Fiat Money, Gold, Beanie Babies, and Beeple: What is Value and do NFTs Have Any?

Note: If you’re only here for the NCAA Bracket advice, you can skip to the end. 😉

Yeah, you’re all expecting I’m going to tell you NFTs are worthless, aren’t you? I mean they mostly are, but before we get to that, I’d like to have a broader discussion of how human beings ascribe value to physical (and now digital) items.

You may recall originally hearing of this topic in a college economics class…what is money? Does gold really have intrinsic value or is it just a shiny object? Why does anyone think paper money is worth more than the cost of buying some paper and ink? And why do they call it fiat money again?

Society is organized around common beliefs. Governments only hold power because people believe in them. Religions are obviously centered around belief. Not all belief systems are good. Hatred of others can be a common belief. But I won’t turn this into a philosophy lecture.

The point being that “value” is a belief. Money has value because we believe it does. We all realized giving value to random pieces of paper or metal was more efficient than bartering for all our needs and thus money was born.

This original money was most often in the form of coinage which had its pros and cons, but that is also another lecture. The point being people believed gold and silver had intrinsic value – because they were shiny and because they were scarce. The former made it desirable, the latter made it credible.

We later evolved to what we call “fiat money” – the paper stuff. This obviously brought challenges, mostly the potential for abuse (theft, counterfeiting, etc.) but it also brought convenience. Just as coins were more convenient than barter, paper was more convenient than coin.

The new danger this introduced to the world (inflation by government abuse of the printing press) is also a topic for a separate lecture. What is germane to the present discussion is people came to accept paper money…and eventually virtual money as credit cards were introduced.

Don’t Stop Believin’

The point being fiat money is a belief system. We all know that the government can devalue it at any time…and many have. Yet, we believe.

Why does this matter and what does it have to do with NFTs? Everything!

NFTs are a belief system. As are all stores of value. But what makes a store of value credible? That is the question we need to answer!

Prominent backers of NFTs like to say “a baseball card is no more than a piece of cardboard. It has no intrinsic value and can easily be copied. It has value because it is scarce and other people believe it has value.”

And they are right…but they could also be talking about dollar bills! So why does a Mickey Mantle rookie or a Monet painting function as a store of value? Because it is scarce and other people believe it has value!

So the NFT backers are sort of right. The issue to be adjudicated then is whether enough people will believe NFTs have value or is this just a sophisticated pump and dump?

What’s an NFT?

I know I committed writing sin 101 assuming everyone knows WTF a NFT is. I did that for a reason. Stick with me.

A NFT is a “non fungible token”. In English, that means it’s a unique blockchain creation. In plain English, that means it’s a one of a kind item with no risk of counterfeiting. You can think of it like a master of a recording or the plate of a printing press.

If you own the NFT, you have proof you own the original of a piece of work. That doesn’t stop anyone from making their own copy, just like anyone can record a song when they hear it. But only the NFT holder owns the original.

That sounds kinda special, right? Well, that’s the debate.

Top Shot

One of the hottest areas for NFTs is sports collectibles, namely Top Shot. These are “unique” rights to highlights from an NBA game. So basically you own the “original” video of someone shooting a three pointer. And some of these are worth over $200,000 because they are “rare”.

If this sounds stupid, I agree this sounds pretty stupid. It sure feels like a bubble because I can watch NBA highlights whenever I want. There is nothing particularly compelling about it. For example, I could record a game at home and, if someone makes a spectacular dunk, capture the clip and potentially turn it into an NFT.

Would anyone pay $200K for that? Of course not. Even if I swore I would only do it this one time and never again! That would make it scarce!

What NFT believers don’t grasp is scarcity alone doesn’t make something valuable. This post is a one of a kind. I don’t think anyone will pay $200K for the NFT of it (although if you are dumb enough to want to pay that much, I will gladly oblige).

