BIG MAD SPECIAL INVESTIGATION- NBA TopShot and NFTs (3.5.21)
NFTs, economics, Da Blockchain, collectibles... this one is all over the place folks.
I am going to preface this weeks newsletter by saying that unless you have already purchased NBA TopShots, Bitcoin, Dogecoin, or any other of the bazillion blockchain powered NFTs or cryptocurrencies then itās too late for you to make any money. Sorry to say itās likely that you have missed the boat to Financial Independence Island. However itās not too late to get a little more informed as to what the fuck these things actually are and to prepare yourself to jump on the next one. Alright buckle in.
NBA TopShot is only the latest and greatest of a lucrative new internet scheme known as NFTs, or Non-Fungible Tokens. I first heard about TopShot on a podcast a few months ago where Bill Simmons and Dallas Mavericks owner slash Shark Tank Shark Mark Cuban were discussing collectibles markets. They only mentioned it in passing though, and at the time I sort of dismissed it and thought nothing more about them.
This was around December 2020, where things in terms of the virus and our crumbling democracy were at their most grim. I think the collective trauma inflicted upon us by the pandemic has caused many people to regress into āchildishā hobbies and pastimes as a sort of coping mechanism. Thereās a reason coloring books and video games and bread making (aka PlayDoh for adults) have enjoyed a renaissance. For me, itās been collecting basketball cards. Now that I am a big boy with a big boy job and big boy salary, I can now afford to spend hundreds of dollars on rare basketball cards my 10-year-old self would be creaming his corduroys over.
Iāve been buying a couple cards per week for months now, and it feels like I am constantly running to my mailbox like a giddy little schoolboy to see which cards Mr. Mailman brought that day. As I immersed myself in the marketplaces and learned all the minutiae of card grading and valuation, I began to notice how prices fluctuated based upon how well players were playing or whether they were in the news. It reminds me a lot of trading stocks, which conveniently allows me to justify āinvestingā $200 in a Jayson Tatum rookie card that one day might be worth thousands.
Then one night a few weeks ago, I see an article on ESPN about a Zion Williams card going for $200,000. That a lot of clams, even for a rare Zion card. Memorabilia and collectibles rarely make headlines in real sports media, so I was intrigued. I come to find out it wasnāt a physical card that was sold for that price, it was something called a NBA TopShot āmomentā, a sort of digital trading card in the form of a short highlight, that fetched a sum like that. Thus began my journey down the rabbit hole of Non-Fungible Tokens.
What is a Non-Fungible Token?
A non-fungible token, or NFT, is a unique digital asset that could be anything from a piece of art to a virtual trading card to a unique in-game skin for an online game. In essence, these NFTs are a way to manufacture verifiable digital scarcity. In other words, NFTs are a way for artists, creators, and scammers to create a limited amount of digital assets than can be reliably tracked and exchanged online. If this sounds like jargony bullshit just bear with me.
NBA TopShots are sort of the flagship of the NTF movement for a variety of reasons. Sports memorabilia in general is a highly developed collectibles market, which means collectors wonāt have too difficult a time wrapping their heads around something like a digital trading card. Also, only a perverted sports fan could rationalize paying $200,000 for a GIF. The NBA also worked in close concert with TopShots to develop their NFT, lending their credibility (and their license) to help jumpstart the adoption of the product. Also sports people are just insufferable, and whenever something remotely cool or legitimately interesting happens in the sports world they manage to beat it to death within days.
Even through sports trading cards are sort of the low hanging fruit of the NFT space, itās caught on elsewhere too. YouTuber and Confirmed Human Garbage Logan Paul recently raked in a cool $5 million selling NFTs to tweens that doubled as raffle tickets for a pack of 1st edition Pokemon cards (valued at $40,000 a piece). Grimes recently sold $6 million worth of digital art in the form of NFTs. They are a flexible technology that we have only begun to scratch the surface of its potential for scams.
The key concept here is scarcity. Letās zoom out for a moment with a quick Economics 101 crash course on scarcity, because this idea is critical to understanding how the fuck all this works.
Scarcity 101
Scarcity is a foundational concept in economics that suggests since there are a finite amount of resources on this planet and a theoretically infinite thirst for people to buy shit, we have to make ārationalā decisions about how to allocate those resources to best meet those consumers desires. The efficiency in which we can allocate those resources in order to meet peoples wants and desires affect things like supply, demand, and ultimately prices. Scarcity mostly affects supply, which has a big effect on price.
