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29 March 2021

Why NFTs are not a new way to make money

Non-fungible tokens have driven a boom in digital art and design, but the investment model they represent is very familiar.

By Will Dunn

In the 1963 short story “The Days of Perky Pat”, Philip K Dick imagined Earth as a post-apocalyptic dust-bowl in which the survivors of the final war exist as a cargo cult, emerging from the tunnels of their “fluke-pits” only to receive care packages dropped by aliens that never land. The family dynamic of the survivors is skewed: the adults, who can remember life before the war, spend all their time playing with a doll called Perky Pat. They break up the computers and radios in their care packages to make TVs and lawnmowers for Perky Pat’s “layouts”. Meanwhile the children, tough little hunters who have only known the world as it is, view their parents’ attempts to inhabit the vanished world of shopping and cars with bemused contempt.

Of all the consumer goods and environments that one character builds for Perky Pat, Dick wrote, “it was the house he perpetually yearned for”. But the shiny, impossible house has value only as a shared delusion.

The same might unkindly be said of Mars House, “the first NFT digital house”, which was sold last week by the digital artist Krista Kim for 288 Ether (a cryptocurrency, and a sum worth $512,712 at the time of purchase). That is a lot to pay for a house that doesn’t exist, especially one that looks like it’s been made out of spare footage from The Lawnmower Man.

You couldn’t live in the Mars House because it’s a “light sculpture” on a screen (also, it appears to be up a mountain and made entirely of glass, so it would suit an exhibitionist whose hobbies include wiping surfaces and shivering), but the extent to which the buyer actually owns the house is also limited.

An NFT – a non-fungible token – is a unique certificate of ownership, saved on to a database that’s shared by many users (a blockchain). The buyer owns the certificate itself, which is authenticated by everyone who uses that blockchain, but they don’t own the intellectual property on the design (indeed, the intellectual property on the Mars House was disputed almost as soon as it was sold).

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Other crazy-money NFT sales in the past week have included Jack Dorsey’s first tweet – “just setting up my twittr” – for which one investor, who described it as the “Mona Lisa of the digital world”, paid more than £2m (does he think the Mona Lisa was the first painting?), and a £500,000 “self-portrait”, which wasn’t really painted by a robot that isn’t really a robot. These sales followed the auction, by Christie’s, of a JPEG by the digital artist Beeple, for which the winning bidder paid $69m, and which you can download for free here.  

Again, the buyers of these works didn’t pay for physical originals or intellectual property rights, but for NFTs linked to them that assert ownership.

An NFT advocate might argue that this is not philosophically different from buying, let’s say, John Singer Sargent’s Group with Parasols, which was painted in 1904 and is therefore out of copyright. The things that give Group with Parasols its aesthetic value – its composition, its ideas, the feelings it elicits – cannot be physically isolated and sold as a unique asset. Digital images of the painting can be shared for free. The square metre of oil and canvas sold at Sotheby’s for $23.5m in 2004 is, an NFT investor would argue, simply a unique (non-fungible) token that relates to the work.

[See also: a special series on the Big Tech Backlash]

But the experience of physically looking at Group with Parasols clearly has value, as those who go to see it at the Met gallery in New York can attest – although that value is obviously not $23.5m per ticket.

What this tells us is not that NFTs are worth tens of millions, but that the art market is wildly inflated. But the value of an NFT is still more inflated because the material experience of ownership – downloading the $69m JPEG – is available for free. The only thing you’re buying with an NFT is the idea that it might have monetary value.

For most people this monetary value is highly questionable, not only because NFTs are new and confusing but because, as the British software engineer Jonty Wareing has pointed out, the technology that supports many NFTs – including the $69m JPEG – don’t actually reference the work itself but a web address or gateway that is maintained by the company that sold it. If these companies go under and stop maintaining these addresses, the NFTs won’t refer to anything.  

For one very specific type of buyer, however, NFTs do make a lot sense. Because NFTs use the blockchains of cryptocurrencies, people who own large amounts of cryptocurrency can profit from the craze by using these sales, and the headlines they generate, to boost the price of the other assets they own.

If you look at the people apparently splurging on NFTs, it becomes clear that most, if not all, are investors in cryptocurrency. The $69m Beeple was sold to crypto investors, as were the Dorsey tweet and the Mars House. And this makes sense: if an Ethereum investor can persuade people that Ether is a stable enough currency to buy houses of any sort, the price of their Ether and other crypto-assets will rise.

This is proving extremely lucrative for some investors. The price of Ether, the currency behind most NFTs, has risen more than ten times in the past year and the currency itself has a market capitalisation of over $200bn

Paying apparently exorbitant amounts of money to profit elsewhere is a familiar concept in the art world. Auction houses have long been accused of placing “chandelier bids” on the paintings they’re selling to create the illusion of demand. Since the 1970s, the art market has been pumped with increasingly eyebrow-raising amounts of speculative money.

Does it matter if a handful of rich people make money buying and selling risky investments of debatable value? This is where paintings and NFTs differ. One calculation puts the total carbon footprint of the emerging NFT business at more than 100,000t of CO2e, equivalent to a year’s driving for 22,000 cars. This is still tiny in comparison to Bitcoin, which uses more than twice as much energy as Bangladesh (population: 163 million), but it’s a lot for a new trend.

As with cryptocurrencies, the immediate financial risk is to those gambling on the promise of a quick buck in a market that is moved by the decisions of sophisticated institutional investors. As in any apparent gold rush, the people really making money are the people selling the shovels.

[See also: are Apple and Google weaponising privacy?]