Why The NFT Market Is Not As Crazy As You Think | Economics Explained

this is niancat a video of lebron james dunking and a tweet by jack dorsey these all have one thing in common they were not sold in recent months for millions of dollars despite what you may have heard what actually happened was the digital signatures of these three pieces of media were sold off to a new breed of 21st century collectors bringing massive attention to these non-funchable tokens or nfts now overwhelmingly these astronomical prices have been ridiculed by outside observers that perhaps understandably see spending lamborghini money on a pop-tart cat gif that you can watch for free a bit insane but it might not be and it's really important to understand why for a few reasons for starters exploring these bizarre auctions can give us a fantastic insight into how value is truly determined in a free market it is also a great lesson in what makes economies run efficiently and finally to be fair i missed out on the game's top hype so i'm making sure i capitalize on this while it's still relevant but as always to make sense of a marker that looks to make absolutely no sense at all we need to explore a few areas what is a non-fungible token really and what have most people been getting wrong about them so far can they really justify the absurd prices they've been selling for in recent months and finally if you were so inclined how would one actually go about selling a gif that they could get for free off of the internet for hundreds of thousands of dollars now before we go any further it's time for the big disclaimer nfts are a new and highly volatile market don't invest in something you don't fully understand and if you take one thing away from this entire video let it be that putting money into these tokens is gambling not investing got it good all right then now that is out of the way it's time to understand what most people have been getting wrong when explaining nfts fungibility is a word that refers to the equivalence or interchangeability of an asset or even a liability the classic example of this is a five dollar note if someone offered you five one dollar notes for your single five dollar note you'd be happy to make that trade neither collection of notes are worth any more or any less than any other collection of notes with an equal face value this ability to trade any combination of notes with an equal value indiscriminately back and forth with one another is the essence of what fungibility is but it's not as black and white as most people make it an asset can't always be classed as fungible or non-fungible because in reality everything that we materially value exists on a fungibility spectrum for simplicity let's say this spectrum is between 0 and ten with perfectly fungible goods being a zero and perfectly non-fungible goods being a ten now you might think things like cash and cryptocurrencies belong down at zero as perfectly fungible assets but the thing is they are not and we'll get to why this is in a second in the meantime though consider pure commodity gold it is about as close as you can get to a perfectly fungible asset gold is an element so when talking about gold as a commodity there is almost no way of telling one bunch of gold atoms from another bunch of gold atoms sure they can be arranged into ornamental shapes in the form of jewelry or even stamped out as gold bars but this can always be melted back down into a perfectly indistinguishable store of value the only real gauge of its value as a commodity is how many gold atoms you have cash is the next step up from this for a few reasons for starters paper money in most advanced economies is serialized which means it is possible to have notes in circulation worth less than face value it's an extreme example but suppose a bank is robbed and a selection of numbered bills are stolen the bank will just report those notes as stolen and from then on no financial institution will accept those notes for deposit this means that a 20 bill that has been part of a robbery does not truly have the same value as a 20 bill that is fresh off the money printer what's more is that this exchange ability is not exhaustive trade a 20 note for four five dollar notes and nobody has any issues but try to pay 100 with nothing but pennies and things might not go as smoothly of course these are all extreme examples and even though cash is serialized most people outside of financial institutions don't pay attention to these numbers so it's highly likely that at some point the cash in your wallet was involved in some kind of sketchy dealing with you and the authorities being none the wiser one more step up from cash is electronic funds like the ones you keep in your bank account these are even less funchable because now all of a sudden this is directly linked to an individual or a company through whatever name is on the account you might think this doesn't really impact the actual value of the money within these accounts and for the most part and for the vast majority of people it doesn't but it can consider this would you rather receive a million dollars sent from the account of a reputable company or would you rather receive a million dollars sent from a bank account of a mexican cartel both of these options still result in you having a million dollars and even assuming that both of these organizations are happy to pay it i'm gonna say that most of you would prefer the regular company because that much money being wired to you from the second option is gonna result in a knock on your door from the men in black theoretically though had this been paid out in cash this transaction record would not have existed therefore electronic funds are less fungible at this point you are probably wondering about cryptocurrencies at the end of the day one of their main selling points is that they are decentralized and outside of the direct control of a single government surely this means that they are more functionable than cash right well no despite what most outlets have reported when covering nfts regular cryptocurrencies are actually less fungible than money in the form of cash or money sitting in bank accounts that's because people can see a full history of everywhere coins have been on the public ledger which is at the heart of how cryptocurrencies work this means it can be painfully obvious if a coin has been used on dodgy websites or collected by scammers of unsuspecting victims such tainted coins may not even be accepted by the major exchanges due to their anti-money laundering and know your customer requirements this of course makes it very difficult to sell these tainted coins for regular money there are actually cryptocurrencies like monero and darkcoin which are specifically designed to get around this very well-known fungibility problem by encrypting their public ledgers this creates its own problem though in the sense that not a lot of reputable businesses and exchanges want to deal with a currency that is specifically designed to keep shady dealings under wraps now one thing that i really want to emphasize here is that all of these examples gold paper electronic money and cryptos are all still very fungible but it's irresponsible to assume that they are all perfectly fungible now the reason that this is so important is that economists care a lot about this characteristic of tradable assets doing business where every dollar is slightly different from every other dollar would slow things down a lot stifling trade activity and economic growth that doesn't mean that this characteristic is always a good thing though and in fact there are times where people want assets to be as non-fungible as possible take an example like pokemon cards we did an entire video on this bizarre asset class but on the surface they look like they should have a lot of the same characteristics as a fungible currency one first generation charizard should be exchangeable for another first generation charizard right after all they both look exactly the same and are functionally identical if you actually wanted to play the card game but of course they are not condition ratings can make one charizard card worth hundreds of thousands of dollars while another example might only be worth a few hundred this is not something that afflicts cash for example because even the most shriveled up dollar bill is still worth a dollar now this isn't a bad thing collectors of everything from pokemon cards to watches love the uniqueness of their particular item even if it was originally something that was mass produced in fact part of what makes pokemon cards like the first generation charizard here so valuable is that there really is no way to tell how many cards in good condition are left in circulation and how many are rotting away at the bottom of a long forgotten school bag but what if someone wanted to take this to the next level