A painting of a digital cat with a bubble that says NFT.

Written by 10:06 am Investing, Money & Lifestyle

NFTs: Pyramid scheme, fad or the next big art trend? A 101 on what they mean for your wallet

About 8 minutes to read

Mike Winkelmann, better known as the digital artist, Beeple, first cultivated a name for himself through his long-running project ‘Everydays’. 

Combining topical subjects with a distinctive cartoon style, Everydays is a series of digital compositions that are made and shared daily, with the venture running for 5073 consecutive days at the time of writing. The accompanying Instagram has around 2 million followers and according to a profile in the New Yorker, this made him realise that if he were to release his art as NFTs – non-fungible tokens – then he could create a fortune. 

He was right. 

At the end of October 2020, Winklemann dropped three new art pieces on Nifty Gateway, an NFT marketplace, as a test. As of March 2021, each of the 100 editions of the work, valued at a dollar each, had resold for as much as $600,000. In December, a subsequent collection of ‘Everydays’ images was ‘dropped’ on the platform. It sold for $777,777. 

And that’s all before we come to his history-making success in March 2021, when Christie’s auctioned off ‘Everydays: The First 5000 Days’ for over $69 million. 

The huge price tag makes Winkelmann’s work the third most expensive ever sold by a living artist, sitting a few million behind Jeff Koons’s “Rabbit” and David Hockney’s “Portrait of an Artist (Pool with Two Figures),” which both sold for upward of ninety million dollars, also through Christie’s. 

Of course, Winklemann hasn’t been the only one to cash in on the growing hype around NFTs. 

In recent weeks, a ‘digital home’ by Toronto artist, Krista Kim, sold for half a million dollars on the marketplace SuperRare. Twitter founder, Jack Dorsey, dropped his first ever tweet as an NFT for $2.9 million (in a move similar to selling a signed jersey). Grimes has sold millions worth of digital art as NFTs since February 2021. And Kings of Leon became the first band to release an album as an NFT in March, dropping When You See Yourself as part of their NFT Yourself series, saying that they aim to ‘deconstruct, degenerate, and distort iconic band symbols and photography’. 

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“For those in the space that understand, they’ll appreciate the techniques of audio-generated imaging, pose detection, and pixel morphing that we used to create this collectible art,” says Casey McGrath, Kings of Leon’s creative director. “For those that don’t, we hope they’ll appreciate the undeniable power and emotion that results from the collision of analogue and digital.”

The fact is that NFTs are having a moment. The market tripled in the last twelve months, seeing 299% growth in 2020, and according to Benzinga, around 37.5% of people say they expect NFTs to become a successful market alongside standard art forms within the next decade. 

But – if you cut through the hype and the mania – are NFTs really all that? They’re interesting, of course, but are they safe? Are they something to explore as part of an investment portfolio?

The short answer is no. At least not yet. Let’s dig into why. 

An overview of NFTs

If you want to go into technical detail, NFTs or ‘non-fungible tokens are a type of crypto-asset created on a smart contract platform – most are part of the Ethereum blockchain – but unlike cryptocurrencies like Bitcoin or Ether, NFTs are completely unique and not interchangeable with any other asset. 

Breaking it down into everyday terms, NFTs are simply a tool to provide proof of ownership of a digital asset. They make something that only exists online into something collectible. So even if a million people screengrab Beeple’s ‘Everydays’, the original is demarcated by the NFT. 

“Imagine digital Beanie Babies, but with only one existing copy of each,” explains Kyle Chayka. “For artworks, the N.F.T. format functions a little like a museum label noting the piece’s provenance—a proprietary stamp, attached to digital pieces that can still circulate freely across the Internet.”

In other words, because NFTs are unique and can’t be replaced or replicated, they have the potential to bridge the gap between virtual and IRL economies – at least in theory. Whilst right now NFTs are dominated by ultra-high-net-worth individuals, there are opportunities for brands and businesses as well. This is what Matty S, better known as the crypto-collectible expert DCL Blogger, told Canvas8 in a discussion about TacoBell’s creation of taco gif NFTs.

