The NFT Bubble is Going to Burst.

Updated: May 26


Photo by Majestic Lukas on Unsplash


If you grew up in the United States during the 1990s, you likely remember a brief period of time when little bean-filled cotton sacks in various cute animal shapes became a national obsession. Surprisingly, its extreme fan base was not actually comprised of the demographic which these stuffed animals were targeted for (pre-teens and below), but rather, their parents.


Unbeknownst to all at the time, this beanie baby craze quickly and swiftly became the Tulip Mania phenomenon of the Baby Boomer generation.



A Brief Overview of the Beanie Baby Craze


During the mid-1980s, a sales representative by the name of Ty Warner began working for Dakin Toy Company. At the time, Dakin was the world’s largest manufacturer of plush toys. Warner quickly became the company’s top salesman, and through this, saw an opportunity to venture off on his own to start his own company. That company, Ty Inc., would forever change the course of the stuffed animal industry forever.


Warner was a master salesman. As well, he understood the principles of supply and demand, and knew how to quickly manipulate his customers using generally basic techniques. Initially priced at $5 USD per stuffed animal, Warner’s beanie baby collection quickly built a loyal following of fans. However, it wasn’t until he “retired” an animal that he learned how much of a cult following his company had built.


The retirement of an animal from a particular collection ultimately created shortages for interested buyers who had not yet had the opportunity to purchase a particular animal. As these buyers began scouring the shelves of toy stores, hospital gift shops and more, a secondary market for these products began to emerge. The demand and frenzy got so out of hand that eventually, a store clerk would be held at gunpoint for 40 bears, and a security guard would be killed over a dispute with another man involving several hundreds dollars “worth” of beanie babies.


The craze carried well into the late 90s – until one day in 1999, when Warner announced the retirement of another batch of beanie babies, and the market did not react. A signal of the beginning of the end, the price of the plush toys began to plummet, in certain instances going from more than $1,000 USD per toy down to less than the original purchase price of $5. The bubble had finally burst.



The NFT Bubble is Rising


The NFT boom is in full swing. Unless you have been abstaining from television, Twitter, and perhaps the internet in general, many individuals likely would have come across these three random letters at some point during 2021.


Barely a mainstream topic towards the end of 2020, the NFT market has ballooned to a valuation of more than $22 billion USD – a growth of more than 22,000% between December 2020 and December 2021. NFT marketplaces like OpenSea, Nifty Gateway, and more, have exploded in volume – as celebrities, creators, and individuals from all walks of life scramble to mint the latest JPEG or PNG file onto the blockchain.


Search for the #NFT hashtag on Twitter and thousands of Tweets appear by the hour – most falling into one of three categories:

- Informing users of sales (private, public, or otherwise)

- Asking users to sign up for whitelists, airdrops

- Alerting the public of giveaways


Unheard of projects are regularly minting 10,000 NFTs – with nothing particularly special about the images associated with the token. Often times containing an animal or entity in 10,000 different outfits, colors, or backgrounds, the only unique thing about the NFT is the fact that all of them are different.


And yet, people continue to tweet, retweet, sign-up, buy, and further push the narrative that NFTs from any walk of life have some sort of value.


This is a bubble.



Bullish and Bearish on NFTs


To perhaps clarify first – NFTs (or rather, the technology behind them and what they can represent) are incredible. As I have written before, there is a very, very bright future for the NFT industry, as well as its potential future applications (that we know of today and that we have yet to consider). NFTs have the capability to disrupt and improve almost every industry on Earth – and it is more than likely that they will do so in the months and years to come. From supply chains to gaming – NFTs are going (or have already started) to alter how we work, play, and interact in the physical and digital worlds.


With that said, the current state of NFTs does not accurately reflect this promising future that the industry is positioned for.


At best, most NFTs today are currently a cash grab – playing on the emotions of the crypto community who hope to score the next set of CryptoPunks or Bored Apes. In all likelihood, those times have already passed. Barring NFTs which are truly outstanding (either artistically, conceptually, or otherwise), the majority of the NFTs today are no different than a random beanie baby which was sold in the mid-1990s. To understand why this is the case, we need to first understand why NFTs even have value to begin with.


What Gives NFTs Value?


At the end of the day, NFTs are representations of data on the blockchain. Therefore, it is extremely important to understand, what, if anything, this data is actually representing. Binance has done a nice piece to provide a general framework on how to assess the value of an NFT. In particular, the company suggests that the three key factors to consider when evaluating the intrinsic value of an NFT are rarity, utility, and tangibility.


Rarity

Rareness is often defined by how little there is of something in this world. For example, wild pandas are rare, and the comic book where Superman made his first appearance is rare. In these clear examples, wild pandas are difficult to locate, and Action Comics #1 is difficult to obtain.


