When I got involved with NFT in 2018, it was an extremely different industry. There was almost no venture capital. At the time, the NFT space felt different from the rest of the cryptocurrencies. There was a feeling that NFTs were the actual use case that crypto needed, not just something to speculate on like ICOs, or a tool to facilitate speculation like DeFi.
Fast forward to today, and things couldn’t be more different. I can’t pinpoint exactly when it happened, but by mid-2021, NFTs were completely merged with the rest of the crypto world. They became something else for cryptocurrency people to speculate on. Many people who helped create the ICO bubble turned to NFTs.
Today, most of the participants in the NFT art and collectibles space are “speculators”. Here, I am defining a speculator as someone whose primary motivation for participating in the NFT world is the desire to make money. Of course, many people participate in the NFT space for reasons other than making money, but they are in the minority.
polling data of various sources reveals that speculators make up the majority of participants in the NFT space. It also manifests itself in the types of products and services that become popular. For example, Blur didn’t become the hot new thing because it got a new group of people interested in NFTs or because they discovered a novel use case for NFT technology. They rose to fame by cutting fees to zero and paying people to use their product, features that are clearly aimed at speculators.
There is nothing inherently wrong with speculation. But it’s preventing the collectible NFT world from capturing what is a much bigger opportunity: the luxury goods opportunity.
Speculators prevent space from reaching its potential
A majority speculation NFT market is a local high for NFT. It is a trap that the NFT space is caught in.
Because most market participants are speculators, the people who create the future of the industry—markets, makers, and investors—have an incentive to create products that appeal to speculators.
But speculators are a unique type of client. Products created for speculators will not attract any other type of customer. In fact, they will likely actively drive away the customers who are most important to the future of NFTs (more on this in the next section).
This is the basic form of the trap the NFT space is currently in: builders create products for speculators because speculators are the largest group of industry participants right now. But those products only attracting speculators and shutting out the biggest potential customers, which means the NFT space cannot grow.
The problem of collectibles as an investable asset class
Collectibles are a fun and sexy industry. But studying the industry, which is built on the same basic principles as the NFT collectibles industry, shows that they have historically struggled as an investment compared to other opportunities.
Let’s take art as an example. Art is by far the largest and most important type of collecting in the world. The global art market was valued at $65.1 billion in 2021, and the estimated total value of all art and collectibles is an estimate. $1.7 trillion as of 2020. It is expected to grow to 2.12 trillion by 2023.
However, a look at the art fund industry shows that this has not resulted in a large amount of investment capital being allocated to the physical art asset class. Money invested in art funds went from $2.1 billion in 2012 to a paltry $830 million in 2017. On the contrary, the actions are approximately $105 trillion asset classand the amount of money invested in equity mutual funds in the US it was about $18.75 billion in 2017. This significant disparity shows just how wildly unpopular investing in collectibles is compared to investing in stocks.
If that’s the case, who are the collectors who own the $1.7 trillion worth of art and why own art if not for investment purposes? In short, they are people motivated by passion. The most common primary motivation for art collectors is ’emotional benefit’ they derive from art. Many also factor in the value of the art they purchase, but the data shows that a financial motivation is far less common than in the NFT space. This insight into the psychology of art collectors directly explains why art is a tricky investment.
Why isn’t more money allocated to collectibles as an asset class?
Some say it’s due to a lack of liquidity, the unregulated nature of collectibles, or how inaccessible the market is. But those problems are symptoms that collectibles are complicated investment assets, not causes.
Collectibles are rare investment products
Collectibles are tricky as investment assets because of a paradox at the heart of investing in collectibles, specifically, the fact that a collectible’s value comes from the emotional attachment the owner(s) have to it and nothing else.
This is what creates a fundamental paradox when an investor with explicit goals of return owns a collectible. An investor who owns a collectible cannot be motivated primarily by emotional attachment to it because he has a fiduciary duty to view it as an investment.
The “fundamentals” of an artist can be approximated by measuring the emotional attachment that all collectors have of that artist, collectively. This means that simply by owning a collectible, an investor worsens that artist’s fundamental value by reducing the aggregate amount of emotional attachment that an artist’s collector base has to his or her work.
