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14 April 2022

The NFT bubble looks ready to burst

Are people finally realising that automatically generated pictures of monkeys aren’t actually worth that much?

By Will Dunn

My favourite thing about Sina Estavi, the cryptocurrency entrepreneur who bought the NFT linked to Jack Dorsey’s first tweet for almost $3m, is the fact that his LinkedIn page is decorated with a picture of Isaac Newton and his quote, “We build too many walls and not enough bridges.” I can guess why he chose this (it’s the first result if you search the BrainyQuote website for “bridges”, and Estavi’s Malaysian cryptocurrency business is called Bridge Oracle) but it’s also unintentionally apt.

From 1712, Newton (previously a cautious and successful investor) began investing in the South Sea Company. In the years that followed he was joined by thousands of new retail investors, drawn by tales of limitless riches from South America and a government that was only too happy to endorse the scheme. South Sea stock went, as the crypto bros say, to the moon. As the stock approached its peak in 1720, Newton cashed out — and would have done very well for himself had he stayed out. But he piled back in, reinvesting a large proportion of both his own wealth and an estate he managed into the company. The stock collapsed, and by mid-1721 Newton had personally lost around £14,000 — or £3.2m in today’s money.

Three centuries later, Sina Estavi has just learnt a similar lesson in a similar bubble. Having listed his arguably priceless (and even more arguably, worthless) NFT on the Opensea marketplace last week, Estavi expected it to fetch more than $25m. The maximum bid received by the time the auction closed was less than $7,000.

Perhaps it was the fact that Estavi had offered to donate half the proceeds from the sale, if it went over $25m, to charity — which might have looked generous to him, but looked to everyone else (including Dorsey himself) as if Estavi was hoping to use an association with charity to make a profit of several million dollars.

Possibly the lack of enthusiasm may also have had to do with recent concern over Estavi’s other businesses, two of which went under after he was arrested and imprisoned in Iran for issuing a cryptocurrency token the Iranian authorities described as “fraudulent”. He has since been freed and the charges against him appear to have been dropped.

Or perhaps — and this is what’s described as “FUD” (fear, uncertainty, doubt) by crypto believers — blockchain entries linked to automatically generated pictures of monkeys aren’t actually worth that much after all? Such thoughts are difficult to entertain for those of us who, having listened to such notable (and impartial) investment analysts as Paris Hilton, remortgaged our homes to make a solid investment in a low-resolution jpeg of a rock. But what if it’s true?

As Charles Mackay noted in his Extraordinary Popular Delusions in 1841, there inevitably came a point in a speculative bubble when, as in the “tulip mania” that occurred in Holland in the 17th century, “the more prudent began to see that this folly could not last forever. Rich people no longer bought the flowers to keep them in their gardens, but to sell them again at cent per cent profit. It was seen someone must lose fearfully in the end.”

People look to the rich for cues on when to invest, and the rich often have a vested interest in encouraging greater fools into the market. However, it only takes a few notables cashing out to cause what Frederick Lewis Allen (writing in 1931 of the 1929 stock market crash) described as “a perfect Niagara of liquidation”.

Will the speculative bubble around NFTs now pop? Not if the people promoting them can help it — the wealthy celebrities, corporations and news publishers making a quick buck from them, the influencers paid to market them and the scammers eager to cash in on the craze. As in the South Sea bubble, the government is also eager to help: On 5 April Rishi Sunak asked the Royal Mint to create an NFT as he tries to make the UK more like the prosperous and democratic regime of El Salvador (which adopted bitcoin as legal tender in September).

The price of NFTs is also easily manipulated upwards — like the price of cryptocurrencies — by “wash trading”, the practice of placing bids on your own auction. The lack of oversight or regulation in these decentralised assets makes this trivially easy to do, and there is evidence that on some NFT exchanges, almost all the sales at a given time are users selling NFTs to themselves, gaming up prices in the hope that someone will be stupid enough to think this is because they’re actually worth something. This also gives them some real-world use value, in that it makes them attractive to people looking to launder the proceeds of organised crime.

While there are many vested interests keeping the NFT bubble inflated, there is one significant force opposing it: inflation in the wider economy. It is no coincidence that the fiscal stimulus programmes used to inject trillions into capital markets during the pandemic coincided with a massive boom in speculative investment; for a while it was almost impossible to lose on the stock market. But that stimulus is now being wound up, interest rates are rising and there are fewer smiles in the casino. At some point it is likely that the socially agreed value of many investments will rapidly change and, as the frothiest thing in a time of irrational exuberance, NFTs may well be the first to go.

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