Cryptocurrencies

Please please PLEASE, Beware of NFTs!

It’s safe to say that the hype surrounding NFTs has now hit the “ludicrous” phase. It’s disturbing to watch and will surely lead to many very upset speculative traders in the not-too-distant future.

Clearly we are now witnessing “Cryptokitties 2.0”. As a community, we should really know better!

Perhaps it’s because much of the newer crypto money was probably not in crypto when the Cryptokitties hype congested Ethereum to a near standstill (much like DeFi has now done) in late 2017. But what disturbs me most is that some people who were in crypto during that period, people who should know how this all ends, are going just as nuts for NFTs as anybody else.

Of course there is nothing inherently wrong with buying and trading NFTs. There are profits to be made and there must be a few genuinely desirable NFTs out there. But for the most part, the NFTs being minted are absolute trash, worth a cent or two at most. Unique items crafted with skill have given way to mass produced items crafted for profit. Scarcity has become contrived and false, and some NFTs are obviously jokes – showcasing the insatiable hype for NFTs, no matter how ridiculous they may be.

There is no reason to turn a Tweet into an NFT, that’s not art, it’s opportunistic commercialism – preying on the naïve, the deluded and the greedy. There is no reason to attribute high value to 8-bit colour characters rendered in ultra-low resolution. Some mass-produced monsters in ’80s arcade games like Galaga had better graphics than many NFTs I’ve seen!

The mere act of minting something as an NFT does not give it value. For an NFT to be valuable, the item should HAVE value and desirability prior to becoming an NFT! The only exception to this would be NFTs which contain a certain amount of cryptocurrency X or Y within them, something which could be recovered if the NFT is burnt. But even in that case, why not just buy the underlying asset instead?

The dead giveaway of the over-hyped market is that EVERYONE is talking about NFTs. Old crypto money, new crypto money, people who are only partially into crypto, crypto news channels, freinds on Facebook, MAINSTREAM news channels…
Even a crypto amateur should be able to tell you what that means: overheated market.
And “overheated market” means “standby for a nasty price correction”.

NFT hype is even worse than ICO or DeFi hype. At least with ICOs or DeFi, people were investing in some sort of platform which may later (after the hype and the inevitable correction) succeed and make money further down the line. I bought into a lot of ICOs a few years ago – knowing the risks. Most of those projects vanished, scammed or dwindled away into nothingness. But some kept on going, coins which are now contributing seriously meaningful gains to my portfolio. DeFi works the same way: many platforms will not survive the correction, especially in the face of so much competition, but a select few will, and will go on to become the stars of future crypto.

NFTs don’t work this way. Your “investment” in an NFT depends solely on collector desirability for its value. There are no share-like characteristics to it which give some form of platform ownership or entitlement to profit-sharing. There are no fundamental underlying reasons for it to be valuable, unless it is confirmed to have to have been created by a famous artist or celebrity personality, AND is scarce in number. Obviously if you are the owner of “Cryptokitty #1” then you have a valuable piece of crypto history in your hand. But if you have one of Joe Soap’s NFTs, number 3,972,154 of 10,000,000, then you bought snake oil.

Searching for #NFT tags on https://twitter.com/compose/tweet

NFTs are analogous to proof coins in the precious metals world: they’re similar to the regular varieties (in this case fungible tokens and bullion coins), but rely on collectors for their value. The thing about such markets is that they are NOT safe-havens! Proof coins lose all their extra worth in times of panic, we’ve seen this in the past. Liquidity in collectors’ markets drops to zero when the proverbial hits the fan, and the perceived extra value of collectors items vanishes as people seek essential assets over luxury ones.

With NFTs this is even worse than with precious metals. At least a silver proof coin is still made of the same thing that a silver bullion coin is, so its value won’t drop below that of a silver bullion coin. But an NFT, by definition, does not enjoy all the benefits that fungible tokens or coins do. You can’t suddenly trade it as a fungible token, because there will be no market for it. It doesn’t have thousands of trading pairs on hundreds of exchanges; it relies instead on a handful of niche exchanges – which may quite literally have zero bids for such items during difficult times. Furthermore, unlike fungible tokens, NFTs can easily be tracked. Whereas normal fungible tokens can only be tracked up to a point, and smart crypto users will know how to shake such tracking attempts, with NFTs you can’t do that. You will always be able to find the location of the NFT on its blockchain (assuming that it is residing on a blockchain and not in some dodgy second-layer add-on which could vanish!), so you will always be able to see which address owns it. You could link that to further information, such as which wallet address paid for the NFT, severely compromising your anonymity within the cryptospace.

I’m not saying don’t hold NFTs, I hold a couple myself. I’m saying “know the risks” and act accordingly. NFTs are not a replacement for fungible crypto assets. They do not have the same functionality. They are collectors items of questionable and capricious value.

And they are headed towards a big crash.

The ball is – as always – in your court. DYOR.

Yours in crypto

Bit Brain

All charts made by Bit Brain with TradingView

“The secret to success: find out where people are going and get there first” 

~ Mark Twain

“Crypto does not require institutional investment to succeed; institutions require crypto investments to remain successful” 

~ Bit Brain

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