Put another way: if the supply of a particular collectible is in the hands mostly of people who really love it, then it will hold its value. But if it is in the hands mainly of people who are trying to sell it for more money, it will lose its value.
This is the fundamental reason why investing in collectibles is so rare and complicated. Just by opening an art fund, promising returns to investors, and buying some art, you risk worsening the fundamentals of the art you buy for that fund.
This is also why the larger collectibles industries, especially the art world, intentionally keep flippers away. They know that an artist’s paintings that are mostly owned by flippers will be disastrous to the value of that artist’s work.
There is a much better custom type that the industry should focus on.
Does this mean that NFTs and other collectibles can never get big or shocking? Absolutely not.
Collectibles companies have gotten big and impactful by convincing more and more people to fall in love with the products they create instead of convincing people to view their products primarily as investments.
Bags, like physical art, are another case study of collectibles that we can use to learn about the NFT world. They are not popular because they are a financial instrument. They are popular because their creators have gotten incredibly good at selling “the dream.” Buying a $10,000 handbag signals to the world that you have high status and are wealthy. This is the fundamental appeal to the “luxury goods” type of customer.
The luxury goods type of customer is basically the opposite of the speculative type of customer. They are customers who buy things to signal to the world their sophistication and cultural knowledge. Many of them have all their financial needs met and use the luxury items they buy as a subtle way of showing it off to the world.
“The NFT industry can be much bigger if it breaks out of this local high and focuses on selling luxury items rather than speculative assets.”
duncan rearing cock
And indeed, having speculators around will likely actively deter luxury-goods customers. And all things being equal, luxury goods customers would probably rather own collectibles that make them part of a club of people like themselves than collectibles that make them part of a “let’s get rich trading this asset” club.
The NFT industry can be much bigger if it breaks out of this local high and focuses on selling luxury items rather than speculative assets.
Going back to my original point. The NFT customer base is mostly speculators, which means that industry participants (markets, builders, and investors) have incentives to build for the speculator customer. But building for speculators doesn’t help attract luxury-goods customers. In fact, it probably makes it harder to do so. At best, attracting speculators is a distraction. True luxury customers don’t shop to make money. they are buying because they I want to point that out to the world.
It probably sounds counterintuitive to someone reading this article, but as I’ve pointed out, the overwhelming evidence from the physical collectibles industry is that selling collectibles as luxury items is a much bigger business than selling collectibles. as investments. This means that the NFT space could be much larger if industry builders shift their focus towards luxury items.
A hard change to make
I have come to realize that speculation is fundamentally embedded in many different parts of the NFT space. It’s hard for me to even conceptualize what the NFT industry would look like without a focus on speculators. Even the vocabulary that people use to talk about the industry itself would have to change.
“Truly pivoting to attract luxury goods customers would require NFT degens to sacrifice a lot of their sacred cows.”
duncan rearing cock
Luxury goods customers are not very interested in the daily fluctuations of the minimum price. They don’t care if there is no liquidity for what they buy. If there is ‘utility’, that could be negative for them. In short, really spinning to attract luxury goods customers would require NFT degens to sacrifice a lot of their sacred cows.
The change would almost definitely upset some existing NFT participants. That’s part of what makes it a trap for the industry: It’s a significant adjustment that many entrenched interests don’t want to see happen.
NFTs have a number of significant material advantages over physical collectibles: guaranteed authenticity, ease of transportation and storage, and unique creative opportunities. But the first principles of why NFT collectibles exist in the world are the same as the first principles of why physical collectibles exist in the world. This means that the fundamental advantages of NFTs cannot be fully realized, while most NFT collectors are speculators.
Making this change is much easier said than done. But I predict that NFT builders, marketplaces, and innovators who aren’t afraid to take the band-aid off and jump into a totally different type of customer will be the most successful in the long run.
Duncan Cock Foster co-founded Nifty Gateway in 2018 along with his twin brother, Griffin Cock Foster. Nifty Gateway pioneered many important parts of the NFT world, including crypto art deliveries, open editions, and more. Nifty Gateway was acquired by Gemini, and Duncan recently left to start another company.
