My $20.000 Bet on The Future of Art: Part One

The nerds are coming for the art world.

[Click here to read the original version of this post on jacobmorch.com]

Last week, I spent $20.000,- on pictures of penguins and other silly animals.

Here they are, in all their glory:

Have I gone mad? Maybe.

It may certainly look that way to an untrained eye, but if you read to the end of this post, perhaps you’ll see it differently. If you also read the post I’ll send out next week, maybe you’ll even consider it a rational financial bet.

But we’re getting ahead of ourselves. First, let me take you on a tour of the wild world of crypto art. Fasten your seatbelt – and keep a very open mind.

Blockchains and Cryptocurrencies 101

I assume that most of you 334 readers of this newsletter have heard of cryptocurrencies and blockchains, perhaps have even bought some Bitcoin or Ether, but do not consider yourself an expert on the topic. So let me provide a very quick primer before we get to the pictures of funny animals – because if you don’t understand crypto basics, you’ll never understand how animal pictures can be worth thousands of dollars.

(If you already understand crypto well, just skip ahead a few paragraphs.)

Blockchain is a specific type of software technology

The easiest way to explain blockchain technology to a knowledge worker is this: imagine a bunch of Excel spreadsheets that are always in sync, and to which you can only add new rows, not edit old ones.

That’s it. That is effectively what a blockchain is.

If someone adds a new row of data to one of the interlinked spreadsheets, the same change happens in all the other sheets automatically.

Everyone who looks at his own copy of the spreadsheet can therefore know that the sheet in front of him shows the truth, because (for technical reasons I won’t get into here) messing with the data is practically impossible.

Cryptocurrencies are specific applications of blockchain technology

Cryptocurrencies are “digital money” in various forms, for example Bitcoin, Ethereum and a few thousand others. These are created using blockchain technology and controlled by algorithms, instead of being created and controlled by central banks.

Just like Excel sheets can be used for many different things, so can blockchain technology. Therefore, Bitcoin is not the same as blockchain, just like your file weddingplanner.xlsx is not the same thing as Excel. Bitcoin is just one specific application of blockchain technology. Ethereum is another, Cardano is yet another, and so on.

These various cryptocurrencies try to achieve different goals. Bitcoin tries to become “digital gold”. Ethereum tries to become.. well, “digital electricity” perhaps, or “digital plumbing”, or “digital roads” – the infrastructure for the next generation of the Internet. But let’s not go there, because then I’d have to write for the next 12 hours. Let’s stick to what we’re here for: the penguins.

The Sudden Rise of Digital Art, NFTs and expensive JPG files

Blockchain technology and cryptocurrencies can be used for much more than sending money to someone. As we speak, blockchain tech is disrupting the multi-hundred billion dollar gaming industry, the music industry, health care, shipping, real estate, the energy sector, literally every part of the financial industry, voting and governance, academia… the list goes on and on and on. Follow the list long enough, and you’ll get to a surprising place: the world of art.

Internet-native art seems to have found its technical form. It is called NFTs, or Non-Fungible Tokens, and it is the hottest thing in the crypto world right now.

An NFT is a essentially a digital file which can be bought and sold. Just as analogue art can take many forms (paintings, sculptures, poetry, film), NFTs can take many digital forms – they can be .jpg images (which is most popular at the moment), audio files, video clips, GIFs, text files, you name it.

Here’s how it works:

1. An artist or creator makes a digital file, for example a picture of some kind.

2. The artist makes the file available for others to buy. This is done by turning the file into a Non-Fungible Token, which is an asset that can be traded on a blockchain network such as Ethereum.

3. People like me can now find the NFT and buy it, by paying the creator the sale price in ETH (the currency of the Ethereum blockchain network). If I buy the NFT, the ownership of the file is transferred from the creator to me.

4. I now own the NFT, and can do what I want with it: sell it, print it out and hang it on my wall (if it is an image), lend it out (!), or even fractionalise it and sell a part of it to a bunch of other people.

That is exactly what I did with the penguins and other weird animals in the picture at the start of this post. I am now the owner of these images, and the proof is coded into the Ethereum blockchain.

“Isn’t it just a file..?”

Let me bet what you are thinking at this very moment.

“If I want the image file of that penguin… can’t I just right click on the image, and click ‘Save File’?”

Yes you can. But, as anyone in the NFT world will answer, you can do the same with a picture of the Mona Lisa. In fact, I just did. Here she is.

I can even print her out and hang Mona on my wall if I want. If I’m truly shameless, I can go out and sell the prints on the street.

Does any of this make me the owner of the original painting? Of course not.

NFTs work the same way. The original version of a file can only exist in one edition, and the blockchain record proves who owns the “original”.

You may see where this is going: NFTs are inherently scarce. Combine this scarcity with human desire to status signal, show off and be part of an in-group, and you have the basis for what is currently going on – an NFT mania.

Nerds love pictures of Rocks, Punks and Penguins

Just believe me for a second when I say there is a revolution going on in the NFT space right now. And believe me when I say that all of this is going on in a part of the Internet dominated by nerds.

Many of these nerds are extremely wealthy, because they discovered cryptocurrencies early, put their savings in there, and 10-1000x’ed their money.

Many of them also approach life the same way they approach video games – by not taking it too seriously, doing fun things “for the lolz”, and talking about it with other gamers using incomprehensible gamer language.

The combination grande crypto fortunes and a lolz-based approach to life has led these gamers to buy NFTs. Many NFTs. Weird, funny, often ugly NFTs. For a lot of money.

