Tapestries-33 | Layers of value
How to think about the "value" of NFTs, and what it tells us about what we value.
Note: This piece assumes some prior knowledge of what an “NFT” is. If you want a quick primer, this is a good starting point.
I find the concept of non-fungible tokens (NFTs) fascinating. I am not an artist, collector of art, or crypto-fanatic. I find NFTs interesting because like other emerging technologies, they are changing our relationship with longstanding human notions. Ben Thompson summarized what I find interesting about their evolution:
“The explosion of NFTs is forcing people to reconsider what we value, and what scarcity and authenticity mean in a digital age.”
I agree with this statement, and the number of pieces written on the topic over the last few weeks speaks to the way NFTs have captured our attention. But like many things in our culture, the most prominent part of the NFT narrative has been their price.
I followed the auction of an NFT on Twitter about a week ago, and it revealed what I think are some important perspectives, both regarding the trend itself and what it says about what we value. I describe a number of these perspectives and lessons below. But, first some background.
Background
I've been watching Fran Lebowitz's Pretend It's a City with Tali. In one of the episodes she discusses watching the auction of Picasso's Les femmes d’Alger at Sotheby's in New York in 2015. What struck her is the way the audience was silent when the artwork was presented, but erupted in applause when the hammer came down at a then record price of $160 million. Reflecting on this strange dynamic, she quips "we live in a world where they applaud the price, not the Picasso." And she's spot on.
The same dynamic feels dominant in the discussion of NFTs. I am not here to determine whether the underlying artworks or collectibles are "good" or "bad" or "timeless" or "interesting" or "desirable" or “iconic” or “beautiful” or whatever adjective one could use to describe such objects. What is clear though, is that the most interesting element of NFTs so far has been the price some are selling for.
The intrinsic value of a Picasso or a rare collectible is very hard to determine; they are "worth" whatever someone is willing to pay for them in a competitive process (to be clear, one can make a very defensible case as to why a Picasso is worth more than a Beeple today, but that’s not the purpose of this piece). But the difference with NFTs is that, from what I can gather, the majority are being traded on the Ethereum network, and are therefore being bought or sold using Ether or "ETH" (the platform's native token). I think this is an important nuance, and makes the discussion of "value" in this context infinitely more interesting.
The aforementioned Twitter auction I saw was being run by someone I follow, Jack Butcher. Jack was selling an NFT he had created. Jack makes nice, minimalist visualizations that one could describe as the embodiment of original and creative "business" or "strategy" maxims. They're quite good. He was tweeting through the auction, and you could feel his surprise as the value climbed from ~2 ETH to finally close at 33.888 ETH.
As I watched the auction unfold, I thought to myself "what does that actually mean"? The visualization is quite nice and definitely consistent with his other content, but is there any relationship between the sale price and the artistic quality of the piece? How are multiple notions of "value" being combined here, and to what effect?
What does it mean
At current prices, 33.888 ETH is worth around US$57,000. Would a rational person pay that amount in USD for the NFT? Honestly, maybe? Jack has a great following and is definitely a thoughtful and insightful character, and perhaps someone thinks this is a worthy investment. However, the calculus makes a lot more sense to me when considering pricing in terms of ETH, not USD. Here's why:
First, ETH's price is volatile and is difficult to determine in reference to intrinsic value.
It is not a traditional means of exchange, so one cannot easily determine the opportunity cost of buying a piece of art for 30 ETH. In other words, it’s hard to figure out what else can one buy with 30 ETH. We know what it equates to in terms of USD at a given point in time, but only at that point in time. One single ETH may be worth US$0 or US$10,000 in the near future. While I personally believe it's likely to be worth something, it's possible it may turn out to be worthless. So while NFT sale prices are usually reported in terms of USD to help us appreciate what somebody actually paid (in equivalent terms), it's a poor proxy for what value someone is ascribing to it, or what they’re parting with to purchase it. In this case, price and value are worlds apart.
Second, there aren't many things you can do with large stockpiles of cryptocurrency.
