Those pictures above are chalk full of memories. Some of them are part of the mana base for my EDH deck, some are in my money binder. I got that Revised Tropical Island in 2001 for babysitting a friend’s kid, it was then valued at about $20. It’s currently about $700. A buddy of mine wasn’t going to be able to play at the Oath of the Gatewatch pre-release (2016) because the LTS wouldn’t let him use store-credit to pay for his entry, so I told him to take my cash and pay for his entry, and then to buy me packs of Battle For Zendikar with expeditions in them with his store credit. He brought me five packs, the second one had the Misty Rainforest Expedition, approximate value of $300.
Now why, you might ask me, are two pieces of cardboard worth $1000? Because they’re staples in some formats, and they’re rare. Because of their relative scarcity. Because they’re shiny. Because the art is pretty. Because people will pay that much for them. There are thousands of things that dictate value to a collector, and the rules aren’t set. Certain defects in certain sets are really rare, so those defected cards are worth more, some sets had production problems and defects were relatively common, so those defected cards are worth less. My point is that collectibles generally have value in excess of the sum of their base material costs.
Which is why when I first heard about NFTs, I didn’t immediately dismiss them. People were talking about how the pictures weren’t worth anything, and how people that were buying them were suckers. I ultimately agree with those takes, but from a different perspective: An NFT can absolutely have value over and above the cost it took to produce…. You just need someone who will pay an amount, and all of a sudden that NFT is worth at least that amount, to at least that person. But there’s the rub: You need someone willing to pay the amount. And in the long term, I think that’s going to be rough.
This is part of a larger narrative: There has been a push over the last few years, particularly among the crypto community, to get people that historically didn’t have much in the way of investments into the market. Let’s look at a couple of case studies that are related to NFTs, but perhaps not in an obvious way.
The earliest iteration was probably the Facebook IPO, the valuation of Facebook stock was estimated by the market to be approximately $20. Stock valuation is complicated, but the basic value is derived from the expected profits and dividends of the company; you would reasonably expect a dividend of about 2% annually and the stock price increase would be an unrealized gain until you sold the stock. Which means that the market expected Facebook to pay about $0.40 per share in dividends. But people, the unwashed masses, decided that they wanted to own a share of Facebook. All of a sudden, the market was flooded with buyers who didn’t care about dividends or even investment pricing, they just wanted a piece of the pie. Facebook shares traded up to $38 on IPO day, purely on noise trading. This meant that serious investors bought the IPO at $20, give or take, and then sold to noise traders for more. Facebook’s IPO was in May of 2012, By September, it was back to trading at $18 a share, where it was probably properly valued and didn’t recover to the $38 until August of 2013. This represented a 0% increase in value over 18 months and $.60 in dividends over 18 months on a $38 buy in. That’s not the worst case scenario, which would be the company going belly up and leaving your portfolio valueless, but it’s not good. Since then, the price has increased to $336, which represents an almost 25% per year increase in share value, which is phenomenal.
GME
Another case study happened last year. Traditional investors decided to try to short Game Stop Stock (GME). Shorts are very complicated, but the simplified explanation is that an investor thinks that a stock is overvalued, and the price of the stock will go down over time, so they borrow the stock with a promise to return that stock at some point in the future, sell the stock, wait for the price to bottom out, buy the stock and return in to where they borrowed it from, pocketing the difference between what they sold the stock for and what they had to pay to replace it.
A short is probably one of the most risky trading practices out there. If you buy Facebook stock for $18 and it goes to zero, you’re out $18. Your loss is limited to the price of the share you bought. In a short situation, if you shorted Facebook stock, sold at $18 and it went up to $336, you’re out $318 per share. Most people are correct about stocks being overvalued when they commit to a short, but your potential loss isn’t limited if you’re wrong.
