Beware the NFT Bubble Built on Digital Sand

Here’s a sound piece of advice for anyone tempted to jump into the most extraordinarily speculative South Sea Bubble-style investment frenzy since, well, the 18th-century South Sea Company’s bubble burst, financially ruining thousands of investors in Georgian Britain.

Don’t do it.

Investing in so-called non-fungible tokens (NFTs) is fine provided you’ve got unlimited funds and can laugh off spectacular losses. But if you’re considering raiding your pension pot or your child’s college fund in the hope of getting rich quick … Please, think again.

The idea of trading in NFTs seems highly attractive, especially in an era when people are desperate to get rich quick without really doing anything. NFTs are pretty much any digital entity whose ownership and provenance can be verified on a blockchain platform, which is a supposedly incorruptible, unhackable digital ledger on which transactions can be recorded.

Because who ever heard of a computer being hacked?

“Fungible”? It’s a term that describes any type of asset that is interchangeable with an identical item: a dollar bill, shares or securities, for example. “Non-fungible” describes something that is unique – a collectable soccer card, a parcel of land, a diamond – or, apparently, an NFT.

And yet, while one can hold a soccer card, and swap it in the playground for another, strictly speaking an NFT doesn’t actually exist, other than in the digital domain.

The non-fungible madness knows no bounds, as witnessed by the launch of Tilia.Earth, a Geneva-based startup offering NFT-backed “virtual real estate properties in the metaverse.” In the Middle East it is offering “properties” in Israel, Saudi Arabia and the UAE, where the almost 300 sites listed include a plot on the Palm Jumeirah for £602.48 (“tax included”).

Incredibly, real people are paying actual real money for these entirely fictional plots, presumably in the hope that the rising tide of NFT hysteria will see them get rich quick, as it has for investors in the runaway phenomenon that is CryptoPunks.

CryptoPunks are the low-pixel-count computer-generated cartoon-style characters, resembling the crudest of avatars from the early days of computer gaming, which pretty much got the whole NFT insanity started.

A collection of 10,000 “unique collectible characters with proof of ownership stored on the Ethereum blockchain,” CryptoPunks were created in 2017 as a kind of post-modernist techie joke by the two programmers behind “creative technology” company Larva Labs.

The images are, or rather were, inherently worthless. When they were launched in 2017, each of the 10,000 punks was offered free to anyone with an Ethereum wallet (naturally, the platform has its own cryptocurrency, Ether, aka ETH).

They certainly aren’t free now.

Last May, a collection of nine CryptoPunks sold at auction house Christie’s for $16.9 million. Ethereum has its own marketplace, where silly money can be paid for CryptoPunks up for sale. Earlier this week the cheapest was on offer for $195,086.28. The most expensive single CryptoPunk to date is No. 5822, one of nine so-called “Alien” punks, which sold on February 12 for $23.7 million.

Yuga Labs, creator of the algorithmically generated Bored Ape Yacht Club NFTs, is another leading NFT producer, which sold 10,000 digital apes on the Ethereum blockchain in April 2021 for about $190 each.

Resales have since totaled in excess of $1 billion. Naturally, celebrities have piled on the bandwagon. Justin Bieber, Eminem and Serena Williams have all purchased Bored Ape NFTs, with Bieber paying $1.3 million for his – Eminem uses his as his Twitter avatar, so that’s money well spent.

But what do you get when you purchase an NFT? Nothing. Well, not quite nothing – you get the key to a blockchain, access to which allows you to confirm that you do, indeed, own the NFT in question.

When you spring for a rare Rolex, a limited-edition Bugatti La Voiture Noire or a drawing by Renaissance artist Raphael, you have something very obvious to show for it, on your wrist, on your drive or on your wall.

But an NFT can be viewed online by anyone – and can be copied and pasted endlessly, like any digital image. When Christie’s sold its very first NFT back in March last year for $69.34 million, it tweeted an image of what it called, without any apparent irony, a “unique work in the history of digital art.” The company that minted the $69.34 million windfall had the chutzpah to compare NFTs to the original versions of great works of art, and any copy made of them to the posters one might buy at the museum store.

Except, of course, you could hang the original Mona Lisa on your wall – and there is literally no difference between the “original” NFT and any copy anyone chooses to make of it.

The truth is that the whole NFT edifice is built on digital sand, an emperor’s new clothes for the crypto age. The “value” of an NFT lies not in the art itself, which can be endlessly reproduced, but in the metadata embedded in the blockchain.

Good luck hanging that on your wall.

Most NFTs appear to have few redeeming features as art, but of course that’s not why people are interested in them. Wealthy celebrities might buy them as digital status symbols, but essentially they exist solely to be traded and to make money – and therein lies the makings of a technological South Sea Bubble.

Buying into NFTs is now an expensive business, and the more expensive it gets, the more likely it is that late-comers to the great game will be taken for every Ether they have.

You have been warned.

Jonathan Gornall is a British journalist, formerly with The Times, who has lived and worked in the Middle East and is now based in the UK.