- An NFT owner doesn’t have any copyright or legal rights to the piece if there isn’t a contract.
- The digital artwork lives on the internet where anyone can still “watch, listen to, or copy” without paying.
- When buying an NFT, the actual object isn’t being purchased.
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Non-fungible tokens have taken the world by storm, becoming the hottest thing in the cryptocurrency market within only a few months. They are touted as a way to revolutionize the way digital art is bought and sold. But a closer look reveals NFTs are no more than a pump-and-dump scheme designed to make a few crypto insiders rich.
NFTs are one-of-a-kind tokens that live on a blockchain. Whereas fungible tokens, like bitcoin, can be swapped out one for one, NFTs are unique and can be used to reference images, sound clips, videos, and more.
The speculative mania for NFTs peaked in March when Christie’s sold an NFT linked to “Everydays: The first 5000 days,” a digital collage by Mike Winkelmann (more commonly known as “Beeple”). The token claiming to represent the massive JPEG sold for $69.3 million with fees, paid for in ether, the native cryptocurrency of the Ethereum blockchain.
But the craze didn’t begin there. Beeple NFTs were being pumped by crypto bros months beforehand, only to culminate in a large sale that brought a media storm to NFTs and the world’s attention to a graphic artist who few people previously had ever heard of.
The true value of NFTs
The intrinsic value of an NFT is zero. When you buy an NFT, you are not buying the underlying object. You are buying an entry in a distributed database, which allows you to pass that entry on to someone else. There is also a bit of code in there that points to the digital object somewhere on the Internet, but that’s basically it.
An NFT doesn’t convey copyright — or any legal rights at all unless there is a specific contractual agreement saying so. The digital artwork itself continues to live on the internet, available for anyone to admire, watch, listen to, or copy, without paying a penny to the owner of the NFT.
Jorge Stolfi, a computer science professor at the University of Campinas in Brazil, says the very idea of a digital collectible makes no sense at all.
“A purely digital artifact — a pattern of bits, like a JPEG image or an MP3 song file — cannot be a collectible, because it can be duplicated trillions of times, and every copy is exactly the same as the original. Not just similar or even identical, but the same thing,” he said.
He likens NFTs to the International Star Registry. In 1979 Ivor Downie, a Canadian, had the idea of selling the stars in the sky. You gave him a few dollars, and he would pick a yet-unnamed star on an astronomical photo, and enter its coordinates along with your info into his company’s ledger, thus making you the “owner” of that star.
“Everybody (well, almost everybody) understood that the registry provided only pretend ownership, no legal right of possession of the star,” Stolfi said.
Here’s the difference — while the price of stars on the registry never rose above $100, NFT prices have skyrocketed, so what’s driving their value?
A quick look at the NFTs selling for the biggest sums reveals that prices are generally the result of bidding wars between two crypto insiders — or one crypto insider and some anonymous agent, who nobody is able to identify.
The price of the NFT linked to Beeple’s “Everydays” shot up because the buyer — who went only by “Metakovan” at the time, but was revealed to be crypto entrepreneur Vignesh Sundaresan — was locked in a bidding war with Justin Sun, the CEO of the Tron blockchain.
Metakovan placed the winning bid in the final moments of the auction, making him an instant celebrity, and bringing heaps of attention to another project he had been pitching — his B20 token, a way to fractionalize an earlier series of Beeple NFTs he’d acquired, in a strategic plan to triple or quadruple his investment.
It turns out, this wasn’t Metakovan’s first NFT rodeo. The Singapore native had been anonymously bidding up the price of Beeple NFTs starting in October. That’s when Beeple — who previously sold his pieces for as little as $100 and had recently gotten a tip-off that NFTs were the thing — launched his first drop on Nifty Gateways, a specialized online marketplace.
The drop consisted of three pieces: “Politics is Bullshit,” a limited edition of 100, and two singles: “Crypto is Bullshit,” an
President Trump wearing a Guy Fawkes mask and giving the bird while riding a bull; and “Crossroads,” a 10-second clip interpreting the 2020 election.
The NFTs for “Politics is Bullshit,” a defecating bull with an American Flag painted across its side, initially sold for $1 each, but since April have resold for as much as $600,000. (Many of these online marketplaces allow the artist to get a cut of future sales. In this case, Beeple gots 10% of that.)
Both single editions were snapped up by Pablo Rodriguez-Fraile, a long-time NFT collector, but the price was driven up by Metakovan bidding against him to push up the price of Crossroads. While someone known only as “Ozark” pushed up the price of “Politics is Bullshit.”
Rodriguez-Fraile ended up paying $66,666.60 — the exact same figure — for each of the items. (A mathematician who likes patterns and numbers, Rodriguez-Fraile claims to have started the unconventional bidding numbers.)
Four months later, Rodriguez-Fraile made $6 million when he flipped “Crossroads,”for $6.6 million, selling it to an anonymous buyer, in a deal brokered by Nifty Gateway’s art buying service. (He would not name the buyer, but told me it was someone “very known and respectable.”)
Anonymous buyers, friends, aliases
Wash trading — when assets are bought and sold by the same people to drive up the price — is a noted problem in cryptocurrency trading. As a result, the asset becomes attractive to naive investors, who think the price will continue to go up and up, or that they’ve just landed a fantastic deal.
Here is an example of how that might work. I mint an NFT, and I buy it from myself for $1 million, giving that NFT a value of $1 million based on its price history. I then sell that NFT at “half price” in a fire sale to someone who doesn’t know any better. I’ve just made $500,000.
Will Cong, a Cornell University professor who wrote a paper on crypto wash trading, says the incentives to partake in wash trading in NFT markets and regular cryptocurrency markets are the same, but pinpointing the fraud is even more difficult.
“Even in traditional auction houses, buyers and sellers may request to be anonymous,” he told me. “It’s just the detective work here is even harder.”
And that is the problem. Because NFTs are often bid by anonymous buyers, it is difficult to gauge exactly what the relationship is between the artists, the sellers, and the buyers — if some of them are even the same people, or if they have some pre-existing business arrangement.
When Metakovan, for example, bought up all 20 single editions in Beeple’s 2020 Collection on Nifty Gateways in December for $2.2 million, he used aliases. And he gave 2% of the B20 token supply — an
representing the value of those NFTs — back to Beeple.
Even if initial sales of NFTs appear to be gangbusters, how will the value hold up when people go to resell their NFTs on secondary markets? That’s the true test of whether the primary sales are real or just a bunch of crypto whales who know each other tossing money back and forth.
It’s hard to gauge, however. The nonfungible market is highly illiquid. In liquid markets, like bitcoin, where there are lots of available buyers, you know where you stand. Whereas if you are selling your wares on an NFT marketplace, it may take weeks to realize you’ve been snookered.
CryptoKitties — collectible, “breedable” cats on the Ethereum blockchain — were one of the earlier use cases of NFTs. They were a huge hit after their launch in late 2017, with one of the highest priced cats selling for $155,000 in ether. Six months later, prices were down 95%.
Similarly, buyers of NFTs will be left holding the bag, when people realize what people were convinced were collectibles, are better off being disposables.