In the GME case, the shorters borrowed GME stock, put it in a short position, reborrowed the stock multiple times and put the stock in short positions to the point that they owed more stock to their lenders than actually existed (again, I’m simplifying the hell out of this, but the gist is right). A group of retail lenders saw what the shorters were doing, and started buying up GME stock. Why did they do this? Because the shorters HAD to make good on their shorts, and so if there wasn’t anyone in the market willing to sell at $3 (what they hoped), they’d have to increase the offer price until they found someone willing to sell their stock. GME started at about $10, it bottomed out around $3, and then when the short got “squeezed”, it went up to $325 before the shorters found enough sellers to cover their first round of short positions. The shorters, mostly investment firms, lost billions. After the first round, GME bottomed out around $40, and then as the second round of short positions came due, the price inflated back up to $264. The firms lost billions again. The price has fluctuated ever since, and is currently sitting at a cool $146.
But that doesn’t mean that the retail investors all made money. The guys at the ground floor sure did. I checked my portfolio, found a couple shares and sold at $250. But the retail investors were sending out signals throughout this whole process: The stonks are going to the moon! Hold your positions! Make them pay more! Diamond Hands Bros! Meanwhile… The stocks eventually had to sell, the investors had to make good, so there WAS an expiration date on the hold. And the signals from those savvy retail investors got some people to buy in at $300, which did put more pressure on the short, but there was always a very tight window to make gains at that price, and some people, normal people, lost their life savings.
What these case studies have in common is uneducated hype. Hype is important to these phenomenon, because it starts the boulder rolling, but neither the people building the hype nor the bolder care where you’re standing. What these things have in common is that they rely on people who don’t really understand what they’re doing to all act in a similar way, and replicate the impact on the market that a very large player in the game would have. But a really large player in the game would never do what these guys want you to do, because it’s likely to be self-destructive. They don’t care about that though, because they want to make their money on the margins, and don’t particularly care who holds the bag.
These amount to pyramid schemes. If you can manage to get in at the bottom, you can do OK, but that’s not a given, and you should really consider your personal financial position before gambling on this kind of stuff. And make no bones about it: Gambling is exactly what these are.
Your success really depends on timing. People that sold Facebook at $18 in September 2013 lost money. People that bought at $18 and sold now did very damn well. It’s hard for everyone, conventional investors and new investors alike, to read through noise. What is the floor? What is the celling? Where are we at in the process? But as a general rule: If you’re already hearing about what’s happening on Twitter, you’re too late. If you have holdings, I’d check them to see if you can sell high. Take what you can get.
What’s worse is that by using the blockchain, they’re starting to sucker in people that wouldn’t historically be able to buy in by fractioning off bits of NFTs. There are groups specifically devoted to taking your money, pooling it, and buying real, fine classical art as an investment. I don’t particularly like this practice, it by definition de-artifies the work and reduces it to a commodity, because you can’t share the Monet between the 10,000 investors that bought it on any kind of reasonable schedule. The new phase of NFTs is going to be getting a bunch of naïve crypto bros on the blockchain to buy the $36,000 monkey NFTs at $500 bucks a piece and leave them holding it. Which leads me to…
If you don’t understand what you’re doing. Don’t. Fucking. Do. It.
Tying this together with NFTs.
My read on NFTs are that they’re the new hype. Without getting into the specifics of what an NFT is, or what the ethical implications of them are (and there are many), what’s important to remember is what their value is based on. Their value isn’t made up of utility, like an MTG card might be if you played competitively. Their value isn’t made up from actual value, like a stock might be in the form of dividends. Their value isn’t in utility, like forcing a short squeeze. The value isn’t proven over time. The value is in hype. And you can tell this in the actions of the participants. If the market isn’t based entirely on hype, you don’t need to hype it. The correct thing to do when you find an investment vehicle that you think is going to do well is to buy it and shut up, maybe tell some of your close friends. You only blast about it on Twitter in the most obnoxiously overblown terms if you’re trying to get people to buy in. The entirety of NFT value is in what you’re willing to pay for it, and what someone else might eventually be willing to pay for it. That is so subjective it isn’t even funny. NFTs are digital pogs. You either don’t know what I’m talking about (and case in point) or know what I’m talking about and what that means (case in point). This is a pyramid scheme that is taking in some very wealthy people and eventually the bottom is going to fall out and someone is going to be holding on to pictures of monkeys that they paid $10,000 for and can’t sell.