“I could just right click and save that NFT” is no longer an argument.
NFTs Why People Spend Millions on JPEGs NFTs Why People Spend Millions on JPEGs
What would it take to convince you that the image above is worth over $9 million?
What you’re looking at is an NFT, one of the first ever created. It is part of the CryptoPunks collection, a set of 10,000 NFTs released in 2017, a time when much of the world was still discovering what bitcoin is.
You’ve probably rolled your eyes, whether at the $9 million figure or at the very idea of the NFTs themselves. The response to non-fungible tokens hasn’t changed much since March, when they started to explode. The general public reflexively rejected them, considering them harmful blows to the environment. The bigger the sale, the more blatant the injustice.
Which brings us back to the pixelated chapter above. Its owner is an affable Canadian software developer who uses the pseudonym Richerd. He started building cryptocurrency software around 2013, but he grew tired of it. After discovering the NFTs earlier this year, Richerd purchased CryptoPunk #6046 on March 31 for $194,000 in what he said was the biggest purchase he has ever made in his life.
Richerd, who has more than 80,000 Twitter followers, claimed last month that his CryptoPunk was priceless for him and was not for sale, regardless of price. The next day, his determination was tested when an offer was made for 2,500 ether, or $9.5 million. This was done not because Richerd’s CryptoPunk was worth that amount – similar NFTs now cost around $400,000 – but because his bluff was being called publicly. It was a challenge, but it was still a legitimate offer. If Richerd clicked “accept” on the OpenSea trading platform, 2,500 ether would have flowed into his wallet.
Richerd rejected the offer.
“Well, obviously, the day before I said, ‘I’m not selling at any price,’ so if I were to sell at that price it would be against my integrity,” Richerd said in a Zoom call. “Also, I used this CryptoPunk as my profile picture, as my brand. Everyone knows it’s me.”
Not long ago, Richerd’s explanation would have sounded insane to me. How divorced from reality would one need to be to offer eight pictures in an image that looks like a Fiverr work? How outrageously wrong would a person have to be to reject this offer? After spending a few months researching and following NFTs, however, this doesn’t surprise me one bit. It actually makes a lot of sense.
Here’s a quick fact that explains why NFTs are bought for the equivalent of a CEO’s salary: Bitcoin is estimated to have made over 100,000 millionaires. It’s no surprise that NFTs became a phenomenon in March. That’s when bitcoin hit $60,000, a 500% increase from just six months earlier.
When you see a headline or a tweet about some outrageous amount being spent on an NFT, it’s easy to be baffled by how absurd that purchase would be for you. What is easy to forget is that very expensive things are bought almost exclusively by very rich people – and very rich people spend a lot on status symbols.
Take the Bored Ape Yacht Club, for example. It’s a collection of 10,000 monkey NFTs, all with different characteristics that make some more rare than others. Rare ones sold for over a million dollars, but common variants cost around $200,000. (At the time of launch in April, BAYC developers sold the NFTs for $190 each.) BAYC, owned by Steph Curry and Jimmy Fallon, is what you would call a “profile photo collection.” The main purpose of the images is to be used as your display photo on Discord, where most NFT business goes down, or on Twitter, Instagram or anywhere else.
To recap: $200,000 minimum for a profile photo.
In isolation, this is crazy. But put it on a spectrum of how rich people spend money, and it will become less surprising. You can right click and save a JPEG, so why spend money on it? Well, you can buy a nice house in a safe neighborhood almost anywhere in the world for $1 million, but celebrities regularly buy mansions for $20 million. You can find a trendy dress for under $500, but brands like Chanel build their businesses selling dresses for 20 times that amount.
We accept that rich people buy extravagant items offline. Is it so inconceivable that they buy extravagant things online too?
“In the real world, how do people flex their wealth?” said Alex Gedevani, an analyst at cryptocurrency research firm Delphi Digital. “It could be buying cars or watches. How scalable is this compared to if I buy a CryptoPunk and use it as my profile picture?”
Obviously, status symbols are not specific to the rich. We all give in in one way or another, whether it’s buying a $20,000 new car when a $7,000 used car will do, or buying a $30 T-shirt when Walmart sells staples for less than $5. One of the status symbols they have in common is that they have a specific audience in mind. The banker wearing his Rolex and the chief executive getting into his Bentley don’t mind that I think any of these purchases are excessive. They have a small but powerful group of people they are trying to influence. The same is true for NFTs.
In Richerd’s case, he runs his own business, Manifold, where he helps show digital artists like Beeple how they can use blockchain technology to make art that could only exist as NFTs. Being part of the most sought after NFT collection helps in these circles. And when he says his brand is built on his punk, he’s not exaggerating — a group of investors even named his organization after him.