If you are comfortable parting with 30 ETH, I'd suggest that you hold a large amount of ETH. In USD terms, this would equate to a lot of "money." But while large cryptocurrency holders do indeed "value" their holdings in terms of USD, it is frowned upon to convert those holdings to fiat money. So one may be left with a large holding of realizable value, but nothing to exchange that value for. Or said another way, large holders have experienced an extreme increase in their nominal purchasing power, but are without many things to actually purchase in the native currency. NFTs are that option; they are possessed of a scarcity and spirit that is clearly recognizable to the cryptocurrency community, and therefore the transfer of value between these two realms is celebrated, reinforcing the dynamic described above. And interestingly, it’s a way for large cryptocurrency holders to show they are “patron[s] of the art on the internet.”
Third, we are witnessing speculation upon speculation.
It's speculation-squared. There is clearly speculation in crypto assets, of which I am a participant. The medium of exchange being used is potentially itself inflated and is in the midst of a hype-cycle. There is also clearly speculation in the market for NFTs, driven by a variety of forces, but all very much within the same hype-cycle. When you stack these two things together, and consider the "value" of ETH per the above, it becomes clear that the widely-reported multi-million dollar NFT sales only tell part of the story.
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There are a number of assumptions and leaps of logic embedded in these three points, but I think they're somewhat sound and quite important if we aspire to understand what’s driving the underlying dynamic.
The cultural context
Watching the explosion in NFTs, I can’t help but see the parallels with the Reddit/WallStreetBets and Robinhood explosion. I have written multiple times that class struggle is the most important lens through which to view the state of the western world. I believe that thesis holds true here as well.
Robinhood—with its no-fee trading, approachable UX and slot-machine inspired dopamine hooks—was an innovation that allowed the masses more access to the previously less accessible equity markets. These markets were (and very much still are) the domain of hedge funds, investment banks and sophisticated traders. The Gamestop episode (it’s still going by the way), amongst many other things, was an example of a previously locked-out majority (retail traders) causing chaos in an albeit small area of financial markets that until now had mainly been Wall Street’s domain. Once they breached the walls, financial anarchy was the order of the day.
The arrival of NFTs has a very similar flavor. The world of art, like financial markets, has generally been the province of the elite. Instead of hedge funds, it is collectors, gallerists and curators who moderate entry into the art-world—both physically and conceptually. Art is at times intentionally unapproachable and probably inflated. In this case, the innovation in question is the NFT, and it’s wresting power (to a small degree) from auction houses and gallerists. And now that the masses (to a small degree) have breached the walls of the art world (to a small degree), anarchy of sorts is again the order of the day; it can be seen as a veiled attack on the art overlords’ control over what’s considered valuable.
Bringing it together
I believe that in our current moment, we value and celebrate things like celebrity, wealth and output, and we're collectively poorer for it. The same currents that drove the Gamestop episode are evident in the explosion of NFTs. It is within this context that we need to consider their emergence.
"Valuing" artwork or a collectible is inherently challenging given the subjective nature of their value. The price at which they can trade is determined by a huge range of factors, including workmanship, scarcity, the size of the pool of buyers, the cultural moment, and the historical context, to name a few. Cryptocurrencies, the true medium of exchange for NFTs, are themselves hard to value. Per the discussion above, this is critical context for understanding the nature of the transactions in the most “valuable” NFTs. The layering of conceptual complexity on a technological innovation tells me that the most interesting part of the explosion of NFTs has nothing to do with their value, but instead reinforces what we value.
We are clearly becoming more and more engrossed by the intersection of finance and culture. In a wonderful piece of writing, titled "Finance as culture," the author observes:
“Posts of wealth generation abound: from DFV’s reddit posts, to Chamath’s IRR tweets, to Elon’s Dogecoin memes. Social media acts as an emotional coordination layer, increasing the amplitude and frequency of culture. Jealousy, resentment, and fomo are more viral and powerful than ever, particularly when everyone is on their computer all day post-lockdown.”
NFTs are a potentially useful and powerful innovation, and one I'm personally excited to follow. But I believe the current moment's emphasis on price, value, money, performance, celebrity and signalling are the relevant threads in this story.
Art can be a lot of things, including a mirror in which we see our own reflection. And true to form, that's exactly what I think it's doing here. You don't have to be a fan of NFTs or cryptocurrency to see the beauty in that.
Photo by Aaina Sharma on Unsplash