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NFT Assets, Artists, and Con Games

08 Saturday May 2021

Posted by pnoetx in Art, Corruption

≈ 2 Comments

Tags

000 Days, Aeriel, Asset Inflation, Beeple, Beeple Crap, Blockchain, Carbon Offsets, Christie’s, Copyright, Crypto-Currency, Digital Racehorses, Ergreifungen, Everdays: The First 5, Face, Federal Reserve, Jerry Garcia, Jerry Garcia Foundation, Katy Perry, Long Con, Metakoven, Metapurse, Mike Winkelmann, NFTs, Non-Fungible Tokens, Remodern Review, Richard Bledsoe, Roper, Royalties, Shill, The American Reveille, Tokenomics

The art world is buzzing about “non-fungible tokens” (NFTs), or digital files in which ownership is secured by blockchain technology. As the name suggests, such a crypto-asset can exist only as a whole piece. That’s unlike crypto currency, which is infinitely divisible and, well, fungible. NFTs are diverse in their features and functions, and various kinds of art are now being traded as NFTs: digital images, GIFs, and audio clips, for example.

Beeple Crap

A digital artist named Mike Winkelmann, otherwise known as Beeple, makes digital “Beeple-crap”, as he calls it, like the giant “Xi-bot” shown above. He has successfully monetized the digital images he’s posted on his web site over the last 13 years, and in a coup de grace, he recently aggregated all those images into a one-file mashup NFT for which a buyer paid $69.3 million in Ethereum (less a substantial fee to Christie’s auction house). And Beeple isn’t the only one making big bucks on NFTs!

Beeple’s “collage” is available for anyone to see or copy on the web. It’s called “Everdays: The First 5000 Days”. But precisely what are the rights now held by the buyer of “5000 Days”? Apparently, they are limited to the satisfaction of knowing digital proof of ownership is his, and whatever that smug feeling might be worth on potential resale! In fact, Beeple himself retains the copyright to 5000 Days, so it’s not as if the buyer is the only guy who can ever print a high-resolution copy. But here’s what Beeple says the buyer got:

“The biggest thing he actually bought is a relationship with me to promote his purchase. He and I are very aligned. I want to see this artwork go up in value. He wants to see the artwork go up in value, which benefits me. So the idea that he bought nothing is kind of misleading.”

The buyer, known as Metakovan, is the founder of Metapurse.fund, a highly influential player in crypto ventures and NFTs. But Metakovan’s purchase of 5000 Days is not his first collaboration with Beeple. They already had a significant “relationship”, and this transaction obviously won’t be their last.

If this smells a bit like a con game to you, you’re not alone. Don’t get me wrong: Beeple does produce art … very striking images, in fact. They might not be your cup of tea, and many are a bit cartoonish, but Beeple has computer skills and a real creative streak. He also has a knack for self-promotion unequalled, in relative terms, by perhaps any of the old masters or impressionists.

I’m perfectly happy to know there is a vibrant market in anything people call art. Whatever floats your boat, baby! However, I have trouble believing that long-term growth can occur on top of this kind of “valuation” without an escalating monetary inflation. Between the Federal Reserve’s open-spigot policy of near-zero interest rates and the advent of crypto-currencies with supply limits, dollars are getting cheap. Asset markets, still denominated in dollars, usually receive more than their fair share of bidding as excess dollars accumulate on balance sheets. So the outlook might be bright for NFTs as an asset class, such as it is.

Art In the Ersatz

The most regrettable thing about NFTs like 5000 Days might be what they reflect about the state of the art world itself. Richard Bledsoe of the Remodern Review has a lively take on 5000 Days and NFTs as a new stage in the long decline in the quality of what is called art. Bledsoe is no fan of contemporary art, which he argues has been enabled by elites who have successfully corrupted the art market.

I’m no expert, but I generally view contemporary art as less ambitious and requiring less skill than earlier forms. I think that’s easy to prove (see here and here), but it’s outside the scope of this post. I have wondered whether the emergence of contemporary art was impelled by the tremendous increase in prosperity during the late 19th and 20th centuries and the attendant expansion in the market for original art. Artists such as painters and sculptors, whose labor productivity did not greatly benefit from technology growth (we can argue about the last several decades), might have adjusted to this reality by focusing on simpler and more abstract forms. This is a digression, but it’s surely worthy of a much longer treatment. 

