We were not surprised to read that a company that tracks NFTs declared that most NFTs are now worthless. But the NFT — non-fungible token — market was huge, so around 23 million people invested in NFTs that are now worth nothing. Worse still, the company notes that because of oddities in how NFTs are priced, the real number of worthless assets is probably even greater than they think.
It is easy to look back and think that it was obvious. After all, an NFT of the Mona Lisa isn’t really the Mona Lisa. Nor does owning it confer any real benefit other than “bragging rights” of owning an NFT of the Mona Lisa. But that’s like saying Luke should have known Darth Vader was his father — it’s only evident after the fact. History is replete with bad ideas at the time that paid out down the road. Of course, history is also full of bad ideas that were simply bad ideas. For every Apple or Google stock you didn’t buy at $4 a share, there are a hundred $4 stocks that you shouldn’t have bought.
The NFT craze was sort of a viral event. We usually think of these as part of the Internet culture, but that’s not really true. There is actually very little new on the Internet. The Internet just lets things reach further and faster than before.
Don’t believe me? Kilroy was a viral meme in the 1940s. Fads such as hula hoops, phone booth stuffing, and flagpole sitting were the ice bucket challenges of their day. But, of course, these things weren’t economic. Just fun fads. But economic fads that turn out to be a bad idea are nothing new, either.
The most famous and possibly first economic bubble was the 17th-century tulipmania that infected Holland. We think of tulips as distinctly Dutch, but it turns out they originated in central Asia and only made their way to Holland somewhere in the 16th century. The Dutch loved tulips and started cultivating them, with different rare varieties having more value.
To add to the fun, you couldn’t tell what kind of tulip would come out of a bulb, especially since — as we know now — some of the more prized varieties had color variations caused by a virus in the bulb. At first, it was a bit of a game for the rich. However, it soon spread to the merchant class and beyond.
By 1634, everyone wanted in on the action. A single bulb could go for 5,000 florins. The florin’s value is hard to know for sure today, but one estimate based on the price of beer is that a florin is worth about $240 in today’s money. So a 5,000 florin bulb would have bought a lot of beer.
Everyone wanted in. The price of tulip bulbs just kept rising, seemingly without an end in sight. Sound familiar? People started buying tulip bulbs on credit, just like you buy stocks on margin, hoping the stock’s gain will let you repay the loan.
The problem, in hindsight, is inevitable. By 1637, prices dropped. Futures on tulip bulbs were now “upside down,” which was especially problematic if you bought them on margin. Bankruptcy and a supply glut ensued. Eventually, the government would allow tulip contracts to be voided at a fraction of their face value.
There is some debate among historians about the actual scale of the financial impact of this on the Dutch economy. Some say it nearly wiped the country out, while others say it affected only a small number of traders. But few disagree that it was a bubble. Investors acted irrationally, came to their senses, and then destroyed the overvalued market. Some think it was just the free market. Something is rare and expensive. Production ramps up to capitalize on the trend. Then supply is great, and prices drop. Perhaps. But if you spend enough on a single tulip bulb that will flower for a week and pay what it would cost to buy a mansion, it sounds like mania to us. At least an NFT of a tulip will last for a very long time.
A Fine Line
There is a fine line between knowing that something will be valuable and chasing a bubble. For example, if you could foresee the growth of cell phones, investing in towers would have been great — the rent to put an antenna on a tower can be $30,000 a year. But you are probably sorry you tooled up to make pet rock houses or Google Glass accessories.
Part of it, of course, is knowing when to get out. If you dumped your bulbs before prices dropped, you probably made a killing. Even cell phone towers will eventually lose value if everything goes to satellite. The thing about cell phone towers is that it is a rational expense and a rational change. With tulips and NFTs, the price is driven not by value but by emotion, and then the change is just a return to rationality, not a natural progression.
So, what’s the next big investment? We don’t know, but if we did, we’d have more money to spend on hacker toys. We tried our hand at minting NFTs (not really; it was, after all, April 1st). We aren’t sure about the fad value of cryptocurrency, but our Raspberry Pi is hard at work.
Featured image: “Tulips” by Kris Runstrom.