Why NFTs are a bubble
Over the past few years, Non-Fungible Tokens, aka NFTs, have become the latest blockchain craze.
In true internet fashion, they’ve inspired plenty of different opinions. But before we get into that, let’s take a minute to go over exactly what NFTs are in the first place.
WTF are NFTs?
Many of the NFTs that have been drawing the most attention lately are pieces of virtual artwork. But they can also be pictures, tweets, game pieces, or pretty much anything else that comes in a virtual form.
So what makes an NFT picture different than any other picture on the internet?
Let’s use a hypothetical situation to help explain. Imagine it’s a few years ago, before the existence of NFTs.
You’re fooling around with your old-school digital camera one day and end up taking a hilarious picture of your cat.
You make it into a meme, post it online and, sure enough, the internet goes crazy over it. Pretty much overnight, your cat becomes more famous than Elvis.
Fluffy is now a verified viral sensation and you know what you (or Fluffy himself) have to show for it?
Even though he’s cracking up people halfway around the world, Fluffy will ultimately end up without a single extra can of Fancy Feast to show for his efforts.
That’s because the long-accepted truth is still that the second you post something online it pretty much becomes worthless.
How NFTs change the game
Now let’s reimagine the same scenario today. Upon capturing the same image of Fluffy in all his glory, you hop online and mint it into an NFT.
An NFT is kind of like virtual proof that your image is an original. Many may copy it, but by minting it on the blockchain, you have proof that yours is the one and only Fluffy original.
That, in theory, is what makes it so valuable.
Now, if you and Fluffy decide you ever want to cash in on your success, you can sell the original NFT photo and even collect royalties every time it changes hands.
With every purchase, a new virtual contract is minted on the blockchain that offers unmistakable proof of authenticity and ownership.
And the odds are that, if Fluffy’s big enough, someone is likely to pay an obscene amount of money for the photo that first launched him to stardom.
Why? For the same reason, people drop millions on original pieces of artwork even though they can just look up the same image online.
Are NFTs a bubble?
As crazy as the above scenario sounds, it’s happening every day. Celebrities from Eminem to Paris Hilton have dropped hundreds of thousands of dollars for NFTs of digital artwork.
The NFT industry is suddenly worth billions of dollars, which has led many people to speculate that it’s formed a huge bubble that’s about to burst at any moment.
But is this really the case? Probably.
The bigger takeaway, however, is that this doesn’t necessarily mean that NFTs are going anywhere anytime soon.
We don’t have to look very far back through history to see an example of what happens when a bubble finally bursts.
The Dot Com craze of the 1990s
Back in the 1990s, this crazy new thing called the internet was really coming into its own.
Everyone could tell that it was going to completely revolutionize the future and they wanted to get in on it in any way they could.
Suddenly, people were investing in anything that was even remotely connected to the internet.
And why wouldn’t they? In the end, they weren’t wrong- the Internet has done exactly what they all predicted.
The problem was that not every random investment turned out to be the next Facebook, Amazon, or Apple.
Around 2000, the dot com bubble finally burst when it began to become clear which internet companies were going to be a success and which weren’t going to hack it in the long run.
Those who had invested in the losers lost a ton of money, but many of the lucky few who chose the winners struck it rich.
The implications for NFTs
The same thing is basically happening with NFTs right now.
They’re the hot new thing and the technology behind them will quite likely prove to be as game-changing as everyone thinks it will.
So it makes sense that everyone wants in on the craze.
As a result, many people are willing to pay a lot more money for questionable NFTs than they should, reasoning that their value will only go up.
But as we learned from the dot com fiasco, it’s highly likely that many of them are in for a rude awakening.
Ultimately, some of the art that people are paying more for than Picassos is quite probably going to turn out to be worthless.
But not all of it will.