and remove the mystery around how many goods were left in circulation to make an item truly individual well that is where our nfts come in now of course one-of-a-kind assets have existed long before nfts just think of any famous work of art but in a world where digital items that are infinitely replicatable have become truly valuable this is a genuinely powerful tool that is not really getting the credit it deserves if you wanted to make sure that you were looking at the original mona lisa it would be pretty easy to do so it's common knowledge that this particular artwork is in the position of the louvre in paris so if you aren't there chances are you're looking at a copy nfts work to do the same sort of thing they create public knowledge of who holds the original work by creating a publicly accessible record in the ledges of various blockchains most use the ethereum blockchain which is a cryptocurrency much the same as bitcoin just with a few extra nifty features which we will explore shortly so in the same way that someone might verify that they are looking at the original mona lisa by looking around and making sure that they are in paris someone else could make sure they are looking at the original nian cat by verifying that the person showing them the fluffy little space pop-tart is the registered owner on the publicly available ledger this publicly available mark of authenticity is extending beyond just digital assets as well for example nike has obtained a patent that will allow them to use these digital signatures to ensure the authenticity of their footwear which is huge given how prevalent convincing counterfeits have become in the luxury goods space in fact low-tech examples of this kind of system already exist when you buy something like a rolex for example you get the watch a nice box but perhaps most importantly a little green card with an individualized serial number that can be used to register your ownership of that watch on the rolex database losing this card can dramatically impact the price of a watch in the resale market because it makes it harder to verify if it is real nfts are simply a more decentralized version of this public database of authenticity by understanding this we can start to properly understand what it is that gives these digital records their astronomical values there are basically two types of nft sales those are sales that include an underlying asset with an nft simply used to verify the authenticity of that asset and sales of an nft exclusively the first are the easiest to understand it's the underlying asset that primarily determines the price and the nft is just a cool way to verify authenticity ownership and sometimes even distribute benefits for example an investor paid 222 000 to purchase a segment of the digital monaco racetrack in the f1 delta time video game the nft representing the piece of the digital track allowed the owner to receive a 5 dividend from all of the races that take place on it including entry fee tickets to this digital track in this example the nft simply facilitated the purchase of a digital asset that would provide an ongoing source of revenue the value came from the ownership of the digital race track and the dividends that would be received from it not from the nft in this case all the nft is doing is acting like a deed on a house in the real world the same was true with the beeple artwork that really pushed nfts into the spotlight after selling for over 69 million dollars at a christie's auction again the value really came from the ownership of the artwork and the nft was simply used as a way to verify that ownership if the new owner was so inclined they could license out this artwork and make money off it because they own it this is still sometimes a bit confronting to people because 69 million dollars sounds like a lot to pay for anything but in the world of high-end art it's nothing too remarkable go watch our video on the art market to make sense of those prices multi-million dollar pieces of art and digital real estate is nothing new it might look weird to an uninvolved person but in the defense of these markets a lot of them have been really good investments nfts didn't create these markets they simply made trade in them easier so nfts are getting a really bad rap because they are facilitating transactions in markets that themselves often get laughed at by outside observers fair enough you don't have to agree that an artwork is worth millions of dollars but as the saying goes something is worth as much as someone is willing to pay for it now take that logic and throw it out the window because the second type of nft sale is where things get weird because only the nft is being sold and the buyer is getting nothing but a digital token the ancat was sold in such a sale the person that bought the cats nft does not have any rights over the gif itself they can't license it out they can't ask anybody not to use it and they might not even be able to use it themselves for commercial applications because they don't own it in the same way the nba has had massive success with the rollout of their own nft program which is allowing basketball fans to purchase tokens related to famous clips throughout the game's history again the people who purchase these tokens do not own the clips themselves they can't license them out and chances are if they put them up on their own youtube channel they'd probably get a copyright claim from the nba so how does this make sense where is the value in this well think of it this way there are baseball cards that will feature a particular player if you own a baseball card even the ones that are worth millions of dollars you don't own any rights to that player you just own a card that people think is cool and sure baseball cards physically exist but they are just cardboard rectangles so in many ways this is a drawback to collectors because those physical cards will need to be kept in a secure location insured and protected from damage a single scuff can cut the price of such a collectible in half compare that to an nft which exists digitally and those same problems don't exist so when non-asset-backed nfts are thought of like pop culture playing cards they make a little bit more sense niancat is arguably far more recognizable these days than mickey mantle yet his playing cards sold for more than nine times the money at an auction around the same time what's more is that there is no way of knowing that this mickey mantle card is the only one out there in a similar condition whereas given that nfts are designed from the ground up to be well non-fungible you can be guaranteed that the niancat nft is one of a kind now if you still insist that a string of digital numbers can never be as valuable as a physical asset that's fine but anybody who has ever invested in cryptocurrencies would disagree with you what bitcoin did to gold as an inert speculative asset nfts are doing two collectibles not many people fully understand blockchain functionality or the market for digital assets or the market for niche collectibles or the market for pop culture pieces of art and for what it's worth i'll be the first to put my hand up and say i am one of those people even fewer people will properly understand all of these different factors together which is effectively what the market for nfts is but there is no denying that people with means see value in these individual markets what's more is that they have historically seen good returns as well so it's unfair for outside observers to write this off completely as some insane fad now with that being said would i recommend throwing your life savings into this market absolutely not but is it crazier than buying digital coins backed by nothing or dropping two and a half million dollars on a planet in a video game or five million dollars on a piece of cardboard i would argue no so with that i am proud to announce the economics explained nft auction no joke to celebrate our 150th video on the channel and a cash in on a hype train we have made nfts for every video on the channel up until this point highlights include the video on the economy of norway our video on global shipping which is the most viewed by far on the channel or of course our video on the economics of youtube which had to be removed from the face of the internet for reasons perhaps you are feeling a bit hashtag meta my fellow youths and want the nft for our video on nfts or maybe you unironically liked economics explained better when it was a channel that made videos on google sketchup we will sell the nfts for those too why not of course this is extremely silly but any money we make off this will go to support the team behind these videos and any money beyond that will go to support my new yacht which i will be selling naming right nfts for too because at this point you'd be silly not to thanks for watching guys bye you