“NFTs are much more than a visual collectible or art,” Matty says. “They can be a way to issue loyalty points, discounts, add a marketplace that benefits collectors, and the community of a brand. The tech is new but it can unlock so much.”  

In other words, there may be a reason for the NFT hype beyond the meme economy or fine art collecting – but it’s still a very nascent market.  

Before we discuss collecting and investing in the context of NFTs, it’s important to understand that whilst the theory is all very high-level utopian with some interesting implications for the virtual economy, in practice NFTs are still rather messy. 

The growth of the NFT market is partly the result of the pandemic. We’ve seen a huge surge in online activity thanks to lockdown and travel restrictions, accelerating the trend towards people spending more of their time – and money – in virtual spaces on virtual goods, services and experiences. There’s a reason, after all, why we’re seeing so many of these social media driven stories right now – GameStop, memestocks, NFTs – it’s all connected to online culture and the growth of our digital lives. 

However, many financial experts believe that what we’re currently seeing around NFTs is just another kind of ‘bubble mania’. Driven by online sentiment, NFTs have been described as a fad akin to the plethora of ICOs that boomed and burst in 2017. 

Others have come in even harder, suggesting that NFTs are a pyramid scheme – which kind of makes sense when you realise that cryptoart ticks all the boxes against the SECs definition of a pyramid scheme. 

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“NFTs are just the latest way that what we might call the cryptosphere — the industry that has sprung up over the past decade around blockchain, bitcoin and other tokens — has found to make a quick buck,” writes Jemima Kelly for the Financial Times

Far from wooed by the current furore, Kelly points out several of the key issues around ownership that make NFTs so problematic. For instance, whilst digital artists can share their work as an NFT, allowing them to prove that they have the original, anyone can actually create one of the tokens – even if they are not the creator of the asset being tokenised. In other words, anyone could create an NFT of exactly the same piece of art – whether it’s a gif, collage, video, tweet, anything on the internet. 

The point and promise of an NFT seems to be that the person who owns it, owns the artwork. This is the entire premise of blockchain as an unfalsifiable public ledger of ownership. But it’s just not that simple. 

For example, an anonymous artist has been creating NFTs in the style of Banksy. There’s nothing, however, to prove that the artist is Banksy. Nor is there anything the NFT does to protect the original maker’s copyright or to stop appropriation. On the flipside, if you were to make a copy of your favourite YouTube video, or download a gif, or copy the ikigai logo, you could turn it into an NFT if you wanted to. This doesn’t automatically give you any right to the content, trademark, or copyright. 

“NFTs are ahead of their time, and as is often the case, the law hasn’t caught up,” said Fred Clark, an art specialist at London-based law firm Boodle Hatfield, in WEF’s article on NFTs. “Future disputes over terms could quickly spill into legal wrangling in a fast-developing new sphere.” 

The tricky thing here is that holding the NFT, owning it, means pretty much nothing if someone else can prove they own the copyright. This has been the case in the US, where Stevie Nicks refused to let a skateboarding YouTuber make an NFT of one of their videos featuring one of her songs. It also means that the system works best only when there are third-party intermediaries that prove the identity of the original creator, as seen with Beeple or Grimes or Kim. Which is kind of ironic since this is exactly what blockchain is designed to overcome. 

Mitchell Clark, writer at The Verge, further captures the somewhat absurd nature of NFTs rather neatly, noting that what’s purchased as an NFT is more about the ‘flex’ or ‘bragging rights’ than anything tangible.  

Or, as Mashable’s Amanda Yeo put it, “An NFT is merely the very costly, environmentally disastrous, tech bro equivalent of peeing on a hydrant.” 

So are NFTs completely without value? 

Again, it’s not a simple answer. Although plenty of people rave about them, plenty more are highly sceptical. 

Right now, the two ways that money is being created through NFTs are through speculators with lots of experience in the cryptoart space and the artists themselves who are paying to ‘mint’ their artwork then buying from other artists to support them. But there are no real collectors in the cryptoart market right now – ie. people who are genuinely collecting to appreciate the work, not to make money fast. This is why, despite the fact that the platforms are designed to create hype and make it feel like everyone is ‘winning’ right now, lots of people are losing money to NFTs. 

