I’ve spent the past week digesting some content recommended to me by our newest reader. (My step-sister, before you jump to the absurd conclusion that we actually get such hifalutin things as organic new readers.) Said content consisted of a podcast episode from the beginning of the month by NYT reporter Ezra Klein called ‘The Most Thorough Case Against Crypto I’ve Heard‘, which in turn addressed a feature-length viral video essay from the top of 2022 titled ‘Line Goes Up — The Problem With NFTs‘. They are pretty much as advertised, in case the straggling crypto evangelists among our readership hoped my single-malt-soaked sabbatical to Scotland renewed my optimistic perspective on the future of the Internet. It did not.
I’d suggest listening / watching both, but considering they together come out to about the length of the Snyder Cut, I know it’s an unreasonable request. So you’ll have to settle for my lukewarm take. We joke a lot about the ‘crypto bubble’ popping. Well, new evidence, rigorous reporting, and YouTube snark suggests: it’s no joke, it’s closer than you think, and it’s Larry David’s damn fault.
If you somehow haven’t seen it yet, you can watch the Larry David Super Bowl commercial above. It’s pretty funny. The subtext? Not so much. The gist, or rather, explicit message, is: invest in crypto, even though you don’t understand it. This is not only the strategy of FTX — the DeFi exchange platform running the ad — but the vibe of crypto culture at large.
Web3 Twitter personalities routinely compete to publicly embarrass skeptics. Other crypto marketing coups include QR codes with no context (which are, ironically, legitimately dangerous in the crypto world) and Matt Damon calling you a pussy. Plus, there’s an entire dialect of acronyms — NGMI, HFSP, diamond hands, etc. — encouraging trading emotionally and against your own self-interest. Never mind that this is an industry primarily propped up by venture capital financiers and Silicon Valley tech bros, two demographics infamous for using purposefully confusing language to gatekeep who gets funded and who gets fucked. The winners of the space have already been decided, and now they’re looking for enough losers to validate their victory. They’re looking for dumb money.
Dumb money is a Wall Street term for investors who bring no advice, connections, or value to a project outside of pure capital. It is a necessary — and often final — stage of inflating a financial bubble before it pops. These investors are the last line of defense for whales, absorbing the financial blows from a crash while providing the liquidity for them to lock in their gains. But, unlike Wall Street, crypto comes with the myth of equal participation, seemingly designed to fool dumb money into believing it’s smart.
The opaque buzzwords used to sell the web3 utopia — decentralized, democratized, permissionless, et al — also sell a fiction. The average investor must believe they have as much of a chance as anyone else at ‘having alpha’ on a project (i.e. being the biggest winner, like those who bought Bitcoin for $4 back in 2011). But, as investing newsletter The DeFi Edge puts it, ‘You Don’t Have Alpha’. If you’re hearing the initial hype around a project on Twitter or YouTube, best believe the project’s builders, VC insiders, whales, and influencers will already have the inside track on leverage. If it’s a pump-and-dump, as is the case with the vast majority of new DeFi launches these days, you will be the dumpee. And, in the increasingly rare case that it is a project with actual legs, your personal financial gain still relies on finding someone even lower on the totem pole than yourself to invest. As evinced above, dumb money is all the more valuable the dumber it is.
This is what you might call the greater fool theory — a catch-all term we will gladly abuse going forward, in lieu of trying to determine whether each new crypto scam is technically a Pyramid or a Ponzi. Speculative assets like Bitcoin (which, despite having existed for well over a decade now, still has yet to generate a substantial use case outside of buying drugs anonymously online) have no inherent value. Their massive price reflects only the hype, and the related promise that a ‘greater fool’ down the line will shell out more for it than you did.
This applies tenfold to NFTs. In the lead-up to the Summer 2021 OpenSea boom, media reports seemed to suggest a significant, untapped market of digital art collectors, leading to a rush of artists and money into the space. But, one year later, the truth is clear. Of the millions of NFTs listed on OpenSea, only 0.2% have ever made a sale. 26% of the monthly market volume is generated by one company alone. And the insane transaction volumes they tout are bolstered by a mere fraction of the userbase. As Dan Olson, producer of ‘Line Goes Up’, points out, even the ubiquitous $69M Beeple sale had nothing to do with actual demand for the artwork. Rather, it was used as a sort of digital gold to peg the value of a coin, B.20, launched by the buyer in the wake of the sale. All this goes to say, the current appeal of NFTs is due not to their demand, value, or use cases. It is merely because those with too much Dogecoin to blow are betting we’re bigger idiots than they were.
Luckily for the blockchainfreude addicts among us, early evidence suggests they made a bad bet. As we reported on Tuesday, the highly publicized NFT of the ‘first-ever tweet’ from Twitter founder Jack Dorsey, which went for $2.9M at the height of the NFT fervor last year, failed to garner a bid above $280 when the initial buyer put it up for auction last week. This suggests the speculation was wrong — there will not be a market for theoretical ownership of meaningless digital assets. At least, not in the form it currently takes. Maybe, just maybe, all the would-be alphas artificially inflating the NFT market activity failed to realize the only money dumb enough to drop on a JPG was in their pockets. Maybe the bubble will only pop in the faces of those who blew it up. Maybe, in the end, the biggest whales were the greatest fools.
Ah, guess the naive optimist in me is not all gone, after all. Truth is, big picture, it’s still looking prett-ay, prett-ay, prett-ay bad. Yuga Labs, in their cringe-inducing hypebeast aspirations, has already demonstrated enough of a use case to ape into the public consciousness, for the foreseeable future, anyway. Same with the major blockchains. And there’s still billions flowing into the space from venture capitalists and celebrities, competing to convince the most gullible among us to bail them out. Plus, web3 has now carved a deep niche for itself in the economy and cultural conversation — who knows what sort of chain reaction it could set off by imploding?
Still, for every 10,000 ‘unique’ generative PFP projects, there’s at least one Super Fungible Token. And, deep down, I do believe our species’ future — whatever remains of it — rests on innovation. However, innovation does not mean couching old scams and hierarchies in new jargon and algorithmically generated attributes. It means leveraging whatever technology is available to make your corner of the world a better place, while enabling others to do the same. And there are those doing so in the crypto space — I’ve had the pleasure of speaking and writing to a few myself. It just takes work to find them. Which is why I’d say, even more importantly, innovation requires an open faucet of information, smartening up our money and minds, allowing us to choose the future we’d like to see for ourselves.
So, next week, I’ll cede the floor to El Prof to make the case for crypto. Despite him cosigning most of these points, it’ll be a strong one, I’m sure. (He got a much better grade from Arthur Lupia than I did.) Nevertheless, I suspect the self-interested cynic in him will continue to urge artists into the NFT space, regardless of its structural integrity. After all, there will always be more dumb money to be made.