Channel: Economics Explained

Views: 289,428

Keywords: nft, nfts, nft explained, nfts explained, non-fungible token, non-fungible tokens, non fungible token, non fungible tokens, digital nft, digital nfts, nft crypto, nfts crypto, crypto nft, crypto nfts, nft market, nft art market, nft artwork, nft artwork market, nft beeple, what are nfts, nft nba, nft nba top shots, nft nyan cat, nft nike, nft nike patent, nft economics, nft economics explained, ee, economics, economics explained, nft tips, nft news, nft investing

Id: UpXCUEOcyNs

Length: 17min 1sec (1021 seconds)

Published: Thu Mar 25 2021

Reddit Comments

[u/darthbeefwellington]

In its current state, it is pretty crazy in a lot of ways.

Celeb NFTs going for 500k Generative art going for 100x its purchase value in days 1000s of clear cooyright fringed NFTs (really the biggesti issue) Tweets selling to millions NFTs are liquidity pool tokens in Uniswap V3

I think a huge portion of the market is just way overvalued but there are great projects in it. I hope the good projects outlast the flurry of copycats and money grabs.

[u/h0wser]

Very informative video, thanks!

I think NFTs actually have a real use case. Sure some NFTs may be "overpriced" and sure there are problems with copyright and copycats, but these have been issues ever since people started creating media.

NFTs might be overhyped at the moment, but sometimes I think people forget that not everyone in the cryptospace are purely looking to make a profit. Some people actually just want to own an NBA highlight video and call it theirs.

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[u/kvothe5688]

wokaks selling for thousands of dollars would disagree

[u/happyfiouw]

Still a bubble