Some thoughts on NFTs
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These are long form notes im using to formalise my investment framework and explore the world of content creation. If what I have to say is interesting to you or your peers, please hit the subscribe or share. The content will always be free and I welcome criticism and discussion.
On a final note - these notes are written anonymously but in the case you decipher my identity, they represent my personal views and not those of my employer.
Let’s get into it.
A little bit of context of my crypto journey - feel free to skip
I have been fortunate enough to have been invested in Crypto since Jan 2017, I had been watching Bitcoin for a while and was unsure what to make of it or what it was. I understood it conceptually and could see that it traded with the traits of a safe haven asset.
If I cast your memories back to 2013 - Europe was in crisis and to secure emergency funding, Cyprus agreed to a bail-in where savings over 100k Euros would be haircut
Depositors in two Cypriot banks lost billions when savings were confiscated to protect the island’s banking system in 2013, in a process known as a bail-in. The move was a condition sought by international creditors for a 10 billion euro ($11.62 billion) bailout to the east Mediterranean island.
Reuters
Of note during this period - bitcoin exploded. The narrative at the time was that money was fleeing the European banking system as fast as possible.
Whether or not this was true or not is somewhat unclear. On my commodity trading desk and in the media - this was the narrative being spun.
This was what I would see as my ‘awareness’ moment. I noted it was interesting and then went back to trading copper arb.
However in 2016, I could see that people I considered leading thinkers like Mark Hart from Corriente Advisors were starting to look at Bitcoin more seriously. I started to dig a little deeper, watching interviews with Dan Morehead of Pantera and Wences Casares of Xapo explain their rationale for investing in this new asset class.
I opened a BitStamp account. Was fearful of sending money to Poland as was required at the time. Did nothing.
Then I went on a backpacking trip around Argentina, Uruguay and Brazil over December 2016. For those that haven’t been to Argentina, the banking system simply doesn’t work - and I went during the most stable time under the Macri Presidency - ATMs are empty, cards are hard to use and FX rates are spurious. However the interesting part to me was that Brazil and Argentina have this chunky cross border trade where the payment fees were likely multiple percentage points. Would it be possible to sit on the border and arbitrage this payments system via Bitcoin? That became my theory. Was this possible over multiple EM’s? Sure
I came back from my trip and started to buy bitcoin on BitStamp
I will be the first to say I got lucky with timing.
The other characteristic that I had noted about Bitcoin is that it traded with the profile of an option, yet had 0 theta (time decay). I trade options for a living and when someone offers you a somewhat free bet, you should take it.
Nothing sharpens the mind more than suddenly making a silly amount of money. That was me. Down the rabbit hole I went.
I missed ETH but I nailed Sol DeFi - a big thx to Adam Webb. Those who know me from the HF world will know I used to laugh at conversations of where the next 50pips are in EURUSD when I was getting paid 40% for lending USDC in decent size.
Just as my original thesis on Bitcoin has related to payments arbitrage, I could see that DeFi was leading to Interest Rate arbitrage and would suck money in from everywhere. Crypto had the opposite characteristics to TradFi - the bulk of the participants were amateurs who were ignorant to financing costs and would embrace volatility. This led to unheard of opportunities running regular TradFi trades with a price agnostic party on the other side. A phenomena that has started to flip.
Here we are 2y later and USDC lending is a couple of percent.
This leads me to NFTs
NFTs are pretty interesting. Digital scarcity is a slightly abstract concept.
Let me share what I can see so far and I invite anyone to comment/challenge my views.
Lets start with Profile Pictures/Collectibles
I am a big physical art fan. Our house is littered with pictures from around the globe. I like to navigate in the 0-10,000 USD art price range but I try to follow what is happening at a broad level.
One of the trends you notice in art is that rarely does something super original come into being. Most of the market is in someway inspired/copied from a piece of work that has already shot to fame.
For instance - I own a pop art Pure Evil Marilyn Munroe which is an unequivocal rip off of the work of Andy Warhol
Warhol
Pure Evil
One is worth millions of USD, the other hundreds.
However the interesting part is that by people copying the design/style for the original Warhol - it only acts to make original more valuable and culturally relevant.
Original culture is very very valuable.
Most buyers of ‘culturally inspired’ art and merely unable to obtain culturally original art
We see a pretty similar phenomena happening in the NFT world. The two major projects that are culturally relevant at this point are Bored Ape Yacht Club and CryptoPunks.
An example Punk
An example Ape
As can be seen from the original pictures - these markets are trading some serious size.
Ethereum is ~3000 USD today
Punks have done ~2.7bn USD in transaction volume
Apes have done ~1.5bn USD in transaction volume
Its hard to find good data on the physical art market but at a guess - these are now some of the highest grossing art collections of all time.
There price is being heavily supported by the same dynamics at play as in the Warhol/PureEvil shown above.
Pixelated pics are everywhere
Imitation Apes are everywhere
Other projects are trying to merge the two
As other projects seek to replicate the original creators brands, they only act to reinforce the value of the originals. What will go to 0 in an NFT bear market, the imitations. What will everyone be trying to buy as prices fall, the originals.
