July 3, 2022

In February 1637, at the height of the speculative frenzy in the Netherlands, we now know a “tulip mania”, a single bulb of the coveted Viceroy tulip that was sold for 6,700 guilders and is enough to run a large house in one of Amsterdam’s most sought-after neighborhoods to buy.

The tulip market collapsed later that month, and prices for more common bulbs fell as much as 95 percent. Since then, the tulip craze has epitomized the irrationality of financial bubbles.

So what about NFT mania?

Last week, Nifty Gateway, a specialized online marketplace for non-fungible tokens (NFTs), held an auction of a computer-generated illustration by digital artist Mike Winkelmann, known as Beeple, whose JPG collage “Everydays – – The First 5000 Days ”was sold online by Christie’s earlier this month for a sensational $ 69.3 million.

Work on Nifty Gateway, “Ocean Front,” showed a ramshackle condominium development of old trailers, buses, and containers sticking out of the ocean on wooden stilts that sold for $ 6 million. That could have bought a three-bedroom, three-bathroom apartment overlooking Central Park in New York.

“We are in a speculative frenzy. I don’t know how long these awards will last, ”said Robert Norton, CEO and co-founder of Verisart, a company that certifies works of art on the blockchain. “We live in a moment of collective hysteria.”

For the past few months, NFTs have almost routinely been selling at staggering prices on specialized websites that accept payments in cryptocurrencies. In February, an NBA top shot video clip of a LeBron James Dunk was sold for $ 208,000 and paid for in FLOW tokens. Last week, Jack Dorsey, the CEO of Twitter, sold his first tweet, re-“coined” as NFT, for 1,630.6 ether, the digital currency of Ethereum’s blockchain-based platform. That price was equivalent to $ 2.9 million.

Most jaw-dropping, of course, was the $ 69.3 million spent at the end of Christie’s two-week one-lot auction of the Beeple JPG. As a digital mosaic of all satirical illustrations that the South Carolina-based artist has put online every day since 2007, “Everydays” was the first purely digital NFT that Christie’s had sold.

In another first case, Christie accepted payment in Ethereum, the cryptocurrency most commonly used for trading digital collectibles. The price of Ethereum has more than doubled since Jan. 1, inflating investors’ virtual wallets, some of whom are splashing their Ether on NFT art.

“Everydays” was bought by Singapore-based crypto entrepreneur Vignesh Sundaresan, also known as MetaKovan, whose 42,329,453 ether payment was both the hammer price of $ 60.2 million, according to Rebecca Riegelhaupt, a spokeswoman for Christie also covered fees of $ 9.1 million.

Sundaresan is the founder of Metapurse, a cryptocurrency fund that launched a “public art project” called B.20 in January. According to its website, B.20 seeks to redefine “the experience and ownership of art”. At the heart of the project is a “bundle” of virtual assets anchored by a collection of 20 Beeple NFTs that were purchased in December for approximately $ 2.2 million.

Ownership of the B.20 collection, but not the assets themselves, has been split into 10 million tradable virtual tokens. The Beeple images are displayed in virtual museums on cryptovoxels.com, which describes itself as a virtual world powered by the Ethereum blockchain. Visitors to these virtual open access museums can become stakeholders of the collection by purchasing B.20 tokens at virtual vending machines.

One work you won’t see, however, is “Everydays”. Sundaresan and his business partner Anand Venkateswaran, also known as Twobadour, said in an email that the Christie acquisition was “not part of the B.20 collection.” They added that there were “no plans yet” to monetize the 5,000 image collage.

With the prices of individual NFTs soaring, the B.20 fund is just one of several NFT fractional ownership companies that split tradable tokens among a group of buyers at affordable prices tied to the value of desirable digital assets .

“I find the move toward fractionation worrying,” said Michael Moses, founder of Mei-Moses, an auction sales database now owned by Sotheby’s. The main index shows that the total value of the many thousands of works of art resold at auctions has not increased in the past 10 years.