So NBA highlights – that are otherwise ubiquitous – are a dumb idea for a NFT. If it were say some exclusive video – like LeBron recorded a private message for you just before Game 7 of the NBA finals and he scores 100 points in that game – well, then maybe. But just some random jumper? Who cares? The people buying this are sheeple.

Beeple

And that leads us from sheeple to Beeple (groan, I know, sorry)!

Beeple is an artist who makes cool drawings on his computer. That is going to sound like I am diminishing him, but I don’t mean to. He is very talented and he is clearly an artist. He just uses a computer as his medium instead of a canvas.

Furthermore, his art is unique and likely collectible. While it is easy to copy for anyone who can take a screenshot, NFT believers will tell you that is no different than people who take pictures of the Mona Lisa at the Louvre (I actually think that isn’t allowed, but I think they do let people take video on their phone, you get the picture – ugh, more Dad jokes!).

I think those people are correct. The rights to the original productions of Beeple – that he has authenticated are his masters – are worth something.

Like other art, they are scarce and enough other people enjoy them and are willing to pay for them. I think these are legit uses of NFTs given there isn’t really a way to sell the original like a traditional artist could.

Now, that doesn’t make it worth $69 million. That is stupid and appears to be a publicity stunt (the buyer is a crypto bro who is likely seeking validation). But if you told me it went for $69K, I wouldn’t have been shocked.

Market Depth and Supply

So the difference between Beeple and a Top Shot Moment is Beeple is an artist. Art collecting has hundreds of years of proof that people value it and view it as a store of value. Lots of transactions take place which demonstrates the market has depth. Baseball cards have only been around for decades, but there is still a large industry dedicated to them that conducts millions of transactions.

Top Shot is an experiment with very little liquidity. We have seen lots of speculative buyers. We haven’t seen many buyers on the secondary market though. Nobody knows what the market depth is. It’s a little like Softbank driving up WeWork’s valuation all on its own.

Also, supply is artificial. Top Shot can operate like the government of Argentina if it wants and prints millions of moments. Current buyers trust Top Shot not to do that, but Top Shot is essentially a fiat system. It will be tempted to run the printing press like everyone else in history given that power.

Beeple is only one person and can only create art so fast. Therefore, there are limits on his supply (he makes one piece a day, but the record sale was the rights to 5000 of those daily pieces). The buyers don’t have to worry about the market being flooded.

Score one more for Beeple relative to Top Shot. Top Shot has to hope it can create a deep market of buyers and sellers. This can happen organically (think how Nike basketball shoes became an asset class) but it rarely happens by diktat. Top Shot is trying to force people to be interested.

The Wow Factor

I wish I still had my original Air Jordans (though they weren’t of collectible value given I wore them into the ground). I don’t wish I still had the video of Sam Bowie (the guy picked before Jordan) making a layup that year. Nobody cares. Thus, it’s not collectible and it won’t retain value.

So let’s add one more thing to what makes a store of value…it’s scarce, other people believe in it, and it has a wow factor. If you have a suitcase full of $100s, that has a wow factor! If I still had my original Jordans (with no scuffs), people would want to see them. If I had a game worn jersey of MJ’s from one of the Finals games, that’s a wow factor. If I had an original Picasso, that’s definitely a wow factor. For certain people, Beeple may have the wow factor.

So can you guess where I’m going next??? Yup, Beanie Babies.

You know why Beanie Babies didn’t retain value? No wow factor. People only bought them cause they were told they were rare. I’m sure there were some little kids who genuinely found them cute (in the same way they find a plush toy they can get today for $7.99 cute), but nobody was impressed by your Beanie Baby collection. No, really, they weren’t.

It was a greater fool game. If you bought Beanie Babies, you did it to sell them to someone else. You didn’t want to be the last idiot holding them. That’s what Top Shot will be. And guess what?

You know when Beanie Babies took off? The late 90s. What was happening in the late 90s? The tech bubble and an energetic Fed. What is happening today? A tech bubble and an unprecedently stimulative Fed. It is truly Groundhog Day!

