Why Did A Crypto Geek Pay $500,000 For A Rock Picture?

NFTs are a fantastic innovation that may be even more important than the coins on which they are built.

Justin Sun, a cryptocurrency entrepreneur, stated on Twitter a few nights ago that he had paid $500,000 for a photograph of a rock with laser eyes. It wasn't even a good rock photo. It, like the majority of non-fungible tokens, has little to no creative quality. Whether it's the original cryptokitties, penguins in hats, or the rocks, it's all crypto-community internet kitsch, a big inside joke that only the cool crypto kids are meant to get. While the rest of us shrug, the geeks buy and sell these "assets," raising prices to unsustainable levels. They claim that "we just don't grasp it." It's totally clear to me.

First and foremost, NFTs are an astonishing breakthrough that may be even more essential than the cryptocurrencies on which they are built. NFTs create property rights in the digital realm where none previously existed. According to Katya Fisher, writing in the Cardozo Arts & Entertainment Law Journal, the "first sale doctrine" in US copyright law states that it is "allowed to resell or otherwise dispose of tangible copies of copyrighted works." Until now, no such safeguards existed in the digital domain since digital copies of a work of art were thought to be fungible, and a digital first sale right could not exist with digital works due to their fungibility. When a person purchases a physical painting, he or she is only purchasing the painting itself, not the rights to duplicate it. NFTs function in a similar manner.

The fascinating thing about NFTs is that they aren't currently being employed for that purpose. They're being exploited to speculate about nonsense. There are actual digital artists whose NFTs are trading considerably below the penguins and lo-res cats, such as David McLeod and Alberto Seveso. Sure, Damien Hirst recently sold a slew of dot portrait NFTs that have skyrocketed in value, and Beeple recently sold his digital mosaic "Everydays: The First 5000 Days" for $69 million, but Hirst is the most famous fine artist of our time, and there has been much debate over the artistic quality of Beeple's crude daily sketches.

One aspect of this bull market has perplexed me over the previous year: the best-performing assets have been the dregs, companies like GameStop Corp. and AMC Entertainment Holdings Inc., junk bonds with negative real yields, and 24px NFTs. Rather than racing out and purchasing the best assets, speculators are purchasing the worst. The WallStreetBets crowd could easily have purchased Apple Inc., but they did not. Financial historians will look back on this period with a mix of awe and dread.

Because NFTs are non-fungible, they are essentially collectibles. There have been a few collectable bubbles over the years, with Beanie Babies being the most well-known example from the late 1990s. The implosion of the Beanie Babies had no systemic consequences, but it was notable for being perfectly timed with the rise and fall of dot-com stocks. Collectibles bubbles tend to be synchronous with other asset bubbles, and actual physical collectibles, from comic books to sports memorabilia to sneakers, are blazing right now.

However, one distinction between the physical collectibles market and the NFT industry is that tangible items have a finite quantity. New NFTs are being minted all the time as high prices entice new entrants. Some people told me about their children minting new NFTs for as little as $20 and then selling them for $1,000. This is happening thousands of times around the country as tech-savvy youngsters try to get in on the action.

Jens Parsson highlighted how attitudes around money changed in Weimar Germany in "Dying of Money: Lessons of the Great German and American Inflations": "When money was so easy to get by, one took less care to obtain actual worth for it, and frugality grew to seem immaterial." Money is so easy to come by in 2021, and speculation is prevalent, just as it was in Germany in 1920.

What stage of the cycle are we in when people pay $500,000 for crudely painted rocks?

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