“How do you estimate what is fractionated? Value is something that becomes included over time and is not added immediately, ”Moses said in an interview. Breaking down expensive digital items into tradable tokens made the market “volatile,” he added. “Basically, it’s a game of chance. They have no idea of ​​the real value of work. “

According to a blog post by Twobadour on Jan. 19, 50 percent of the 10 million tokens in the B.20 Fund were held by Sundaresan, and 2 percent of them belong to Beeple himself. Another 25 percent were in a public offering in January at a price of 0 , $ 36 released. The first 16 percent of the public offering was bought “instantly” by bots, Twobadour said, referring to the high-speed automated trading mechanisms used by speculators.

On Tuesday, the tokens were trading at $ 6.33. On March 10, the day before Beeples “Everydays” went on sale at Christie’s, they had peaked at $ 28.43, according to coinmarketcap.com. The B.20 website states, “Art has an infinite advantage.” But the fund’s token holders, like those who speculated on tulip bulbs, find that the value of these assets can go down as well as up.

According to economist Peter M. Garber, author of “Famous First Bubbles: The Basics of Early Manias,” the Dutch market for tulips – or rather, futures arrangements for their invisible, buried bulbs – became “just a gambling market” in 1637 , especially for the cheaper lightbulbs traded by weight in taverns whose promissory notes had risen 20 times in a month.

“People came with no wealth and no credit,” said Garber. “The deals have dissolved. It wasn’t sustainable. “

In an article published last week, Beeple told The New Yorker that he cashed in the crypto profits from the sale of his Christie for 53 million old-fashioned dollars. The day after the record-breaking auction, he said in an interview on Coindesk TV, an online blockchain and cryptocurrency news media company, “I think it’s a bubble,” adding, “If it’s not a bubble now, I probably think so it will be a bubble at some point because so many people are rushing into this room. “(Winkelmann did not respond to requests for comments on this article.)

A token based on a New York Times column on NFTs by Kevin Roose was sold in an online auction last week for 350 ethers, more than $ 500,000. All proceeds from the auction will be donated to the Neediest Cases Fund, a Times-affiliated charity.

Damien Hirst, who, according to The New Yorker Winkelmann, sent a message of congratulations after the Christie’s auction, is one of the artists joining the rush. On Tuesday, Hirst announced in a press release that it would offer a collection of 10,000 NFTs called “The Currency Project”, with each token tied to an associated original paper work.

A single artist’s project minting 10,000 NFTs doesn’t seem to coincide with the growing outcry over the energy consumed by Ethereum’s proof-of-work algorithm, which requires a large number of computer servers.

In December, London-based digital artist and computer scientist Memo Akten calculated that the minting and sale of the average NFT produced about 200 pounds of carbon dioxide. Based on these calculations, Hirst’s latest project would use energy equivalent to the electricity consumption of an average American household for 412 years. (Hirst and Palm, a crypto startup he’s working with on the project, said in a press release that their implementation would be “up to 99 percent more energy efficient” than previous Ethereum-based NFT sales.)

Environmental concerns could possibly be one factor driving the excitement for NFTs. Another reason could be a decline in the value of Bitcoin and Ethereum, which NFT prices are tied to.

Back in early 2018, the burgeoning crypto art market was stifled when virtual currency prices collapsed. However, in recent months, Bitcoin’s value has been bolstered by investments from electric car company Tesla, hedge funds and other influential players, giving investors hope that cryptocurrencies may lose their reputation for volatility.

Kenneth S. Rogoff, a professor of public order and economics at Harvard and author of the 2016 book The Curse of Cash, said investments by heavy hitters like Tesla may have fueled the idea that cryptocurrencies like Bitcoin are evading the government would regulation.

“The core problem with cryptocurrencies is that people are able to conduct large-scale transactions that cannot be easily traced by the government. This makes tax evasion, money laundering, crime and terrorism easier, and governments cannot tacitly allow this to happen, ”Rogoff said in an interview. “But central banks and regulators have moved slowly. Bitcoin and other cryptocurrencies can last for a long time. “

It should also be noted that feverish speculation about assets that have no physical existence has flourished during epidemics, when people spend a lot of time indoors. The tulip craze coincided with an outbreak of bubonic plague in the Netherlands that killed a fifth of Amsterdam’s population between 1635 and 1636.

As the character of a weaver who mortgaged his house and sold his loom to buy promissory notes for lightbulbs put it in The Rise and Decline of Flora, an anonymous Dutch satire on the tulip craze published in 1637: “It was madness. ”

Will people feel the same about digital tokens?