Letās walks through an example. Letās say thereās only one Tilda Swinton. Which there is. She usually makes one movie per year, and itās usually some indie flick you have to go halfway across town to some shitty independent theater to go see. But there is a scarce quantity of Tilda Swinton, therefore big fans of Tilda like myself will pay top dollar to go see her movies and have no problem going halfway across town to the shitty indie theater to catch her movie.
However there are literally dozens of Chrisās (Pratt, Evans, Hemsworth, Pine, etc.) who collectively churn out dozens of mediocre movies per year. Itās abundant resource. Even for big fans of Chrisās, there are many different opportunities to get your fill. Supply is sufficiently high where even if people are clamoring for more Chris, thereās always enough to go around and people can expect to pay a reasonable price to get them some Chris. (Side note: Absolutely BONKERS all these motherfuckers were in the same cinematic universe.)
All the content found on the internet, all itās existing assets like videos and memes and data, is fungible and effectively infinite in supply. Fungible just means something can be duplicated and replaced by something identical to it. Yes, in theory all this data needs to sit on some server or hard drive somewhere. But in practice we can store an essentially infinite amount of data. For example, you and I could both click on this link and watch this video at the same time without issue. We donāt have to take turns watching it. The asset itself, aka the video, is fungible. All we need to do is query some server somewhere and viola, the video pops up in both your browser and mine.
The effectively infinite supply and fungibility of all this content on the internet has made monetizing content and data a tricky endeavor. How can you justify charging anyone for something that you have an infinite supply of? Seems a bit greedy. But thatās capitalism, baby, and everything has itās price.
Think about how Spotify operates. You pay $5 per month to access their service, which grants you unlimited, unfettered access to their massive library of music and podcasts. But Spotify itself doesnāt have any physical copies of all this content lying around. Thereās no warehouse of CDs somewhere. They donāt have Justin Bieber locked in some recording studio slash prison playing his music over and over every time someone streams his songs. They just have some server somewhere to hold all the music files and handle bandwidth. They have an effectively unlimited supply of music.
But Spotify is a corporation, and they need to make money somehow. Also, they need to compensate these artists for the hard work and creative genius it took to make their music. Although there is an unlimited supply of music on their servers, there is not an unlimited supply of musical talent. Ultimately what we as consumers are paying for is Spotifyās ability to attract and retain that musical talent on their platform. This all begs the question as to whether $5 is a fair price to be paid, but thatās for another day.
Ok, back to NFTs.
What makes NFTs different is that unlike basically everything else on the internet, there is a scare quantity of them. And this scarcity is all manufactured intentionally in order to justify charging a shitload of money for them. Letās look at NBA TopShots, the NFT en vouge, as an example. NBA TopShots are essentially digital trading cards that come in the form of highlights. TopShots looks something like this:
Collectors can log on to the platform and purchase digital āpacksā, which contain a handful of āmomentsā that are added to their collection. Itās the digital equivalent of going to your local hobby store and buying a new pack of Panini or Donruss basketball cards. Each Moment is bestowed with a unique serial number, so the collector knows just how rare their card might be. Some cards have thousands of other identical ones out there (abundant), and some only have a handful (scarce). They could just as easily make infinite copies of each moment. And in fact an infinite amount of them do exist elsewhere in the form of highlights on YouTube and Twitter and Instagram. But only by packaging and commodifying the highlights, thus creating scarcity, can they justify selling them for a lot of money.
All this is only made possible thanks to the blockchain. Each card exists inside TopShots own specially engineered blockchain ecosystem. Any time a card is opened in a pack, a new block (corresponding to that unique card) is āmintedā (aka added) to the blockchain. Any time a card is sold or exchanged, that transaction is recorded on the distributed ledger for posterity sake. The ledger is accessible by anyone on the system, and any transaction must first be verified by a critical mass of ānodesā on the blockchain for it to process.
We are treading dangerously close to a full-blown blockchain deep dive, so Iām just going to stop there. The important point to take away here is that the blockchain feature is critical to ensuring and protecting that artificial scarcity. Since each card has itās own unique identifying serial number, one can trace the chain of custody all the way back to when the card was first opened in a pack. This eliminates any possibility that a card might be a fake or forgery, so collectors know exactly what they are getting in any exchange.