“Anyone who owns a CryptoPunk believes in certain things,” explained Richerd. “Either you’ve been in the community for a long time and you believe in what it is, or you paid a lot of money to join, which shows conviction.
“I want to show my conviction. This is one of those projects that makes you put your money where your mouth is.”
a little difficulty
The NFTs are polarizing. There is a small group of people who believe in the underlying technology (tokens that prove ownership of a digital asset), but there are many more who consider it a hoax. Just as the second group struggles to see any value in NFTs, the first group can sometimes be defensive about the imperfections of the technology.
And make no mistake about it, there are a lot of problems with NFTs.
The first is confusing inaccessibility. There’s a reason software developers tend to do well in encryption and NFT trading: setting up blockchain wallets and other necessary digital gadgets is difficult. Even buying and selling can be dangerous. Send money to the wrong wallet address by accident, and it will be lost forever.
Then there are the fees. Imagine that you are interested in dipping your feet in non-fungible water and have $1,000 that you are willing to lose. If you’re creating a new NFT during a public sale, you’ll typically spend between $120 and $400. Not bad – until you factor in transaction fees. Most NFTs are built on the ethereum blockchain, which is notoriously inefficient. The more people using ethereum, whether trading altcoins or buying NFTs, the higher the fees. At a good time, you’ll spend about $100 per transaction, although double or triple that amount is common. Suddenly that $1,000 doesn’t go very far.
This is especially problematic for NFTs, who are notorious for causing “gas wars”. It is possible for 100,000 people to buy shiba inu coins at once, as there are a quadrillion in circulation. But when 10,000 people try to buy an NFT, it results in a huge increase in transaction costs, as some users outperform others to speed up their purchase. It may only last a minute or two, but a lot of damage can be done in that time. People who spend more than $10,000 on a transaction fee are not uncommon. People who lose $1,000 on a failed transaction don’t either.
Ethereum’s inefficiency also contributes to the other big criticism of NFTs, the huge amount of energy they consume. Note that this is a semantic problem: NFTs are not bad for the environment as much as ethereum is. Other networks, like Solana, use a fraction of the energy. Ethereum developers are expected to implement an update next year that will make mining consume 1% of the energy it currently consumes. But at this point, while no one can say precisely how much energy the ethereum consumes, we know it’s a lot. (Bitcoin, despite getting all the headlines, is even less efficient than ethereum, which is why almost nothing gets built into its blockchain.)
And finally, there is the fact that most people who trade NFTs do so for a profit. Scams are everywhere and prices are volatile. Most people who create, buy, and sell NFTs are either ignorant or uninterested in technology. If there is a technological leap taking place, it is likely to be overshadowed by dizzying price movements.
“I would say it’s a bubble,” said Gedvani, “because the number of speculators entering the market is outpacing the genuine creators.”
But a bubble can burst and leave something better in its wake. Think of Pets.com. It had a peak valuation of $290 million in February 2000, but by November of that year, when the infamous dot-com bubble started to burst, it had already closed the shop. It is used as a cautionary tale for speculative trading in bubbles. But the impulse to invest in Pets.com, of course, turned out to be justifiable. This particular venture was misguided, but the e-commerce trend it was experiencing was legitimate. Seven-digit pixel art may not last forever, but proof of digital ownership, which is what NFTs are really about, can be.
a great 2022
Where the NFTs will end up, no one knows – and anyone who claims to know is probably trying to sell you something. What we do know is that the amount of people buying NFTs is almost definitely on the rise.
It is estimated that around 250,000 people trade NFTs each month on OpenSea, the largest market for NFTs. In the short term, CoinBase will soon open its own NFT marketplace, for which 2 million users are on the waiting list. Robinhood has similar plans.
More importantly, giant companies that already make money outside the cryptography space want to get in there. Niantic, the company behind Pokémon Go, has just announced a game where players can earn bitcoin. Twitter and the company formerly known as Facebook plan to integrate NFTs into their platforms, and Epic Games says it is open to doing the same. Envision a world where, instead of buying skins in Fortnite, you buy an NFT for the skins you own – meaning you can trade it in for clothes and weapons in other games or sell it when you’re done. (Epic has said it will not integrate such mechanics into Fortnite, but that may not deter competitors.)
Richerd reckons the flood of people soon to enter the NFT market will create a greater diversity of digital products sold to different audiences. Your neighbor might not want to spend $200 — let alone $200,000 — on a profile picture, but maybe he’s willing to spend $10 on a unique skin or product on Facebook’s Metaverse. But while space may change, he remains confident that CryptoPunk #6046 is safe for a while.
“Even if all the NFTs go down,” he said, “the CryptoPunks will be the last.”
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