There’s no accounting for tastes, of course, and while I like some contemporary art, I’m definitely sympathetic to Bledsoe’s views. As for NFTs, he quotes from his book, “Remodern America: How the Renewal of Art Will Change the Course of Western Civilization”:

“Billions are being spent on unskilled and intangible contemporary art. Just like in the good old days, many of the suckers are the newly rich or globalists looking for social credibility and a fast buck. There’s a lot of money laundering and tax evasion in the equation as well.

How does the art world convince well-heeled fools to part with their money, when they are offering so little real value in return? Simple. The art market follows the tried and true methods honed by generations of confidence tricksters: the elaborate pantomime known as the long con…”

Don’t You Let That Deal Go Down

Bledsoe gives a brief sketch of the mechanics of the “long con” and how it’s practiced in the art market. He describes players such as the “Shill” (a promoter who avoids revealing a personal stake), the “Face” (a celebrity whose presence helps to “guarantee buzz will exceed rationality), and the lastly the “Roper”:

“… whose affluence leads to influence, a savvy and powerful individual whose participation gives credibility to the whole enterprise. What is ignored is how much moguls like this manipulate the market to serve personal interests, using insider trading, shady financing and backroom deals to inflate the value of their own collections.

In any other industry, common practices of the establishment art market could probably lead to criminal charges. But in the unregulated free-for-all of the art world, it’s very hard to bring these cases of potential white-collar crime to justice, and the victims here are less than sympathetic. After all, the buyers are people who have so much money it’s meaningless to them. Who cares if a bunch of billionaires are getting ripped off?”

All of these players seem well ensconced in the world of promoting NFT art: Beeple in particular, and the “art experts” at Christie’s, Beeple’s celebrity pals (OMG! Katy Perry!!), and finally Metakovan’s stature as an authority on NFTs and “tokenomics”. By the way, his considered opinion is that 5000 Days is “worth a billion dollars”. Well, okay then!

Carbon Indulgences

Another insane aspect of NFTs and the crypto-currencies used to buy them is the pushback over the carbon footprint of crypto-currency mining. This is discussed briefly by Bledsoe as well. While the electricity used in mining is significant, the amount attributable to any given transaction is minuscule. Yet now, sales of high-value NFTs are accompanied by the purchase of carbon credits. Read this description of an auction to be held for a piece of art created by Jerry Garcia on a Mac in 1990. It says “… carbon offsetting to be provided by a company called Aerial.” Now, Jerry Garcia was a talented visual artist on canvas and on his early Mac, not to mention his considerable magic as a guitarist and songwriter. God bless his family, and no offense to the Garcia Foundation, but they were perfect suckers for what has quickly become a standardized virtue signal or buy-off. The fact is that carbon offsets generally don’t have an impact for many years, and there are doubts as to their efficacy in permanently reducing carbon when the time comes.

Redeeming Potential

While the artistic value of NFTs like 5000 Days can be debated, my doubts about their value as assets center around the lack of real ownership rights conferred to buyers. Work is underway, however, on new NFT standards that would allow an NFT buyer to collect royalties, which would obviously carry real value. So, for example, a musician or band could immediately monetize a recording’s future royalties by selling it as an NFT. No one should have qualms about that, and good for the musicians.

I believe other kinds of NFTs have real value, in principle, such as the digital racehorses discussed in this article. Apparently, virtual horse races have already achieved a degree of popularity. These crypto-horses actually win prize money and collect stud fees, based on their digital bloodlines. Another example: NFTs can be concert tickets, electronic possession of which entitles the bearer to a particular seat at the venue; or, an NFT might remain in your “digital wallet” as a season ticket to sporting events. Among the claimed advantages over “normal” electronic ticketing is security, and NFT tickets live on as tradeable memorabilia as well.

Conclusion

It’s still early days for crypto-currencies and especially for NFTs. I can’t object to a free individual spending their hard-earned crypto-wealth on crypto-art like 5000 Days. Unfortunately, the market for NFT art does seem to embody aspects of a confidence game. And like Richard Bledsoe, I’m a skeptic when it comes to most contemporary art. However, there are circumstances under which the value of NFTs can be compelling, and the development of more “use-cases” will increase the value of digital currencies. New NFT standards and applications might well revolutionize certain industries. Continuing asset inflation instigated by central banks, and especially the Federal Reserve, will cause the dollar value of crypto-assets to rise. Big institutions like investment banks are starting to jump on the crypto bandwagon as well. So, while some NFTs might be short-term plays and might even be dangerous swindles, crypto and NFTs in general should not be dismissed as an asset class.

