Non-Fungible Tokens

I don't understand NFTs. I think they are Ponzi schemes, and they are ready to go bust.

I may be wrong.  I am OK with with being wrong. I don't mind missing out. 

Sometimes there are legitimate booms, with demand far greater than supply. Prices go up. I am experiencing this right here in my home town. It is hard to find a tradesperson. A hot dry wind blew a fire from house to house in September of 2020 and destroyed over 2,000 homes here. Today if one has an emergency water or electrical problem, a desperate homeowner pays dearly to get a tradesperson to show up. This boom make sense to me.

The prices I see for classic cars sometimes seem crazy, but there is some sense to them, too. There is an unquantifiable foundation that underlays the demand for old cars. Yesterday I saw a spiffed up Ford Maverick in a parking lot. A guy was standing next to it. I learned his was a 1976 model. He let me look inside it. It looked like this:

The '76 Maverick triggered memories of my very first car, a 1972 Maverick, bought when I was 22. It is long gone but not forgotten, not when I saw the '76 model. My '72 was green. It looked like this:

My car was nothing special. It was an economy car, cheap to buy and operate. It was the stripped-down version. Seeing the '76 Maverick triggered memories. I will never be 22 again, but I could own a car like the one I had then, and reverse time. 

I understand the foundation for the market in old cars. There are people who want them for sentimental reasons that have nothing to do with objective value or drivability. That very real foundation supports an industry of people who buy, fix-up, advertise, and sell cars. That industry supports people whose interest is speculative. They are watching price. Speculators have value. They provide liquidity and price discovery. I could probably buy one like the one pictured for $9,500. If there weren't speculators and an active market I wouldn't know that.

I don't see the foundation for NFTs. Most of them are for items of no value, one of essentially-identical billions of similar ones. NFTs created a speculative market without foundation. Yes, items are unique because they can be identified and numbered. Uniqueness does not create value. A scrap Post-it note on my desk is unique. It does not gain value by my having written on it "Number 4072" and offering it for sale. Nor does it gain yet more value by my writing "Number 14 of 12,000." Still, it could be assigned a price, which it would have if someone offered me $20 for the one numbered 4072 and $200 for the one numbered 14 of 12,000. If the prices of buys and sells were published, and if those paper scraps were resold for $40 and $400, and then $80 and $800, we would now have a red hot speculative market. My sense is that the NFT market is just that and nothing more. People are betting on price. Some will make money; some will lose it. It is a zero-sum game without foundation. It is ripe to collapse.

Maybe it is already doing so. We have been in an era of zero interest rates at a time of low inflation. People had money they desperately want to put to work somewhere, anywhere. It found its way to speculation based purely on price movement.  Now interest rates are going up. People are getting serious again. Back in 2007, just before the great financial collapse Citibank president Chuck Prince led his company to near bankruptcy by playing a speculative game too long. He said:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”

He didn't realize the music had already stopped.

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