Edmund Schuster, an associate professor of corporate law at the London School of Economics, told Kelly at the FT, “What we need to understand is that what is being traded is not the artwork, it’s the participation. And why not? People can subjectively assign value to something, and that is not something that we can really argue against, even if NFTs have no objective value whatsoever.”

For anyone seriously looking at NFTs, it’s important to brush up on your crypto-collectibles. You need to understand what you’re buying, what your rights are as a buyer, and what you eventually own. You also need to consider whether it’s truly in line with your values and goals, as whilst you may like the idea of supporting a particular creator or artist, there remain huge questions around ownership, theft, and privilege. 

“NFTs are not a boon for struggling artists,” writes Yeo for Mashable. “They are a plague facilitating art theft. Numerous creators are having their content stolen, with artists angrily speaking out and setting their Twitter accounts to private in an attempt to curb the soulless free-for-all. Unfortunately, right now it feels like building a lean-to in the path of a tsunami.”

Similarly, if you’re an artist or creator yourself, you also need to think about what you’re selling and how you’re selling. What will you own at the end of the day? Currently, art online is easily duplicated and shared – often with little credit given to the artist – so NFTs could make it easier to hold up and say ‘this is the original’. But it’s also fair to say that anyone can duplicate and similarly tokenise your work, claiming it for themselves and profiting. This is already happening, with accounts like @/tokenisedtweets making tweets into NFTs regardless of whether the tweet itself was created by the person requesting them to do so.

Legal disputes are inevitable. Discourse over ownership will only grow. If you’re considering NFTs as a buyer, seller, or trader, our biggest tip is to do your research and go in with your eyes wide open and your wallet aligned to your financial and personal values. 

Because it’s not just pockets that could be in danger thanks to NFTs. It’s the planet. 

As I ended up discussing on a classic lockdown walk through Battersea Park (or this tweet neatly put it into a limerick), NFTs are not good for the environment. Powered by blockchain, cryptoassets take a huge amount of energy to power – from their creation (or ‘mining’), to buying, selling, storing and sustaining. 

Studies show that mining bitcoin now consumes more energy per year than the entirety of Argentina. Bitcoin’s carbon emissions are on track to equal that of the entirety of London. Some even project that bitcoin’s emissions alone could raise the temperature of the Earth by two degrees. 

And NFTs are no different. 

Consider “Space Cat,” an NFT that’s basically a GIF of a cat in a rocket heading to the Moon. According to the website cryptoart.wtf, the carbon footprint of this one NFT is equivalent to an EU resident’s electricity usage for two months. That’s incredibly high for a piece of art. Add in the rest of the growing NFT market and you’re looking at annual energy use that’s on par with Ireland’s according to the World Economic Forum, who are recommending that ‘green-minded collectors might look for pieces which avoid Ethereum and instead use lower-carbon systems – or avoid NFT artworks altogether’.

There are potential solutions in the pipeline. For NFTs on the Ethereum platform, there are talks of changing the standard to potentially lower the amount of energy needed per transaction. Similarly, some are attempting to offset their NFT footprint. But those solutions are not immediate solutions. 

As things stand, we all need to weigh the short-term economic benefits against the cost to the environment in the long-term.  

NFTs might be a passing fad, but digital ownership is here to stay.

The search for digital ownership is increasingly meaningful in today’s world. There’s clearly appetite and desire for solutions that put the power back in the hands of creators, as we’re seeing through art and music. There’s also real potential for more blended online/offline experiences that NFTs or something equivalent could unlock. 

Right now, it’s easy to be caught up in the hype. NFTs are – despite the decidedly gnarly name – incredibly fascinating. There’s a reason why they’re having a heyday. 

But NFTs also raise questions around our values – personal, social and environmental. So for anyone going into this market, determined to start collecting, remember to spend aware, to be prepared for huge market drops or even collapse, and make sure you’re not ‘investing’ what you can’t afford to lose. 

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Maurizio & Edgar, Co-Founders, ikigai

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Tags: , , , , , Last modified: 26 March 2021