Initial Coin Offerings: Bits of Capital For Little Guys

27 Wednesday Sep 2017

Posted by pnoetx in Capital Markets, Technology, Transaction Costs

≈ Leave a comment

Tags

Andreas Antonopoulos, Bitcoin, Blockchain Technology, Crypto-Currency, Due Diligence, Ethereum, Exit Scams, ICO, Initial Coin Offering, Investment Banking, Jeffrey Tucker, Listing Requirements, Risk Preference, SEC, Self-Governance, Venture Capital

It’s possible for relatively small ventures to raise significant sums of capital without meeting onerous government filing requirements or venture capitalist demands and controls. This is enabled by a sort of hybrid between an initial public stock offering (IPO) and the issuance of private crypto-currency (like Bitcoin). It’s called an initial coin offering (ICO), and it is growing in importance as a funding source, primarily (but not exclusively) for applications leveraging blockchain technology. ICOs themselves are enabled by blockchain, through which a system of virtual, shared accounts is maintained in the cloud, essentially a ledger of who owns (and owes) what claims on whom (and to whom). Like stock or a venture capital investment, its value is tied to the success of the venture or project:

“When a cryptocurrency startup firm wants to raise money through an [ICO], it usually creates a plan on a white paper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction.“

Scanning though a list of ICOs or “token sales” just might make your eyes glaze over. The descriptions of some of the ventures sound impossibly intangible (or ethereal… a major blockchain application platform is called Ethereum). A few relatively accessible examples: augmented reality platforms; crypto-payment mechanisms; gaming community services; software platforms for dentists and “gig” economy providers; “tokenized” real estate investment; and peer-to-peer property rental.

Crypto-currencies like Bitcoin are viewed as highly speculative by many investors; likewise, ICO tokens are very risky. In fact, the ICO “space” has been fertile ground for fraudulent activity, pyramid schemes, and “exit scams”. Investor due diligence is often no better than guesswork, unless there is already an established product or service related to the project. The last link quotes a Bitcoin expert name Andreas Antonopoulos:

“The best way to learn which ICOs are worth it is to lose money. Waiting for the wash-out. When these people promise great riches, they usually mean for themselves. If you have a viable product… build it first and they will come. I do not treat these technologies as investments but learning opportunities.“

Very comforting! Some guidance and a framework for ICO due diligence are offered here and here, respectively. More guidance is here. And here is an actual due diligence report on an ICO. Suffice it to say that ICOs are not a perfect match for my risk-return preferences!

Nevertheless, there is a lot to like about ICOs. Jeffrey Tucker writes enthusiastically about their disruptive and innovative nature. The heavily regulated world of investment banking tends to deny smaller firms access to capital, and venture capitalists have their own, frequently costly demands on start-ups. ICOs open a new, low-cost channel through which funds can be raised from investors with a greater appetite for risk. Here is Tucker:

“Why is this strategy for raising money for new ventures working so well? There is the most obvious consideration of low barriers to entry. Anyone can float them and anyone can buy them–from and to anyone in the world regardless of geography. There is a larger pool of investors that can bypass the impossiblycostly and complex national regulatory machines that have gummed up capital-raising methods in conventional finance.

It has been a long time since the financial markets have been free. That the market is mostly deregulated and decentralized, and thereby more active and effective, is itself interesting. No sector is more replete with the myths of ‘consumer protection’ than this one. …

And the solution is absolutely ingenious. It relies on decentralized markets that live on the Internet, combined with the invention of new tokens that have all the qualities of traditional money, depending entirely on supply and demand for their value, and also serve as asset titles to the protocol of the company itself.“

Unfortunately, governments and large private players do not always wish to promote decentralized markets. Quite the contrary, and in the case of ICOs, governments and regulators are already “chomping at the bit”, so to speak, to impose regulation. Warnings of ICO risks have been formally issued by the SEC, and China has placed a freeze on ICO activity pending inspections of exchanges, reports and the likely issuance of regulatory measures. Given this scrutiny, Tucker might be a bit too optimistic about the ongoing development of the ICO market. It will depend in large part on the success of efforts by participants at self-governance. That’s something financial markets have traditionally done well, despite shrill claims to the contrary. Let the investor beware!

ICOs will tend to encourage the development of competitive forces in the broader economy. And while investment banks might view the funding objectives of many ICOs as table scraps, ICOs will create more competition for those banks if the volume and breadth of “coin” funding continues to grow. ICO’s won’t find their way into my portfolio any time soon, but they show great promise as an economic development.

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