NFTs: Virtual Bubble in Real Numbers
NFTs are here to stay, but mind the early-adoption bubble.
March 16th 2021, by Valentin Vincendon
Introduction
NFTs, or Non-Fungible Tokens, are the new fad at the intersection of Tech (crypto) and Art.
The value proposition seems difficult to accept or even understand for our generation, but remember Paul Krugman predicted in 1998 that "most people have nothing to say to each other! By 2005, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s."
Truly disruptive innovation does not gain foot by old generation adoption: it gains foot by the old generation getting old and irrelevant/dead and a new generation of native adopters taking over. Just try and explain Twitter to your grandma, or try and get your little niece/nephew to explain TikTok to you.
I strongly believe that NFTs are here to stay and will play a pivotal part in the future Metaverse ecosystem(s).
However, I also strongly believe we are at the very early adoption stage in the S-curve, and that current enthusiasm is a pure bubble.
There is nothing like orders of magnitude.
When I was teaching physics to undergrads, I was always keen to push students to discover the flaws in their own thinking process through the Socratic method. And as my dad always rightfully taught me, orders of magnitude are the best tools to highlight obvious mistakes.
I still remember a time where a student had used Newton's laws to determine the speed of a satellite as a multiple of another speed. I asked her to quickly calculate the resulting speed and to write it on the blackboard. It did not shock her. I then asked her to write the speed of light underneath. She did not know it - not ideal for a physics undergrad. So I wrote it. Then I asked her what her conclusion was. She acknowledged that her calculation might not be entirely correct, considering her satellite was supposed to be flying more than 100 times the speed of light, thus breaking the laws of physics as we currently understand them. Had she done this quick mental check, she would never have shared this impossible answer.
I found that in most quantitative decisions in life, whether calculating the mass of a planet, playing with financial ratios, or measuring distances to drill holes in a wall, orders of magnitudes are always a life-saver and allow you to think just.
So, let's apply some orders of magnitudes to the current NFTs market.
Crunching the Numbers
In the past month, there were 135,733 NFT sales, for a total volume of slightly above $200 million dollars ($201,740,067 to be precise) - source.
That brings the average NFT purchase price to $1,486.
We will be using this price as a reference in the following calculations.
Please note that this average price is very far below the most publicised NFT transactions which happened recently: Beeple's "Everydays: The First 5,000 Days" fetching a record-breaking $69 million in Christie’s sale and Jack Dorsey selling the first tweet ever for $2.5 million.
To give an order of magnitude, if all tweets were to sell for the average NFT price, the total amount would reach $3,344 trillion, i.e. more than 60,000 times Twitter's current market cap.
That's obviously far-fetched, but the same logic applied to in-theory less numerous and more valuable videos on Youtube, would still bring us to $217 trillion, i.e. more than 100 times Alphabets total market cap as of today.
If we compared the aggregate retail price of all three digital media above (if they were to sell at $1,486 each, the total would reach the astronomical amount of $11,000 trillion.
Let's be slightly more "conservative": let's say that only 1% of those three digital media will actually be sold (and bought) for our average price. 1% means that we are still including a lot of crap that probably should not deserve to enter the "Art" definition. But again, feel free to have a look at the average NFTs currently being bought for this kind of amount...
It brings us to a more "reasonable" $110 trillion.
How does this compare with more standard stores of value?
The most important ratio to look at is when compared to the global art market.
In 2019, the total art market value was $1.7 trillion - source.
That would make the NFTs market 6,448 times more valuable based on the assumptions above. Of course, 1% is an aggressive hypothesis, but it means we could pick 0.001% and still end up with an NFT market multiple times more valuable than the global art market.
If we consider transactions, things get even crazier. The annual transaction volume run rate for NFTs is $10.5 billion. The very mature art market is at $64.1 billion. The NFTs market volume represents more than 16% of the traditional art market. Those are actual figures. No hypothesis there.
Even if we could maybe, maybe, not consider this a bubble, we also have to take into account that NFTs are most likely traded by younger generations than traditional art (on average).
Wealth is far from being equally shared between those generations.
If we assume that most NFTs demand comes from Millenials and Gen X, while most of the traditional art is owned and purchased by the older two generations, we need to add another factor 3 against NFTs when accounting for relative purchasing power.
That would bring us to an NFTs market half the size of the traditional market in terms of wealth allocation.
Today.
Conclusion
There will be some incredible NFTs success stories.
The NFT market is here to stay, and it will coexist with the more traditional art market.
Similar to how the Internet was hard to believe 30 years ago, NFTs and the Metaverse are hard to believe now. Younger generations growing with these innovations will simply replace the old ones into oblivion.
But one has to remember that the value of art is unicity and scarcity. If anyone could "mint" a Picasso, a van Gogh, or a da Vinci, their value would not be what it is today.
Unicity does not mean scarcity. Today, there are millions of very unique pieces of art that no one would buy for amounts even close to what people are paying for random NFTs. They are unique, but they are not scarce: average art is very much in good supply.
For valuation to reach record heights, there should be a consensus on the scarce quality of the art piece so that demand far exceeds the supply.
It feels like the NFT offer will soon massively outsize and dwarf a speculative demand.
This usually does not end too well for many.