NFT: Not F*cking Tangible!

A dive into what NFTs are, how they work, and why they won’t succeed

Posted by Luca Martinez on June 21, 2021

What does NFT mean?

Non-fungible token. That doesn’t make it any clearer? “Non-fungible” means unable to be replaced because of individuality. Diamonds, for instance, can be bought and sold, but individual diamonds, each one being unique, are not interchangeable. Thus, diamonds are not fungible. On the other hand, fungible tokens like Bitcoins, which are identical to each other, can be exchanged interchangeably. In other words, exchanging fungible tokens does not have any meaning because they hold the same value.

How do NFTs work?

NFTs are a part of the Ethereum blockchain. Blockchain technology can be most simply defined as a decentralized system of recording information. It does this in a way that makes it nearly impossible to change or hack. Ethereum is a cryptocurrency, but it also supports NFTs, which store additional information that makes them work differently from a crypto token like an ETH coin.

Anything digital can be an NFT, for example, music, drawings, memes, 3D files, your brain downloaded and turned into an AI. Although, much of the NFT hype is around selling digital art. A lot of the publicity around these tokens is about NFTs becoming the evolution of fine art collecting, only with digital art.

Some of the most expensive NFTs sold for tens of millions of dollars. The most expensive piece being Beeple’s “Everydays - The First 5000 Days”, which sold for $69 million. Some factors explain why Beeple’s work has become so valuable. The first and most relevant reason being that he has gained a large following, with over two million followers across his social media accounts. Another factor being that this piece was abundant in content. He created a new digital piece of art everyday for 14 years and included them all in this NFT.

NFTs are DOOMED. Here's why.

The non-fungible tokens hysteria has been one of the top stories of 2021, but data suggests the NFT market is already collapsing. According to data analyzed by crypto news outlets, NFT sales have dropped nearly 90% over the past month. The crypto art sector is being outsold by NFTs linked to digital real estate, sports memorabilia, and other virtual artifacts. All in all, the data suggests that the NFT bubble lasted a little longer than four months.

“It certainly feels like NFTs were the biggest story in crypto a couple months ago and that is no longer the case,” Daniel Roberts, the editor in chief of the crypto-focused news site Decrypt.

The non-fungibility of NFTs means that liquidity will be low for the vast majority of tokens. This means that most of the token holders will have little opportunity to sell and make their money back. On top of this, most tokens have a tax that must be paid to the artist when sold. The friction of selling makes flipping and trading NFTs that much more difficult.

Additionally, fraud is more common in NFTs than in ICOs. ICOs are initial coin offerings--a process in which a company attempts to raise capital by selling a new cryptocurrency. This is because NFT prices are even easier to manipulate than ICOs. Wash trading is a form of market manipulation in which someone simultaneously sells and buys the same asset to create artificial activity in the marketplace. Wash trading done by the NFT artist or the artist's friends can make the NFT seem much more valuable than it is. If an NFT sells for a ton of money, then what is stopping the artist from publishing the same token on another chain? Unlike ICOs that are watched by many that hold the same token, the unique token that’s defrauded with an artist's wash trade is unlikely to be caught by the buyer.

Also, NFTs are really only being bought by the holders of ETH. Obviously this is the platform to be on because all the buyers are on ETH, but they easily could have offered their token on another platform. For instance, ETC would cost much less and require no additional work, but no one offers their coin on it because there are no buyers. The reason artists choose ETH is all of the buyers, but at some point, these buyers will have had enough of NFTs and will start selling their NFTs and stop buying new ones. Unless a lot of rich art patrons suddenly show up in the ETH chain, the bubble will burst, and everything will fall hard.

Ultimately, this means that NFTs are doomed to crash. It is likely that buyers of NFTs will hold their tokens for a long time because there is little likelihood of much liquidity coming into the NFT market. One last thing I want to include is why NFTs are unlikely to come to Bitcoin. The culture of Bitcoin is not spending thoughtlessly but getting good value. Most Bitcoin owners know the pain of spending Bitcoin, thus they’ll be a lot more careful. Moreover, I do not see the NFT market in Bitcoin being nearly as sturdy as on ETH.