NFTs and How to Actually Earn from Them (or Not)

Non-Fungible Tokens (NFTs) are hot right now. You can take any digital media file, "mint" it with a unique string of letters and numbers, and auction the string as a commodity, making the digital file unique to the buyer. It's the shape of transactions to come, and I love the idea in principle. But as with most principles, things are different in practice, and bottom line, they're not worth it for artists who lack a built-in fanbase. I'll admit, I burned a little Ethereum to auction a few works, so that gives me a bias. But there's no better starting point for a critique than having a biased view.

You have to look at the NFT market as a mix of casino and art gallery. Let's take the gallery angle first. A work of art only has value when the circumstances surrounding it have value. Is the artist well-liked, or infamous, in the wider culture? Does the artwork speak to someone with clout, who can proclaim how good it is? Did an agent with a good reputation represent the artist? These and many other factors pump up the price of an artwork, whether or not it has objective merit. This is why Masters of Fine Arts grads can make obtuse, alienating works and earn some dough--they're already connected to the artworld network, so they can find clients faster than a self-taught layman, even a good one. It's also why ebay art sales rarely ever pan out. Your wife may spend a month painting something worthy of Elon Musk's living room, but when the market consists of people who only make 40k a year, it's not going to move. And unless a rich person is convinced the painting has merit, and visits ebay at that exact time, it's still not going to move. We can say "nothing ventured, nothing gained", but maybe that month could have been spent on something more life-giving, like planting a garden. Especially if it can increase your house's curb appeal and raise property values.

This is all true of NFTs. Once minted, your work sits in a long scroll of other artworks. If the site has a nice search interface, with hashtags and other filters, it might get some views, and even connect with some people. It may also look like crap with a heavy price tag. Or the website's search function may be so terrible, your work gets buried by hundreds of other auctions, and nobody even gets to see it, at least nobody with the cash you're asking for. This is where the gallery morphs into a casino. Without any curation or agent process, which moves artworks based on the market, the entire venture turns into a gamble, where artists funnel Ethereum gas (i.e. transaction fee) into auctions that have a very small chance of succeeding. The cost of these fees, other than gas, varies based on the mintery. OpenSea, the most popular mintery, defers the gas costs needed to generate an NFT contract (which are high as I write this), meaning you don't have to spend the extra fee needed to mint the file until the auction is won. But your bids have to reach a hidden threshold, around 1 ETH, before OpenSea will consider the auction a win. You can set whatever minimum price you want, to keep buyers engaged, but if you can't get a bidding war up to the threshold, it's game over. Mintable, OpenSea's competitor, may be a smaller pond to splash in, but the gas has to be paid by the seller upfront, making it hard to gain traction, unless your crypto wallet is deep enough to match the void in your buyer's soul.

Given the total lack of curation in the NFT market, the only way for retail investors to make any bank is through the value of small-time cryptocoins (altcoins) tied to NFT sales. Polkamon is a good example: silly animated trading cards minted with NFTs, which you "unpack" with PMON tokens. The tokens can be purchased with ETH, and the cards each have a different rarity level. Re-selling the NFT on a rare card nets the seller some cheddar and stimulates demand. Of course, like all early NFT markets, a lot of gambling is at play, since the cards in each pack are randomized. But the PMON token's value is really based on trade activity with ETH, which is already bouncing. The people with poor impulse control buying the card packs are going to be on the riskier end, and certainly down the road, as the packs (and ETH itself) get more expensive. Given this, I'm definitely not promoting PMON as a big play, but it gives us a glimpse of where NFTs can go as an investment--a commodity influencing the trade activity of another commodity. It's a lot better than paying for your own auction, where the chances of finding a buyer are down around dinosaur bones.

If I were to give financial advice on NFTs, I'd encourage sticking to the guildelines below, until the market moves from being the wild west into something more stable.

1. If you buy mintery tokens, stick with minteries that have total control over their product line. Un-curated listings of NFT auctions, like OpenSea, are in a bubble right now, and once it pops, only big names will make sales on them.
2. Keep on top of day trades for mintery tokens like PMON and buy cautiously. The NFT market WILL morph in the next few years, turning some tokens into gold and others into dust. This is a volatile market and your pretty princess horsey tokens could die in a week's time.
3. When the house controls the odds, the house always wins. Always.

Point 3 leads to an elephant in the room, so check this: A mintery's entire business model is based on siphoning your hard-earned ETH, in exchange for something with a tiny chance of paying out, and the gas you spend is going to an Ethereum miner. Miners are to the minteries what the IRS is to casinos: another entity sucking money from you. Minteries are not turning a profit because they're letting retail workers become millionaires by re-selling NFTs. They're turning a profit because you're feeding them ETH, win or lose.

And above all, the golden rule of investing: Never spend what you can't afford to lose. You don't want to end up like Prozac Dog.

-M.