This has caused the price of NFTs to skyrocket. Which has caused thousands of artists to start creating NFTs. Which allows more people to buy NFTs. Which pumps the price even further. And so the hype flywheel goes.

This has led to some truly bizarre NFT valuations. JPG files are being sold at prices you can’t possibly comprehend at first glance (although they may actually make some sense to you if you spend time learning about the space).

And now, my friend, we have finally come to the penguins. More specifically, to a picture of a fine, blue, cute one with a mustache and a triangular hat.

Let’s play a guessing game. What is the price of this image of a pingu?

If you guessed $135.000, you were correct. Or, to be more specific, you would have been correct 6 days ago when it was sold for that amount. I have no idea what the market would be willing to pay today, but it’s probably substantially more.

What about this image of a rock?

The correct answer is $250.000 (!), for which it was sold a few days ago.

Finally, how about this pixelated guy?

This fella, CryptoPunk number 7804, is among the most expensive NFTs ever sold. It went for… $7.6 million a few months ago!

Madness? Possibly.

The start of a megatrend that will continue for a long time? I think so. The Internet has disrupted every big industry in the world over the last few decades – why would the art industry be spared?

A quick note on Ponzinomics and “real value”

The NFT craze and the wild prices of weird JPG pictures may look like a good ole’ Ponzi scheme, where prices are simply fueled by new, “stupid money” entering the system continuously until the scheme eventually goes up in flames. In hindsight, that may be the conclusion. But it’s not a given.

Pro-NFT people will argue that the NFTs have “real value”. And they will be right, following the most basic economic definition of value we have. The “real value” of a JPG picture is of course, as for all other goods or services, what the highest bidder wants to pay for it at any given time. In the crypto world, there are many people with too much money on their hands (again, just like in the analogue art world!) who can take the position of highest bidder. If these crypto gazillionaires (and the hordes of people who want to emulate them) keep believing in NFTs over the long run, the Ponzi analogy will break down.

Many crypto optimists will also argue that NFTs are a better form of art than analogue art. I find these arguments quite appealing, if simply from a pure practicality standpoint:

• NFTs are practically indestructible. Expensive paintings are extremely fragile.

• NFTs have zero costs of maintenance. Analogue art requires ongoing, costly care.

• NFTs are easily tradable in open, transparent markets. High-end art is difficult to trade, and the market for them is intentionally obscured and difficult to understand (to keep outsiders out and to keep the cost of entry high).

All of these arguments are decent. But here is the best one by far: the main utility of art is, and has always been, to show off the status of its owner. Showing off your CryptoPunk image by using it as your profile picture all over the internet is radically more convenient than showing off your equally expensive Munch litography.

So.. Are NFTs the future of art?

It’s hard to predict the future, but I’ll make two predictions anyway:

1) I believe NFTs will be a much bigger phenomenon (both artistically and as an asset class) in 12 months than it is today.

The NFT space seems to have surpassed the point of no return. Money is pouring in to the space, and institutional money seems to be on the way. Some of the top dogs in the analogue art word are even seeing the writing on the wall – Christie’s have already auctioned off CryptoPunks, and an NFT museum is opening right next to MoMa in New York.

NFTs are here to stay, and they will gradually seep into the mainstream over the coming months and years.

2) I believe high-end analogue art will be worth more than high-end digital art in 100 years.

I’m much less confident in this prediction than the first one. But I still believe analogue art will remain the most valuable art form over the long run.

Why? The Lindy Effect. Things that have lasted and been valued for a long time, are statistically likely to be valued for a long time into the future as well. Mona Lisa has stood the test of time – NFTs haven’t (yet).

The “NFT MBA”: $20.000 and 4 Weeks to Maximise Learning

All things considered, I’m pretty bullish on NFTs. That’s why I’m doing an experiment I call the ”NFT MBA” as we speak.

This post gave you a primer on NFTs in general, and my next post will give you the juicy details of my own NFT experiment (reply to this email with your questions!) – but here is the short version:

I think NFTs are fascinating, and I want to learn more about them (and about crypto in general). The best way to learn something new is to have skin in the game, and to learn by doing.

That’s why I’ve set aside $20.000,- and four weeks to trade NFTs in my spare time. As insane as that may sound (and would have sounded to myself just 2 weeks ago), here is the underlying rationale:

• If NFTs are the future of art, it’s worth understanding it early. This is my core hypothesis behind this experiment: If I lose all the money I put in, it’s still worth it simply because of the value of what I’ll learn.

• Buying NFTs seem to be an asymmetric financial bet at the moment, meaning more it has much more upside than downside. The downside is capped to whatever I spend to buy the tokens, but the upside is theoretically unlimited (but practically, let’s say 2-20x).

• The NFT MBA has a guaranteed positive narrative outcome: if I make any money whatsoever by trading JPGs, I have a fantastic story to tell. If I lose everything I put in, well, that’s also a pretty good story.

• There is serendipity potential baked into the project. It may lead me to connect with influential people in the emergent crypto economy, boost the readership of this newsletter, or somehow lead to other interesting opportunities.

• It’s fun, quite frankly. As esteemed tech journalist Kevin Roose recently wrote in The New York Times (!) while covering the NFT bonanza, “some days, NFT traders and meme-stock speculators seem to be the only people still having fun on the internet”.

That’s the reasoning behind the experiment. The design and implementation of it will come in this newsletter one week from now. If I’m lucky, my penguins are still worth something then – but no matter what, I’ll have learned a lot.

Have a great week!

-Jacob 🐧

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I hope this is an unnecessary disclaimer, but here it goes anyway: Please do not take any of this as investment advice. I wouldn’t recommend anyone to spend thousands of dollars on drawings of silly animals.