Unfortunately, many NFT projects have taken advantage of this definition to promote to consumers that the definition of “rare” applies to each NFT they issue. While technically speaking, yes, it does, this rarity is far from having the same level as the rarity of a wild panda. In fact, for most projects, the comparison of an NFT’s rareness is more comparable to the leaves on a tree, or the blades of grass on a lawn.


In these latter comparisons, while each leaf and blade of grass is unique and different – it would be safe to say that hardly anyone would be clamoring to buy them up individually based on these “rare” and “unique” characteristics alone.


Instead, what is missing from the rarity definition is the general public’s level of interest in the topic at hand. Wild pandas are valuable today because by and large, the world adores how cute they are – and they are highly marketable ($$$) for the zoos and countries who help keep them safe. Superman’s first appearance is valuable today because this brand is likely worth millions, if not billions of US dollars.


The leaf on the tree outside your window? No one cares. As well as for the majority of the NFT art which is produced today – most with little to no thought put behind it.



Utility

An object’s utility comes down to how useful it is – either in the real world or digital world. Water bottles may be a “dime a dozen” in your everyday life, but on a hiking trip up a mountain – its value and the purpose which it serves becomes significantly greater – especially if water sources are few and far between.


In the NFT world, NFTs can provide utility through video games (unlocking various in-game abilities) or through unlocking content (e.g. holders of an NFT may have access to online content otherwise not available for individuals not holding the necessary NFT).


Again with most of the cash-grab NFTs today – many purport to have some utility. Although further inspection will reveal that many projects are “putting the cart before the horse” – that is, issuing the NFT, and figuring out what it can be used for later.


Tangibility

The beauty of NFTs is that they can represent anything in the physical or digital world. In that sense, NFT issuers have the option of tying the digital asset to a real world or digital object (e.g. the deed to a building, kicks in the metaverse, etc…).


Many NFTs issued today are issued without this relationship. These assets rely on their uniqueness to capture their intended audience’s attention. Simply put – holding the NFT generally does not represent rights to anything else – in the real or virtual world.



Other Factors to Consider – the Real-World Economy


While we won’t go into too many details here, the current state of the real global economy is also in play here. In the US (as is likely in other parts of the world), inflation is at a 25-year all-time high. The US Federal Reserve has printed unprecedented amounts of money in an effort to encourage spending and to get the economy going again. To get an understanding of how much it is, more than one out of every four US dollars today was created in the last two years.


Looking at US Treasuries, the yield curve is flattening – often a sign that leads to the start of recessions.


Prior to the dot-com bust, and the financial crisis of 2008, the US economy was also flashing similar signs (high inflation and money supply, and a flattened yield curve, amidst others, which are beyond the scope of the argument being presented here).


A recession or pull-back in the real economy will undoubtedly trickle to digital economies, with the hardest hit being those digital assets which are on shaky foundations to begin with. For those who are just collecting NFTs left and right, it may be a good time to truly evaluate the portfolio.


Others who insist that high inflation will lead to people pouring their assets into Bitcoin – this is a potential argument. Nonetheless, history has not yet shown that this happens, and we will need to see if this deflationary asset comes out on top in the event of a real-world economy crash.



Looking Ahead


Contrary to the tone of this article, the future of NFTs is actually extremely bright. Similar to how the dot-com bust didn’t wipe out the internet and take us all back to pen, paper, and typewriters, neither too, will a crypto or NFT crash which could very well be on the horizon.


Foundationally speaking, NFTs are solid. Across all industries, they will meet and exceed the rarity, utility, and tangibility criteria that gives NFTs true value in the real and digital worlds. NFTs will re-invent business processes, business models, and introduce a way of doing things that simply is not possible or imaginable today.


With that said, there are a lot of NFTs currently which do not meet these criteria, and which will never meet these criteria. As the real and digital economies get frothier and frothier, NFT buyers should seriously evaluate their investments to best determine longevity of the asset.


Holders of solid NFT assets have no reason to worry – market crashes are part of the crypto industry. In time, a solid asset has a chance to recover and possibly even exceed its current valuations.


For those who doubt, one only has to view Amazon.com as an example from the Web2 world. The company, which boasted solid fundamentals, was trading at $113 per share prior to the burst of the dot-com bubble. Afterwards, it crashed to less than $6 per share. We all know how well the company is trading today.


It is those questionable assets that one needs to be on the lookout for. Those, if held, may likely never come back from the depths of beanie baby doom again.



 

Please note that nothing in this article constitutes as financial advice. I am providing some observations and a point of view/perspective that may be interesting to others only. As with all investments, especially in the world of cryptocurrencies, please ensure to do your own research before entering and exiting a financial position!