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“They Can’t be Funged!” What’s up with NFTs?

Graphic by Keven Vaillancourt / The Concordian

How did a novel idea meant to benefit artists and creators become a frenzy of people clamoring over each other for pictures of punk monkeys in a $17.6 billion industry?

Ah, the whimsical world of NFTs (Non-Fungible Tokens). At the height of their popularity, people were trading digital pixels loosely resembling apes for a staggering US$2.8 billion a month. Fast forward to July 2023 and the NFT market has come down from the clouds, now hovering around a mere 3 per cent of its former glory.  

At its core NFTs were initially created to establish digital ownership and authenticity. Meant to act as digital certificates, built on blockchain technology, they were designed to certify the originality and ownership of digital assets, ranging from art and collectibles to in-game items. 

NFTs are less about the actual art, song, or image and more about being a digital proof of ownership. They’re like a virtual badge that says, “Hey, I’m the real owner of this unique digital thing!” So, while you can still enjoy the art or music, the NFT’s main job is to make sure nobody can fake or copy your ownership. It’s like having a digital key that unlocks the real deal in the virtual world.

Beyond verifying ownership, they empower artists to maintain greater control over their work. Artists can use NFTs to tokenize their creations, ensuring that they get a fair share of any future revenue generated from their art. 

This means that as their work gains value over time, they continue to benefit from it, providing financial security and recognition for their talent. Somehow this concept devolved into a frenzy of uninformed, FOMO-driven investors, yeeting their life savings on pictures of punk monkeys.

Matthew Hougan, Chief Investment Officer at Bitwise Asset Management, sees potential for NFTs to transcend their initial hype. He believes that the second generation of NFT technology will make its way into the real world within the next two to three years. Hougan remains optimistic about the broader NFT ecosystem, even as trading volumes have dwindled. 

That’s all well and good, but it turns out that today 95% of the 73,000 NFT collections we examined are essentially worthless. We went from buying and selling million-dollar pixel art made on MS Paint when the NFT market was worth a jaw-dropping US$17.6 billion to… well, nothing. It’s safe to say that not every pixel is a Picasso.

Then there’s the curious case of supply and demand. Less than a quarter of all NFTs are actually ever bought, leaving a whopping 79 per cent of collections collecting dust on a USB somewhere. It’s almost as if people finally realized that buying a cartoon cheeseburger won’t satisfy their hunger. Who knew?

But wait, there’s more! It turns out the listed NFT prices often differ significantly from their actual selling prices, leading to a speculative market that’s reminiscent of the wild, unpredictable days of the early internet. 

However, not all hope is lost. The future promises a shift from speculative buying to genuine utility and significance. Forget about million-dollar pixel art—NFTs are branching out into preserving cultural heritage, where they digitize and protect historical artifacts.

They’re also infiltrating the gaming industry by enabling true ownership of in-game assets. Moreover, NFTs offer token-gated access to exclusive content, fractional ownership opportunities in real estate and high-value assets, and secure digital identities, reshaping the way we engage with digital culture.

It’s like the NFT market is finally growing up and realizing it has more to offer than just digital trinkets.  

When it comes to NFT as an investment, Hougan suggested considering cryptocurrencies like Ethereum or companies actively engaged in the NFT space, such as Nike, which has already earned an impressive US$185 million in NFT revenue. 

Ultimately, NFTs are undergoing a much-needed transformation, akin to the dot-com bubble burst that ultimately paved the way for the digital revolution. So whether you’re an investor, creator, or simply an amused bystander, keep an eye on the NFTs that bring real value and purpose to this quirky digital universe. 

After all, it’s not just about buying and selling psychedelic monkey JPEGs—it’s about making the virtual world a bit more useful and slightly less bizarre. 

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Explaining the complexity of the stock market with Lego minifigures

GameStop, Wall Street, and Reddit: a summary

By now you’ve probably seen what has been happening the past few weeks with GameStop, Wall Street, and Reddit.

Frankly, it’s a complex situation with some insane potential complications. Well, have no fear dear reader, for I am going to try and explain the situation in simple terms while still answering plenty of overarching questions.

First, an oversimplified explanation: users on a subreddit called r/wallstreetbets collectively decided to purchase GameStop (GME) stock in mass, which drove up the price per share and cost hedge funds who bet against GameStop lots of money.

Don’t worry, I’ll explain each part of that sentence.

Starting off, what is Reddit? It’s a social media site that focuses more on following communities rather than people. Imagine if Facebook only had groups, and your newsfeed was made solely of the groups you joined.

A group on Reddit is called a subreddit, they’re identified by starting with an r/. So for example a subreddit devoted to pictures of cute animals is called r/aww. Users are similarly identified by starting with u/.

These groups or subreddits are managed by moderators who manage the content for their group and establish rules for users to follow.

The subreddit in the spotlight is called r/wallstreetbets (Wall Street Bets). This group of self-described delinquents often use coarse language to make joke stocks into real purchases, often also posting the disastrous results of said jokes on their stock portfolios.

The subreddit’s description reads: “like 4chan found a Bloomberg terminal.” Their popularity exploded in April 2020 when the US stimulus checks for $600 landed, and lots of people decided to take that windfall to the trading floor to alleviate boredom and possibly make that $600 into something more reasonable.

