Friday, September 24, 2021

Bad News For Those Who Want To Make Millions in the NFT Market... It's Not That Easy

As co-founder of a website that tracks the growing spectrum of digital collectibles, Gauthier Zuppinger has seen it all. Drawings of toads, apes, abstract blobs, octopuses with human heads, fire-breathing demons and more. Since NFTs or non-fungible tokens (unique digital files whose exclusivity is guaranteed by blockchain technology) have taken over from meme stocks and second-tier cryptocurrencies as the target of daring speculators, collections on the market have skyrocketed.

Nonfungible.com has added 169 collections in one month, more than in the previous 12 combined. But Zuppinger has a word of advice for Warren Buffett wannabes: "90% of the collections minted today are totally useless and meaningless." Media references to million-dollar auctions of NFTs at Sotheby's have painted a pixelated picture of easy money that doesn't match reality. The market yields, according to Bloomberg, a wide dispersion of investment results.

The success stories are concentrated in "only a small part of the community and a few extremely lucky or knowledgeable people," said Zuppinger, an early enthusiast of these virtual worlds. The frequent result, by contrast, is getting stuck with something no one wants. In the last 90s, 1.9 million assets were sold in the largest marketplace in that sector, OpenSea. Seventy-five percent of these assets never saw another transaction.

The market that does trade is extremely concentrated. The top 3% of the most traded collections accounted for 97% of all market volume. It is these more liquid corners of the market that have taken advantage of the bullish wave... But they are no guarantee of profits either. Of the collections with 100 or more transactions, 42% have seen their price fall, while 39% have doubled in value.

Once volumes have fallen in the wake of bitcoin, the question is the same as in all episodes of speculative fever: whether those who come in last are left with assets that no one wants when the speculative fever subsides. Not the only market with a handful of star assets, many obscure failures and newly rich traders claiming to have systems to make money without risk.

But NFTs are distinctive in their lack of obvious economic value; anyone can mint such an asset as long as they denote ownership and via blockchain. Benjamin Rameau, founder of a decentralized group that invests in NFTs called Jenny DAO, notes that "what the market decides is valuable is sometimes decided by extraneous factors." Herd behavior is inherent in this market. Martin Gaspar, an analyst at cryptocurrency firm Crosstower, made a 40% return in two weeks on the Hashmasks collection thanks to trend-watching on Twitter.

"Everyone is trying to get in on a big trade before it really catches on," Gaspar said. "If there are notable crypto influencers are talking about an NFT project, it's worth listening to or at least taking a look." Also, since assessing the fair value of digital images of koalas, vampires or eggs is so difficult for most speculators that the sector is fertile ground for algorithmic traders, who post lowball bids and instantly resell the tokens.

Prices, moreover, fluctuate hand-in-hand with bitcoin, with volatility exacerbated by disparate liquidity. Loot, one of the most popular collections, has seen the price of its cheapest piece drop by more than 50%. "There is simply no way for many transactions to hold their value." Like cryptocurrencies before them, NFTs have also been dogged by suspicions of money laundering operations, in which a speculator inflates volumes by buying and selling against himself.

According to Zuppinger and Dan Kelly, between May 2020 and February 2021, these bogus transactions accounted for 28% of the market's dollar volume, with another 10% flagged as suspicious. One possible solution is to fractionate NFTs into fungible tokens that represent a portion of the collectible. A transaction facility that opens up this market to more participants but exacerbates the euphoria: the art collective that bought the Doge meme for $4 million later auctioned it for 17 billion virtual pieces, raising the value to $705 million.

"Ninety-nine percent depends on being in the right circle and having the right information at the right time," Zuppinger said. "In the NFT space, you live with this constant frustration that you missed the opportunity to make $1 billion." He knows what he's talking about: when the CryptoPunks collection could be purchased for literally nothing in 2017, Zuppinger saw it as an experiment with little aesthetic value. This past weekend, one token sold for a whopping $7 million.

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