Malt Liquidity 45

Fast Times at Un-shortable High

As a watch enthusiast, perhaps the most common question I receive is "why would you spend so much on something that tells the time inefficiently?"

Although that statement oversimplifies things, it is undoubtedly true - one of the most precise watches I own, a Grand Seiko Spring Drive, will never be as accurate as a ten dollar Mickey Mouse quartz watch or an iPhone. Usually, I launch into some diatribe about the beauty of meticulously crafted methodologies of telling time through an object that has no conceptualization of it, but the fact remains that there is no practical reason to ever spend money on a mechanical watch. Thus the value of a watch is not denominated in practicality.

As such, as easy as it is to scoff at the purchase of a clip art rock for $250k, there is truth in the statement that simply viewing such a purchase in terms of the notional value is missing the point, as I have written about before:

Owning an NFT really means nothing in and of itself - after all, blank pngs devoid of pixels and lots of pixels are going for multiple ETH... But if we’re denominating the value in the cash value of ETH, I think we’re missing the point.

This ties into a core criticism of crypto, where people smugly say “well what do you cash your crypto gains in other than currency?”, but here’s the counterpoint: what if we consider “meaningless transactions” as realizing crypto gains in a relative value sense denominated in clout? I am reminded of the phenomenon on the early days of the app store of “I Am Rich”, a predecessor to the meaningless NFT in that there was no value other than showing you could set money on fire through having the app. Likewise, trading ETH for NFTs of blank pixels or whatever could really just be a way of showing to people that you have a lot of ETH to spare.

Rather than valuing these instruments, let’s instead think about why they transact in the first place.

A core difference in retail traders versus more informed traders is that retail traders tend to be spread-insensitive. By spread-insensitive, I mean that the price print is viewed without regards for the book depth that might indicate that the price - the meeting of the bid and the ask - is less stable than one would think. While this is a dangerous mentality to trade traditional speculative asset centered markets with (equities, commodity futures, etc.), this mentality is almost the purpose of the “hype” centered markets: shoes, watches, “traditional” art, and yes, NFTs.

Traditional art has long catered to the condescending “the reaction is the point” mindset of the rising college sophomore at the Thanksgiving dinner table. The most infamous (and over-referenced) example could certainly be Duchamp’s Fountain (as the modern iteration of the criticism of the edgy categorization of “readymade” is “well, you can just right click and save the photo”), but art markets have long been crazy. Who could forget the elephant dung Virgin Mary that caused so much outrage in Rudy Giuliani, or Blueno, the massive bear/lamp hybrid sculpture that Steve Cohen decided to place on the Brown campus?

With NFTs, the core reaction will always be derivative of FOMO in some way. Whether it’s a 12 year old or Steph Curry getting into the NFT game, the ethereal feeling of having the new hotness drives the chasing of assets that’ll get you into the news, rack up the likes and retweets, and get all the reacts in group DMs. In a market where people are flush - as most crypto enthusiasts are, at this point, unless they’ve been trading with 100x leverage - scarcity starts to have an innate value. Thus the same principle that drives the price premium for Yeezy sneakers and Rolex Daytonas transfers to the equivalent of shiny Pokemon on the blockchain. Cryptocurrency might not have “democratized currency” yet, but it did democratize art collecting, in a sense. One wonders if it also democratized the feelings that billionaires have when they see the price prints on Basquiat paintings while waiting for a bubble to pop that’ll never come. After all, when something is so illiquid - in this case, assigned scarcity, in a painting’s case, actual scarcity - you only need to find one buyer. When a single trade sets the book depth for a market, there is no “fundamental value” to sell something at, as there’s no price discovery, nor is there a short side to bring something back to its “valuation”. It’s all a matter of how you sell it.

However, when you only need a single price print to push the book around, shenanigans ensue. In the past year or two of the “everyone is shut inside so let’s speculate on everything” bubble, I have noticed consistent market manipulation of bubble mechanics in things such as Pokemon cards, watches, shoes, and more. Perhaps the most interesting example comes from Retro Video Games, where someone did a fantastic deep dive into how an auction house, a grading agency, and a few deep pockets manipulated an entire market into a huge frenzy to bid up perceived scarcity. Concurrently, I am positive that with a few smart transactions through wallets you or companions control, you can raise the perceived value of an NFT through just transaction fees + royalties. The underlying principle remains true no matter the market - you can gauge a bubble based on how the appearance of scarcity is being bid up in any commodity market, and you can exploit a bubble based on how illiquid the commodity is and how much control you have over the price prints.

There’s probably a larger point here in that people want to feel unique in any way they can, so anything uniquely identifying has an innate appeal. In an age where your opinions come from whatever is acceptable to talk about in your social group combined with whatever service pushes notifications to your phone and whatever is on your doom-scrolling timeline, it’s hard to have a unique take on anything, let alone feel comfortable enough to voice it. Or perhaps it’s over-reading into a market, as practitioners tend to do - I’m no less immune to the “assigning a narrative” trap that financial media falls into, and maybe people just love NFTs and it’s the new paradigm. Perhaps the future is now, old man.