Patrick Reinmueller and Karl Schmiders
In March 2021, auction house Christie sold a JPEG file created by artist Pebble for $ 69.3 million, an unprecedented record for any digital artwork. Ownership of the “original” file – titled “Every day: the first 5000 days” – was secured as a fixed “NFT” mark.
This sale made headlines, and since then, immutable arguments have become a controversial topic. Investors pumped $ 27 billion into its market in 2021, and now Meta, Facebook’s renamed parent company, reportedly plans to allow users to create and sell non-exchangeable land. But there is a problem: the market for non-exchangeable tokens will eventually collapse, for any of a variety of reasons. A non-interchangeable token is essentially a trademark attached to metadata, such as images. A secure computer network records the sale in a digital book (blockchain), giving buyers proof of authenticity and ownership. The unchanged token is usually paid for using the Ethereum cryptocurrency, and perhaps most importantly, these tokens are stored using Ethereum blockchain technology. Combining the desire to master modern art and technology, the unchanging arguments are the perfect asset for Silicon Valley’s young rich and their group of collaborators in finance, entertainment and the wider retail investor community. But, like other markets driven by generosity, buying impulses and advertising exaggerations, the fast-paced, speculative market for non-exchangeable tokens could set many investors on fire. The current power brings to mind comparisons with the Dutch tulip fury of 1634-1637, when some of the bulbs of this flower reached high prices before the abundance dispersed and the bubbles collapsed. The market for non-exchangeable tokens will suffer a similar fate – but not because of environmental concerns, as some may imagine. To be sure, non-exchangeable tokens are energy intensive because cryptocurrencies like Ethereum and Bitcoin are being “mined” using computer networks that leave a huge carbon footprint – which grows with each transaction. But when it comes to understanding what causes the immovable land market crash, the issue of climate impact is nothing but a distracting hoax. The real problem is that the current boom of non-interchangeable signs is built on a sandy foundation.
Let’s start here with the problem of infinite duration. Immutable marks show ownership of a digital asset, but not the right to prevent others from using digital copies of that asset. Part of the reason wealthy investors are willing to pay tens of millions of dollars (or more) for traditional physical artwork by Rembrandt, Van Gogh or Monet is the fact that the number of masterpieces is limited; The artists who left these works have long since disappeared and can no longer produce new works of art. On the other hand, it is possible that copies of non-exchangeable arguments can become a commodity.
Moreover, as with digital things, there is no difference in appearance between an original JPEG that sold for $ 69.3 million and a copy that was freely downloaded online. Theoretically, the supply of legally usable copies of immutable tokens comes indefinitely, making demand for them weak no matter how high, and causing their prices to eventually collapse. Because the blockchain cannot store current core digital asset, a person buying a non-exchangeable token is actually purchasing a link to the digital artwork, not the artwork itself. Although buyers acquire the copyright to this connection, the transaction costs associated with monitoring the unrestricted display of immutable code, identifying illegal use, and prosecuting and prosecuting infringements make it almost impossible to enforce the copyright. copyright or abuse prevention. This would significantly limit the ability to make money from assets. Another risk is that non-exchangeable tokens are created and sold using new technologies – blockchain and cryptocurrencies. Currently, there are several competing standards for how immutable tokens are created, protected, distributed, and certified, including ERC-72, ERC-998, ERC-1155, Tezos’ flow and non-flow standards, and FA2. The resulting uncertainty about how title certificates will be guaranteed forever threatens the value of assets and even their ownership. Indeed, the value of non-interchangeable arguments can evaporate if the next wave of more advanced technologies that will replace cryptography or blockchain are incompatible with secure ownership of immutable tokens.
Companies dealing in non-exchangeable land today may no longer exist tomorrow and this would dispel ownership claims. The volatility of cryptocurrency prices supporting the non-exchangeable token market is another central issue. Non-tradable currency prices tend to move along with cryptocurrency prices. When cryptocurrency prices fell in 2018, so did the emerging market for immovable token trading.
The psychology of buying luxury goods is also likely to reduce the pressure on non-exchangeable token prices. Most luxury products are called Veblen goods, which have a limited amount of utility in addition to enabling owners to declare their wealth. It is for this reason that they often generate huge profits for sellers. Non-exchangeable tokens enable buyers to advertise their property primarily through the high price they have paid, but only if they receive positive feedback from their peers. If such an expense does not resonate with this audience, the result may not be very different from burning a banknote to light a cigarette. Because mastery of non-exchangeable codes does not prevent others from displaying and showing ownership of the same assets, these tokens do not act as effective indicators of unique spending power. Many buyers of non-exchangeable tokens remain anonymous anyway because blockchain provides limited ownership knowledge. Finally, changing macroeconomic conditions may adversely affect the prices of alternative assets, such as fixed assets and traditional works of art. In the last two decades, the number of billionaires worldwide has more than tripled, as a result of which disposable income is ready to invest in alternative asset classes. As such, the COVID-19 pandemic has reinforced this trend. Much of the massive economic stimulus that central banks pumped into financial markets has gone to financial markets, boosting the net worth of the super-rich. But investor interest can be fast. After the global financial crisis of 2008, sales of works of art and other luxury products fell by about 40%. With central banks now tightening monetary policy in a bid to curb inflation, new and untested asset classes are likely to suffer more than the most credible ones. The highly volatile market for non-exchangeable tokens, which relies on cryptocurrencies that are not backed by anything, is by no means a safe haven.
Ultimately, the price of non-exchangeable tokens will experience a massive and permanent decline. It is true that it is still high at the moment and may continue to rise for some time, but collapse is coming inevitably. Welcome to the efforts of investors who think they can pass the market time, but their optimism is likely to be wrong.
Patrick Reinmueller is Professor of Strategy and Innovation at the Institute for Management Development
Karl Schmiders is professor of finance at the Institute for Administrative Development