The first-ever tweet by Twitter co-founder Jack Dorsey was sold as an NFT (non-fungible token) for US$2.9 million in March 2021.
About nine months later, Justin Bieber bought a Bored Ape NFT for about US$1.3 million. The former is now worth less than US$4 and the latter has lost more than 95 per cent of its value.
The first lines of Wikipedia’s description of NFT reads: A non-fungible token (NFT) is a unique digital identifier that is recorded on a blockchain, and is used to certify ownership and authenticity. It cannot be copied, substituted, or subdivided. The ownership of an NFT is recorded in the blockchain and can be transferred by the owner, allowing NFTs to be sold and traded.
To most, it is just a description. But to some people, it could possibly be the start of the destruction of a tyrannical global capital system and another blow to the fiat order. You can’t argue against that (really, don’t try). But there’s another group of people who are attracted to the idea of investing in NFT.
In school, many of us had spent pocket money, or asked from our parents for some irrational purchase. There was a time which perhaps only lasted a few months, when kids brought images of pop stars printed on postcards to my school.
Because the kids were cool and the images represented the prevailing hip, other kids started collecting these postcards to show to their friends.
An unspoken prestige of these postcards was the fact that at RM1 per piece, they were out of reach for most kids at the time. A small trading market emerged where postcards were traded at even higher prices.
But the exuberance didn’t last. World Cups, Thomas Cups, ‘Terminator’, and Chow Sing Chi movies, Majalah Gusti, Search, and Lefthanded, all took turns to become the cool thing in school.
That brief but expensive episode was a mini economic bubble contained in a specific social circle in a school.
Unlike ‘Terminator’ movies and Search’s ‘Fenomena’ album, you can only derive pleasure and utility from the postcards when other people are envious of you.
That’s the nature of FOMO (fear of missing out) – it might be a permanent human condition, but the ideas and objects of envy are fickle and sometimes even worthless.
A company, big or small, produces goods or offer services to generate income. As the company grows, you might be enticed to be a part owner by buying equity in the firm. Or you lend it money with the promise of some rate of return.
But an NFT, just like a bulb of tulip, generates no apparent economic dividend. You purchase it in hopes that somebody else, for whatever reason, would pay a higher price for it down the road.
So, why did these rich and famous people invest in NFT?
Well, maybe it’s exactly because they are rich and famous. Celebrity endorsements are a powerful thing. So much so that a host of them, including Bieber, Paris Hilton, Snoop Dogg, Post Malone, and Steph Curry are being sued for promoting Bored Ape NFTs by investors alleging that they were misled because they did not know that the celebrities stood to benefit from their promotion, but did not disclose this information.
In financial markets, transactions play a vital role in price discovery – the prices at which goods, services, contracts, and securities are transacted at, reflecting the actual market price. This is true, provided there’s enough transactions occurring to represent a “market”, or what is also known as liquidity.
In a working paper, two Yale University economists argued that many speculators had clouded judgments as they extrapolate past NFT transactions. If a celebrity purchased an NFT for a million dollars today, surely, it will be worth at least a couple more times next year, right?
Furthermore, sellers of NFTs, being overly-optimistic, often set their reserve price much higher than market value, and during a market downturn, are reluctant to sell and realise losses. This in turn, suggests to investors that prices are still high despite the lack of actual transactions.
The research concluded that selection-neglect was a key aspect of the NFT bubble. In statistics, selection-neglect occurs when you take the situation of a highly exclusive group, to represent a wider population. More specifically, it is like taking a few celebrated transactions as representative of how NFT economics work.
NFT is just one of many questionable investments that exploit celebrity culture and FOMO psychology.
For sure, there will be others – just like fads in school, the cool changes with the season. This is not to say all celebrity endorsements and new investment opportunities are dubious, but you can’t automatically fall for something just because it’s new and promoted by someone you like.
A whole lot of risk management boils down to checking our own exuberance and it also helps to have the counsel of even-tempered family and friends.
As Ice Cube said, “You better check yourself before you wreck yourself”.
The views expressed here are the personal opinion of the writer and do not necessarily represent that of Twentytwo13.
