Why NFTs are worthless and I still buy 815k of them

Coinbase's Fred Ehrsam warned that 90% of NFTs will have little to no value in 3 to 5 years. Gary Vee also said that 98% of NFTs in 2021 will be bad investment. Andrew Shirley, editor of The Wealth Report at Knight Frank, said in CNN "It's only a matter of time before NFT artworks will lose their allure to all but a niche group of enthusiasts."

Here's my experience:

I spent 250.83 ETH (around 815,678 USD) excluding transaction fees on 16 World of Women NFTs and it was the most fun use of my crypto. I have no regret even if they went to zero which can easily happen.

Why NFTs become worthless? NFTs are bought mainly for speculation, and prices being pumped by NFT owners. Gartner placed NFT at the peak of its hype cycle in 2021 and price will plateau in 2 to 5 years. Given unlimited supply that an artist could come up to dilute the prices (e.g. Mutant Ape Yacht Club spawning from Bored Ape Yacht Club), prices can only drop on most projects.

Source: Gartner

Even though Gary Vee said that 98% of NFT will be worthless, he had supported many projects. His point was that through researching and spending time on the projects, he have an edge on what can benefit.

Similar to Gary Vee, Chris Camilio of Dumb Money relied on information imbalance to make his investment. He have also invested into NFTs and was can be found in the Discord of the various NFTs.

I have also start tracking NFT projects and found 25 dying projects with minimal trading volume. You can read more about the dying NFT projects here.

What's the problem with NFTs?

What NFTs really do is create scarcity. When the Kings of Leon released their new album as a $50 NFT, they only made it available in that form for two weeks, essentially making a blockchain powered limited edition.

Many people knew NFTs are nifty-but-worthless pieces of digital art most of the time, but could also be once-in-a-lifetime jackpot item. This is aka to gambling and unlike equity investing whereby the underlying asset has a business regardless of stock price.

In term of the Gartner hype cycle, after the hyper all that is left is the trough of disillusionment before a slight slope of enlightenment and plateau of productivity.

There is also no regulation with NFTs that require you to be wary of scammers and hackers.

  • Hackers just need to steal your private keys to access your collection and transfer them out (Metamask did expose the private key in the Chrome Extension and an influencer got his collection stolen when he was sharing his screen). 
  • Scammers can also bid in USDC (which is 3000x lower than ETH) instead of the usual ETH. Someone got confused and sold his Ape at 8 USDC. I also see these bids commonly in my NFTs.
  • Selling fake "clone" in a misspelt collection (e.g. "World of Womenn" instead of "World of Women"). Similar to domain name, the collection name is important and try to ensure you double checked it is verified

There are also tax concerns as IRS had issued some guidance as to the tax consequences of transactions involving what it calls “virtual currency” or “cryptocurrency” (see Notice 2014-21). An NFT is likely to be considered an intangible asset, like some functional tangible personal property, it might even be said to have a life cycle. 

Performance of Arts against Stocks

Even if NFTs are deemed as art, the return might not outperform stock in the long term. Based on a Dec 2020 study by Citibank between 1985 to 2020,

  • All arts produced a 8.3% annualized return;
  • Global developed market equity/stock returned more at 9.9%
  • The best was private equity returning 13.8%

Source: Citibank

What is the difference between a digital asset and an original work?

One other characteristic differentiates NFTs from traditional copies of a work is that an NFT can internally incorporate royalty agreements that allow the artist to share in profits every time the NFT is licensed or resold.

Conclusion

I allocated a portion of my crypto into NFTs because of my silly optimism and conviction to a project. I liked to support an underdog with some edges,

  • Over-shorted stocks like Tesla due to Elon's drive,
  • Ethereum instead of Bitcoin due to to its smart contract,
  • Celsius instead of BlockFi due to its focus on community, 
  • And now World of Women instead of Cryptopunks as gender inequality is a big issue (besides in office and athletics). The project also have some interesting concept of investing in arts which should let it sustain longer unlike those pure Art only NFTs which will rely on creating more arts by its founder.
Author
Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.

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