Okay, now for the more technical stuff, the financial terminology.

r/wallstreetbets users employ a stock trading process called retail trading, which is the process of independent individuals purchasing small volumes of stock, the volume that a normal person is capable of (compared to a retirement portfolio or hedge fund, which have much more volume). They often use an app called Robinhood, which has had its problems with this community, but there are others from across the world. Essentially retail traders don’t trade stocks for a living, it’s more like purchasing a product, hence the terminology.

There is a process being employed by hedge funds and other Wall Street institutions called shorting a stock. Yes, it is the term “short” from the movie The Big Short, which is based on this mechanic. This process is why huge investment firms are losing money. It’s best explained in an analogy.

Imagine for a second that your friend collects Lego minifigures (the little plastic people). They have lots of different figures, ranging from Harry Potter all the way to Star Wars. You go onto eBay one day and see that this minifigure, the spaceman, is worth $10. You figure that the $10 is more than it will be worth in a year, after all the space race is over. Being the excellent friend you are, you ask to borrow the spaceman with the promise to return one to them in a year. They agree and lend you the figurine and you promptly sell it on eBay and pocket your $10, feeling pretty smug.

A year later you go onto eBay to fill your promise. One of two things is going to be true: 

1) Your original bet was right, the figure now costs $6, and once you purchase the figure to fulfill your obligation, you pocket a cool $4. Nice.

2) The SpaceX launches have increased the popularity of the spaceman, and now the figure costs $20 to replace. You made a promise so you’ve got to find the cash somewhere and just swallow the difference. Ouch. You’re out $10 from this transaction, but you made your promise so there’s that.

Here’s the fun part of that second scenario. The spaceman could cost anything, $20, $40, $100… You see the problem here. There’s no price ceiling. You could lose an infinite amount of money making your promise back. You only make money if the item goes down in price.

Institutional investors have been shorting GameStock stock for years. They believed that the retail games store would only fall farther and farther off, making them money. 

Up until a few days ago, that continued to be true. The members of r/wallstreetbets agreed to purchase large volumes of GameStop stock, driving up the price. This is basic economics; the more people want something, especially if there’s a limited quantity, the more money it’s worth.

The coordinated effort by the r/wallstreetbets community resulted in a stock price hike from about $77 on Jan. 25 to a peak of almost $350 on Jan. 27. That’s a 354 per cent increase.

So if you had a large bet that the GameStop price would keep going down and the day comes that your bet is due, and you saw that the price went up hundreds-fold, you’d be out a lot of money, and that’s exactly what happened.

 

 

Graphic by @ihooqstudio

GameStock: the digital revolt of the Third Estate

What are we investing in next?

Scrap New Year’s resolutions, I’m starting a new February resolution: getting financial advice from r/WallStreetBets.

By now I’m sure you’ve heard the havoc that Redditors have wreaked on the fortune of some hedge fund owners over the past week. The David and Goliath metaphor has been frequently used to describe small investors’ move to purchase GameStop (GME) stocks in hopes of taking down companies like Melvin Capital, who has lost $4.5 billion since the beginning of the month.

There has been pushback on both sides, with some saying this is just more evidence that short selling should be considered illegal, while others think rallying hordes of people to pump up the price of a stock should be considered ‘market manipulation’, which is already illegal.

What stands out to me the most in this whole fiasco is the sheer magnitude of what a group of people were able to accomplish with just their phones and a good Wi-Fi connection. 

We’re at a point in the digital era where internet users are understanding the power of public forums. Instead of being used for just individual support, these platforms are now able to reach and rally enough people to topple billion dollar hedge funds.

The internet is still in its stage of infancy; it’s still new to the world and has only recently become understood as a powerful voice for the common people. The Arab Spring in the early 2010s showed how social media could be used to carry and spread a political message more effectively than ever before.

And beyond being used as a way to round up support for a political cause, more and more people are making various types of media primary didactic tools. Recently, platforms like TikTok and Reddit have increasingly shifted into a go-to place for expert advice about anything, from legal counseling to, well, stock market investment advice.

We’ve first used the internet as a way to fast-track globalization, in connecting people from all over the world. Now that this concept is firmly anchored into our lives, online spaces are transforming into democratizing tools. 

We’re seeing a growing focus on bringing people’s strengths together to overcome others’ weaknesses and empower the ‘small guys’. The phrase “Twitter/TikTok, do your thing” to bring attention to an issue or a cause has become common on both platforms.

The soaring stock prices brought along by Redditors is more evidence of an internet revolution. Individuals mobilizing to take down Goliath-like organizations is nothing new, but it’s never been so easy to find advocates for a cause, let alone to incite action on it.

GameStop investors have begun chasing after other stocks targeted by short sellers, now attempting to short squeeze the silver trade. 

This has never happened before. Economists are uncertain what happens after a takeover like this, all possible outcomes for hedge funds and shareholders are hypothetical. But inspired by the principle behind what we’ve seen with GME, I predict more such gatherings are going to take place throughout 2021.

In the meantime, you can catch me scrolling through my newly downloaded Reddit app seeking stock symbols to invest in next.

 

 

Graphic by Taylor Reddam.

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