In today’s Exponential Investor:

  • An expensive JPG file
  • Eight cats
  • More than just art

Editor’s Note: With most of us enjoying some well-earned time off over the holiday period, we’re sending you this week our favourite and most popular editorial pieces from 2021.

We call it (unimaginatively) our “Best of 2021” and all week we’re going to take a look at what we thought were some of our best pieces that are worth revisiting.

Continuing on today, you’ll see a piece from me from 16 March.

It’s fair to say 2021 might be the year in which “NFTs” went mainstream. When the New York Times puts one on their front page, it’s something big. When they sell for tens of millions of dollars, it’s something bigger.

But NFTs aren’t new. In fact I’ve been involved with them for about four years now. Not necessarily multi-million dollar punks, but the principles, knowledge and experience is all the same. And it certainly an area of the markets in which I think you could  be paying much more attention.

Enjoy…

NFT mania

Last Friday 12 March, the Wall Street Journal put a piece of art on its front page.

This piece of art by the digital artist, Beeple, sold at a Christie’s auction for US$69.3 million.

This piece of art only exists in digital format.

So how does a digital piece of art, that theoretically could easily be copied or “screenshotted”, sell for $69.3 million?

Well, it’s a one of a kind. The scarcity of it and full provenance of it can easily be proven too. That’s because the piece, “Everydays – The First 5,000 Days”, is a non-fungible token, an “NFT”.

Right now, in the crypto world, NFTs are white hot. In fact, the market is so hot that even Lindsay Lohan has created her own one-of-a-kind piece of art that recently sold for about US$16,000. It too was an NFT – a digitally scarce token that cannot be replicated, copied or stolen.

On the face of it, this might seem silly.

For example, the New York Times wrote about the Beeple sale. Its headline was,

JPG File Sells for $69 Million, as ‘NFT Mania’ Gathers Pace

Reading that, it is silly. But as pointed out on Twitter yesterday,

It’s funny seeing the NY Times describe @Beeple’s artwork as a “JPG File.” I’ve never seen them describe a famous painting as a “Stretched Canvas Covered in Paint.”

That’s perhaps the best summation of why the mainstream is so wrong about the NFT space. And why a lot of people are simply getting the wrong information about crypto.

If you take the time to learn and understand what Beeple’s $69.3 million sale really means, then you might be a bit more excited about what the NFT world is about to deliver.

Crypto and cats = boom

It’s 2017. Crypto is starting to boom.

This is the third cycle where things have got a little wild. New projects are popping up at great speed. Crypto is coming out of the woodwork and everyone is starting to take notice.

Then something truly game changing happens.

It involved one of the things the internet loves most, and one of the other things the internet loves second…

Cats and collectibles.

Born from this comes the crypto project/game from Dapper Labs, CryptoKitties.

The idea is you can purchase, collect, breed and sell virtual cats.

I know it sounds silly. But it’s one of the first real-world gaming use cases we’ve seen in crypto. And it literally takes over everything.

CryptoKitties became so popular it slowed down the entire Ethereum blockchain in late 2017. I’d not seen anything like it before.

In testing all this out, I bought myself some CryptoKitties.

Source: screenshot of editor’s CryptoKitties collection

These were the first NFTs I’ve ever owned.

Each of those CryptoKitties is unique. There’s none other the same. There are loads like them but none exactly the same.

I can sell, trade or “breed” them if I want – they are each technically one-of-a-kind, hence they are each scarce. However, as they’re not overly unique in terms of their appearance or design, they likely wouldn’t be deemed by most people to be rare.

That, however, does not make them valuable. In fact, at the time, I put Catoshi Nakamoto up for sale for 8 ETH. When I did that, I think the sale price was around $1,000. I forgot to remove the buy function, now he can be yours for just $14,000…

My point is no one is paying $14,000 for Catoshi Nakamoto – although if you want to, reach out and we’ll do a deal!

Just because it’s scarce, that doesn’t automatically equate to it being valuable.

However, if he was an artistically significant piece of art, then perhaps it would be valuable. How valuable? Well, whatever the market decided. Maybe $63.9 million valuable…?

The point is that the NFT itself isn’t the thing that creates value. What it represents is where the value exists.

In that sense, so much of the NFT space is subjective, much like other collectibles and scarce items that exist in the world.

Beeple’s “Everydays – The First 5,000 Days” artwork is deemed to be significant and valuable – the fact it’s an NFT is irrelevant.

Just like how my Catoshi Nakamoto is deemed not to be significant and valuable – even though it’s an NFT.

More than just art

When it comes to art, I do believe we’re seeing some mania sink into the NFT space. In that sense, the New York Times is right.

However, what it really misses is the idea that Beeple’s work is just a “JPG”. It misses the fact that an NFT isn’t an entity into its own, but a representative of something significant.

What’s more, that “something significant” doesn’t even have to be art. It can be anything that’s deemed to be significant and scarce… like an identity.

I recall a conversation I had with one of the co-founders of Ethereum, Joe Lubin. I spoke with Joe in 2018. When talking, we got on to the idea of digitally scarce tokens. He said,

 The ability to create digitally scare assets. So that’s pretty profound. But we’ll need decentralised storage and decentralised bandwidth and decentralised heavy compute and proof of location, and decentralised identity and many of those…

That’s important.

Until next time,

Sam Volkering
Editor, Exponential Investor