” is offered up in an auction to the highest bidder to extract the most value from both sides. The Joe Rogan Show comes to mind. You could even even offer split ownership. But when someone owns something, then they have the right to change it or even delete it, something Joe Rogan is finding out the hard way.

In media, offering things to the highest bidder makes a whole lot more sense than some arbitrary price menu. It’s a problem many companies are working to address today, with or without the use of NFT technology.

How to Buy NFTs

Tinkering around with NFTs falls low on our list of things to do, right alongside learning to play cricket. For those of you who have lots of time, lots of money, and no idea what to do with either, here’s how you can dabble in NFTs. Just log onto one of the many platforms there are to trade NFTs on, names like these:

Credit: CB Insights

Then, buy some cryptocurrency like Ethereum, and use it to buy your NFT. Or you can get a few grams and a couple of high-class escorts offering a no-rush GFE. In the end, you may be out 5K, but at least your bad decisions made for some great stories.

How to Sell NFTs

We get it, you’re someone special, and the world needs to know it. Create something, anything. It doesn’t really matter, just as long as you’re really passionate about it. Then, you can sell your sacred cow, and your newly found role in the passion economy will have been realized. You’ve shown traction, and that means you’re the sort of person that probably would have succeeded with or without the passion economy. That’s the rosy picture, but for most it will be a much different experience.

This article is about investing in NFTs, not creating them, but we think you ought to know a bit how the sausage gets made. It involves platforms that are making a lot of money throughout the process because the workflow is entirely convoluted. For the buyer, converting your dollar to erethreum will incur a transaction cost, and so will using the eretheum to buy and sell the NFT. For the seller, there’s something called a “gas fee.” This means that “users are responsible for paying for the computing energy required to process and validate transactions on the blockchain.” That’s according to an article by Business Insider which talks about how people are losing “hundreds of dollars” trying to sell NFTs. Seller beware.

Conclusion

Spend enough time in a boardroom with a bunch of energetic people who live and breathe “the passion economy” and you’ll probably start drinking the Kool Aid. Truth is, NFTs have an infinite supply and a very finite demand, one that depends on how many “thought leaders” are pushing the buzzwords du jour. In the same way we passed on the ICO fad, we’re also passing on the NFT fad. Eventually, we’d expect some use cases to emerge which look more like value creation and less like a greater fool scheme.

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