Rule 1: Expect the volatility of imitations to be significantly higher than originals and the peak prices to be far lower
One part of the market that is quite refreshing when looking at NFTs vs. the regular art market is the transparency. The physical art market is deliberately opaque. By contrast, NFTs essentially have a one sided order book that is visible to all.
The owners can offer the piece into the market
Buyers can make bids at anytime
OTC transfers are visible and so are transactions
Compare that to when you try to bid an art dealer for something in their collection
Rule 2: Liquidity and transparency will bring more people into the market
As part of my escapade into looking at NFTs - I have gone out and bought a couple of cheap ones to experiment with how it makes me feel.
I was very surprised how engrossed and fun it is to find an avatar to represent your digital identity. This substack is anonymous but I can add a unique digital avatar to represent it in the digital world. Doomberg has understood this well.
I paid 12 USD for this guy
and 24 USD for this one
I really have no idea if they will ever be worth anything but I am very intrigued about how they will make me feel. Will I find a connection with my avatar? Will other people? What does my avatar say about me? If 100 000 people subscribe to my substack or twitter, are they worth more?
Was a Nike swoosh worth anything without the Nike brand?
All questions that i’m keen to find out.
Am I on the hunt for unique digital originals now - you bet. We know the playbook, now just play the game.
Utility Tokens
In the Web2 world we are used to logging into a platform using a username and password - this data is then checked against data on an internal server to grant access into a platform. This is a very centralised system and it works pretty well - despite what you may read on Twitter.
In the Web3 world - we can use NFTs to gain access to platforms without the need to sharing information. For instance - I am an investor into a decentalised DeFi hedge fund project called Basis Markets. My ownership, my vote and my access to proprietary software is all permissioned by an NFT in my digital wallet.
This token is used to verify my rights to complete an action.
The applications here get pretty interesting - physical items that are prone to loss like keys and cards could be fully digitised if we can get comfortable with the security implications.
For instance - Is a mixture of a biometric plus an NFT a better physical security barrier than a biometric plus a keycard - most likely. An NFT cannot be obtained through force.
Would you rather login to private services via an NFT and 2FA than hand over your personal email and a password - absolutely.
The other side of utility NFTs that I find interesting are reward structures. The logic is essentially:
IF NFT is present and X measurable action is completed → reward with Y
A really interesting example of this is a new project called Stepn.
Stepn is essentially a Live to Earn game. You buy a digital NFT pair of sneakers and when you complete physical runs - they reward you with a local token.
The reward token value is currently valued around 4.7 USD so this individual earned ~700 USD for going on a 7.1km run.
Clearly this level of reward is not sustainable over the long term but the concept is very real. We reward people Air Miles for travel, why can we not reward Run Miles with tokens that are redeemable against buying new running clothes/shoes. Again - this is an arbitrage condition - the deal i’m getting using Stepn at any reward >0 is better than Strava, Garmin, Apple Watch etc.
Nike, Adidas, New Balance etc are all short this growing theme. Expect them to move soon.
Running is generic activity anyone on the planet can do - I am very bullish Stepn
The final part of todays piece on NFTs is around naming services.
I have bought both .ETH and .SOL addresses for my family. My ownership of these addresses is via an NFT.
If you think about how communication has developed over the years:
Physical Address - very long, multiple lines
Phone Numbers - ~10 number combination
Email addresses - recognisable words
Handles - @apple
The common theme here is is that we have continues to simplify how we communicate with each other. When I was a child, I would reel off addresses and phone numbers of my family and friends - they were essential to know. Now I couldn’t tell you any of the top two for anyone ive met in the last decade.
The same thing is starting to happen with the movement of value
Bank account details
Centralised banking apps - Venmo, Cash App, Revolut
Decentralised Wallet Addresses
Decentralised NFT naming services
Before I continue - it is worth pointing out that a decentralised NFT naming service can be used for both communication and how we move value. The above is illustrative and due further explanation.
Let’s imagine that you are in Argentina and I want to send you some value from London.
A bank account transfer would be very punitive and subjective to multiple FX conversions.
A centralised banking app has to operate in your country. Revolut for example only operates in the EEA plus a number of commonwealth countries
A decentralised wallet - yes I can send you value relatively easily but the address name is very complex. For example a Bitcoin address looks something like 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2
Use a Decentralised NFT Naming service - you give me your handle, for example argentina.sol and I am able to send you value from any solana wallet from anywhere in the world
These naming services are going to be a big deal in my opinion. Buy something simple and smart whilst you can. A global address book for moving value is going to be available at your finger tips, do you want the handle james49283.eth or james.eth
A simple search for the handle Dave.eth in etherscan reveals just how much information is being simplified
Furthermore - you can have multiple addresses all pointing to the same wallet. One for personal, business, family etc.
The two largest naming services are ENS and Solana Naming Service - get to know them.
Hopefully the above was useful and some food for thought. It’s an area I am still exploring and playing with.
If you think your friends or colleages would find the above interesting - please hit the share button and think about subscribing
Good Luck