Business: NFTs are Pointless — For Now. Their Market’s Downfall May Be Their Opportunity to Make a Point

When you’re young a millennial or Gen Z, many challenges facing your future could keep you up at night, from “how will climate change affect me” to “will I ever be able to afford a house, or to raise kids”. It thus appears that our generation is an easy sell for new, hyped investments sold as having “huge potential” or being “the future”.

Enter NFTs. A few weeks ago, I had the opportunity to meet a bullish Millennial NFT investor. While some of his tokens are doing well, it made me wonder if some of these decisions are, to draw an analogy during Super Bowl season, one big Hail Mary Pass on things we don’t understand. Many of us have heard the advice not to invest in what we don’t understand. So I read a bit to figure out what you could be getting into with NFTs — and, it looks like one huge bubble. Or is it?

1. NFTs’ overvaluations are undermining their own use cases.
   Many may either call me Captain Obvious or a party pooper at this statement. Yet, it’s worth a sense check.
   
   At the start of the year, I compared one of the most popular NFT-based games, Axie Infinity, to Pokémon, and questioned how the most expensive collectable of a game with 1 million users could be three times as valuable as the most expensive collectable in a $100 billion-media franchise with a 25-year legacy.
   
   It may be a crude comparison, but consider how Axie Infinity was hailed for its potential to lift people in emerging markets out of poverty, especially those who lost their jobs due to COVID. With prices such as those above, those people Axie had so much promise to help are being priced out of the market. It appears as though so far, the promise NFTs have to lift people out of poverty or make growth inclusive is purely circumstantial, a case first-mover advantage, and yet to be proven as intrinsic.
2. Many NFTs don’t have utility.
   You don’t have to be in business or finance to know the difference between tangible and intangible value — the former being what an asset is useful for, the latter being how important people think it is.
   
   Let’s break the NFT down into these two. For the former, comparatively little hype has been generated about the use cases for NFTs (the tech that they are transacted upon is a different story, more on that later). Plus, in many cases, you don’t actually own the asset, but rather a certificate of its authenticity — like paying a mortgage for a house’s title deed rather than the house itself. Therefore, your ability to monetise and generate cash flows from the asset is extremely limited, if not non-existent.
   
   In the grey area between the former and the latter is the art space — a way for aspiring and established artists to make a living and access audiences and markets that they never have before, or those subject to censorship or oppression in their home countries to get their messages out to uncensored parts of the world.
   
   Yet the instances of these lead me to the latter. Such NFTs could be compared to artworks or historical artefacts that have either — or both of — historical significance or scarcity. While artists in the grey area, or generation-defining memes or commemorative works may satisfy the former, the explosion in NFT transactions makes these few and far between; and the rest are a dime a dozen. On top of that, scarcity is often artificially generated — which, in other industries, would be called anti-competitive.
3. The biggest investment potential lies not in NFTs as an asset class themselves, but the platforms upon which they are traded.
   Remember that story in 2004, during the early, post-dot-com-bubble years of e-commerce, when pieces of chewing gum claimed to be chewed by Britney Spears sold on eBay for $14,000?
   
   NFT sales in the market give off that same vibe — where NFTs of questionable intrinsic value are selling in the thousands, or even millions of dollars.
   
   But the platforms themselves tell a different story. eBay may have been eclipsed by Amazon, but there’s no doubt about what has happened to the e-Commerce sector overall since then — even pre-COVID, from 2004–2019, eBay’s share price roughly doubled, and Amazon’s had shot up 45x. (By comparison, it was a bit hard to assess the valuation and return on Britney Spears’ chewing gum, but I’d hypothesise it wasn’t much).
   
   So, while there may be plenty of hype surrounding NFTs themselves, the platforms being used to trade them give us an exciting proof of concept for the tech stack upon which NFTs are built. Once a platform gathers enough critical mass of users and transactions, it is well worth a look.

NFTs appear to be the latest example of a hype cycle, and much like a game of musical chairs, NFTs continue to be traded, but one day, the music will stop and many NFT owners will find their holdings worthless. Yet, when that happens, it will be easier to cut through the noise to assess the technology upon which the NFT market is built — and uncover its true potential.