Did that headline hook you? Well, I was kidding. I can’t even come close to explaining the recent prices paid for NFTs. But I am pretty good at questioning what I see and can perhaps shed some light on their true values. And if you have never heard of an NFT, keep reading. I will explain them in a bit.
This whole quandary started when Nyan Cat (see image) sold for $800,000 in March. That’s right, a digital gif that was created a decade ago and until recently would have been considered absolutely worthless by everyone from a seasoned investment manager to my 9-year-old daughter, sold for nearly a million bucks. In explanation, the Wall Street Journal paraded a crypto expert who explained that much like da Vinci’s signature on the Mona Lisa guarantees its value, a digital file associated with Nyan Cat guarantees that this is the original Nyan Cat sold by the original artist and hence has value. Many investors bought this pile of cheese. I only saw holes.
This digital file is called an NFT. It is a nonfungible token or blockchain-based digital device that is associated with an asset. This device stores the data about the asset in a permanent and noneditable ledger somewhere. That data will include originator and date of creation as well as records of subsequent ownership and information specific to the asset. The asset is generally but not necessarily digital itself.
So the Nyan Cat sale included the original artwork as well as a permanent record of the date created and the name of the artist. Or that is what we are told. Neither of those things is fully true.
An NFT offers no guarantee that this asset was created by anyone in particular. All it purports is to know is the name of the NFT’s creator, and when the NFT was associated with the artwork. Nyan Cat’s NFT only works because it echoes the pre-existing trademark, something decidedly low-tech.
Second, the NFT offers no guarantee that this is the original Nyan Cat. “Original” is a tricky concept in digital art. Many copies are created and sent around during creation and the final original version is not the same as the one that is optimized and distributed. Furthermore, the internet is rife with authentic variations of Nyan Cat in all sorts of different costumes and situations that predate the NFT. The NFT promises to know when it was created and associated with the artwork, but not when the artwork was created or if it’s the original version.
Similarly, an NFT does not guarantee Nyan Cat’s value. To point out the problems with the WSJ’s example, the true value of the Mona Lisa is a function of the quality of the painting, the name of the artist, and the work’s importance in history, not a verified signature. Nyan Cat exhibits no artistic quality. It is cute and ironic but lacks artistic merit or conceptual depth. And the artist is certainly not as famous, nor has the cultural significance of many artists whose work sells for far less – take Salvador Dali or Frida Kahlo for example.
The NFT doesn’t even solve a needed problem. Like an authenticated signature, Digital art has had a mechanism for guaranteeing authenticity since the late 90s (and a Sol Lewitt wall painting decades earlier). When a video painting by digital artist Jeremy Blake was purchased in 1999, it came with a certificate of authenticity signed by the artist. There are many ways to view and share his work. Some may even be available on YouTube. But only holders of the certificate of authenticity can sell the work. This is an equally faithful guarantee of the artist’s hand and the work’s origin. Unfortunately, there is no stampede to collect digital artwork with a paper certificate of authenticity (said the guy who owns several Jeremy Blakes).
Since we are running out of explanations, one might wonder if the actual NFT and its connection to a rare blockchain has value. Like how gold from an ugly piece of jewelry can be melted down and used to make a nicer one. This is a reasonable explanation until one remembers is that NFT stands for non-fungible token. Nonfungible means it cannot be exchanged, and this NFT, by intent of creation, has no other possible appropriation or value outside of its designated context. So nope.
In the end, I am pretty sure that the price realized by Nyan Cat was a function of NFTs being novel and some unwarranted purchasing momentum for crypto-based assets. In other words, it is a bubble. If you are considering jumping in, beware. Fundamentals might not be the thing that drives an investment’s price in the short-term, but they are always what drives its value in the long term. Understanding the difference is not hard but anticipating when it will pop can be.