Also, since each card is verified on the blockchain ledger, you always know exactly how many ones similar to it are out there. In other words you know exactly what the supply of each card is, giving you have a better idea of how rare it might be and ultimately how much it might be worth. Nothing is stopping TopShot from making infinite amounts of certain moments. But if there is an infinite supply of something, itās hard to justify paying anything for it no matter what kind of demand there is.
What the fuck does all this mean?
The technology surrounding TopShots and NFTs is undoubtedly as cool as it is complex. But frankly it all seems like window dressing obscuring the simple question: is this all actually worth anything? Is a GIF of Zion Williamson really worth $200,000?
The answer is maybe. Value is kind of a nebulous term, and in collectible markets like these value is inextricably tied to scarcity. Value is also in large part government by the actors in the marketplace. Pretty much everyone in collectibles markets like these are either collectors or speculators, and there needs to be a healthy distribution of both for the market to function properly.
Collectors are people who are willing to buy these sorts of things because they are fans, first and foremost. People like me, who are willing to pay $150 for a rare Marcus Smart rookie card. They are willing to pay $200k for a GIF of Zion Williamson simply because they are huge fans of Zion Williamson. Theyāll pay $500k for a Beanie Baby because they had a terrible childhood. In short, these items possess some sort of intrinsic value to them.
Speculators, on the other hand, are just there to make money. They are willing to pay $200k for a GIF of Zion Williamson because they think sometime soon it might be worth $250k. In their eyes the only real value these items possess is their expected financial return. They are basically a financial instrument not unlike a stock or bond.
I worry with TopShot that there are too many speculators and not enough collectors. There has basically been wall-to-wall media coverage in the past couple week of the TopShot boom, which is attracting more and more curious people (aka Suckers and Marks). Big names like Mark Cuban and Bill Simmons have been singing their praises as the future of collectibles (and probably have a significant financial interest for them to succeed.) And the reality is that there is still a raging pandemic that has left many people financially destitute and desperate for a quick buck.
Iām concerned that prices for TopShots are skyrocketing primarily because speculators are so eager to get in on the scheme that they are willing to pay a premium to get in on it. Suddenly the whole market just becomes predatory in nature, with people who got in early preying on those who are late to the game. But once the jig is up, and it becomes clear that there isnāt any real demand among collectors, prices will come crashing back down to earth leaving someone holding the bag.
This is a textbook case of a bubble, and is not entirely unlike what we saw with GameStop a few weeks ago. A bubble is simply when rampant financial speculation causes prices to skyrocket far beyond what something might actually be worth. In other words, itās when there is a disconnect between somethingās real value and their price. GameStop is a dogshit company, but speculation and hype and memes inflated its price far beyond what it was actually worth. A few people made big bucks, but much more people lost money (Side note: Is this just what our economy is going to be going forward? Some new mem-based scam every six weeks that makes a dozen people fabulously wealthy and the rest feeling FOMO?)
The only thing truly propping up the value of collectibles markets like TopShot are the actual collectors. Otherwise the whole market devolves into speculation and scams, and thatās when things go haywire. However there is a fundamental difference between something like a housing bubble and a TopShot bubble. At least with a house, if the bubble bursts and itās value craters, you still have a the house, you have the land it sits on, and all the copper pipe you can rip out of the walls. It will never truly go to zero.
But TopShots are intangible. When they go to zero, they are truly worthless. Just 1s and 0s on a server somewhere. What happens in six months when some other company comes along and starts releasing their own superior version of TopShot, and everyone in the collectors market flocks over to them? What happens if hackers breach TopShot and manage to steal everyoneās precious NFTs?
The idea of TopShots, and NFTs in general, and undoubtedly cool and very well might be the future of collectibles. But we are still very much in the wild west in terms of the lifecycle of the technology. There is still no reliable third-party marketplace to trade these things. Prices are wildly unstable, which leads me to believe there is still no consensus on the actual value these things hold. And we are still at the point where itās hard to discern a scam or cash-grab from a legitimate NFT offering.
So until all that stuff shakes itself out, itās hard to say whether this will go the way of alt-coins or Bitcoin. Much like the gold rush of the 1850s, thereās a lot of money to be made out there for those willing to take a gamble. But as the saying goes, if you want to live on the frontier, you have to be willing to take a couple arrows.