Anatomy of a Bubble

For those still clinging to their dreams that this isn’t a bubble, I have news for you. Bubbles are real. We can even create them in the lab! Academic research has demonstrated that even when people are given perfect information about the value of something, they are still willing to pay more than fair value for it at times because they get caught up in the price action and ignore the fundamentals.

Harvard will even sell you a game where you too can create a bubble! It’s only $5…which is actually hilariously ironic. (Get it? They don’t understand it would be more popular if they overcharged for it!)

Investment bubbles are a real cultural phenomenon. And I would bet you during every previous one there were true believers shouting the equivalent of “diamond hands”. Signaling to others you won’t sell is part of the manipulation process to get people to ignore the fundamental value.

It is also important to understand before every bubble pops, there are doomsdayers screaming bubble. Most of these doomsdayers are very smart…and very early…but eventually they are right. Just because they are bad at timing, doesn’t mean their argument is wrong.

There were people screaming housing bubble in 2004. There were people screaming tech bubble in 1996 (including the Fed Chair). Don’t dismiss the people screaming about today’s bubble because they’ve been wrong so far.

NFT vs. ESG and How the Bubble Ends

One last thought on NFTs that may influence when the bubble breaks. They are terrible for the environment. In fact, one NFT art seller refused to issue any more NFTs after learning the process of creating a NFT (the “mining”) used as much energy as he typically uses in TWO YEARS!

Mining is dirty business, whether it’s for coal, diamonds, or crypto! By the way, every sale of the NFT also is energy intensive. When the aforementioned NFT was re-sold, it used up another year’s energy to process the transaction.

Oops, there goes your liquidity! If I can’t sell something, it’s essentially worthless (other than any utility value I get out of holding it). When the climate activists start protesting over NFT, the current owners will be stuck with assets they can’t ever re-sell because of the climate impact.

Remember the point earlier about scarcity doesn’t create value. A deep market of people looking to buy that scarce thing creates value. If the buyers disappear over environmental concerns, the bubble pops and NFTs are worthless.

How To Pick Your Bracket

I’m already past 2000 words so I’m not writing a whole new guide. This guide from two years ago was pretty spot on.

The current 538 modeled odds to win can be found here. This year’s consensus picks can be found here.

I haven’t watched much college ball this year so I am not going to go out on a limb with a pick but I can make some observations…

Three weeks ago Baylor was undefeated and people were debating if they were better than Gonzaga. After two losses to ranked teams, they are under 10% in the people’s bracket. That seems like very good value to me.

While Gonzaga is the obvious team to beat and has a super easy path to the Final Four, 36% of the public is on them which means you need to figure out who they will play in the final to win your pool against all the other people who picked Gonzaga…which again leads us back to Baylor.

The non 1 or 2 seed with the most popular support is Oklahoma State because they finished hot and have the #1 pick in the next NBA draft. While that sounds compelling, their first round matchup is with Liberty who is a very live underdog. OSU could go out in round one and ruin a lot of brackets.

Don’t forget about the Covid impact. The most obvious one is that if a team tests positive after the bracket locks, they are disqualified. So this is a good year to pick underdogs! If you like a 12 seed to pick a 5, they might keep going because the 4 seed has a positive Covid test!

Additionally, teams played fewer games than normal and weren’t always at full strength. This means the assessment of teams is more likely to be inaccurate this season also producing more upsets.

For example, Colgate in 9th in the country in the NET rankings (the computer model used by the NCAA). They are a 14th seed out of the Patriot League. The Patriot is one of the worst quality leagues (I went to a Patriot school, so I can say it!) and are typically a 15 or 16 seed.

Colgate went 14-1 playing just three other Patriot teams (repeatedly) in the regular season and five teams total. Only one has a winning record. Yet, the are #9 in the country! If NET is right, they should be a 3 seed, not a 14 and are a great underdog. But they probably really are a 14 seed. Thing is, we just don’t know until they play.

So play for high variance this year! There will likely be at least one really surprising Final Four team.