When I got involved with NFTs in 2018, it was an extremely different industry. There was almost no venture capital. At the time, the NFT space felt distinct from the rest of crypto. There was a sense that NFTs were the real use case that crypto needed — not just something to speculate on like ICOs, or a tool to make speculation easier like DeFi.
Fast forward to today, and things couldn’t be more different. I can’t pinpoint exactly when it happened, but around the middle of 2021, NFTs fully merged with the rest of the crypto world. They became just another thing for crypto people to speculate on. Many people who had helped create the ICO bubble pivoted to NFTs.
Today, the majority of participants in the NFT art and collectibles space are “speculators.” Here, I am defining a speculator as someone whose primary motivation for participating in the NFT world is the desire to make money. Of course, many people participate in the NFT space for reasons other than making money, but they are in the minority.
Polling data from various sources reveals that speculators make up the majority of participants in the NFT space. It’s also manifest in the types of products and services that become popular. For example, Blur didn’t become the hot new thing because they got a new group of people interested in NFTs or because they figured out a novel use case for NFT technology. They rose to prominence by cutting fees to zero and paying people to use their product, features that are clearly geared towards speculators.
There isn’t anything inherently wrong with speculation. But it is preventing the collectible NFT world from capturing what is a much larger opportunity — the luxury goods opportunity.
Speculators prevent the space from fulfilling its potential
A majority-speculator NFT market is a local maximum for NFTs. It is a trap the NFT space is caught in.
Because most market participants are speculators, the people creating the industry’s future — marketplaces, creators, and investors — have the incentive to create products that appeal to speculators.
But speculators are a unique type of customer. Products built for speculators won’t appeal to any other type of customer. In fact, they’ll probably actively drive away the customers that are most important for the future of NFTs (more on this in the next section).
This is the basic shape of the trap the NFT space is currently in: Builders create products for speculators because speculators are the largest group of industry participants right now. But those products only appeal to speculators and keep out the most important potential customers, meaning the NFT space can’t grow.
The problem with collectibles as an investable asset class
Collectibles are a fun, sexy industry. But studying the industry, which is built on the same first principles as the NFT collectibles industry, shows that they have historically struggled as an investment compared to other opportunities.
Let’s take art as an example. Art is by far the largest and most important type of collectible in the world. The global art market was valued at $65.1 billion in 2021, and the total estimated value of all art and collectibles is an estimated $1.7 trillion as of 2020. That’s expected to grow to 2.12 trillion by 2023.
However, a look at the art fund industry shows that this hasn’t resulted in a lot of investment capital being allocated to the physical art asset class. Money invested in art funds went from $2.1 billion in 2012 to a measly $830 million in 2017. By contrast, equities are an approximately $105 trillion asset class, and the amount of money invested in equity mutual funds in the U.S. was roughly $18.75 trillion in 2017. This significant disparity shows how wildly unpopular investing in collectibles is compared to investing in stocks.
If that is the case, who are the collectors who own the $1.7 trillion of art, and why do they own art if not for invest ent purposes? In short, they are people motivated by passion. The most common primary motivation of art collectors is the ‘emotional benefit’ they get from art. Many also have the value of the art they buy as a consideration, but the data shows a financial motivation is far less common than in the NFT space. This insight into the psychology of art collectors directly explains why art is a tricky investment.
Why isn’t more money allocated to collectibles as an asset class?
Some say it is due to a lack of liquidity, the unregulated nature of collectibles, or how inaccessible the market is. But those issues are symptoms of collectibles being tricky investment assets, not causes.
Collectibles are weird investment products
Collectibles are tricky as investment assets because of a paradox at the heart of investing in collectibles — specifically, the fact that the value of a collectible comes from the emotional attachment that the owner/owners feels for it and nothing else.
This is what creates a fundamental paradox when an investor with explicit return objectives owns a collectible. An investor who owns a collectible can’t be primarily motivated by their emotional attachment to it because they have a fiduciary duty to view it as an investment.
The “fundamentals” of an artist can be approximated by measuring the emotional attachment that all collectors of that artist have, in aggregate. This means that simply by owning a collectible, an investor makes the fundamental value of that artist worse by reducing the aggregate amount of emotional attachment an artist’s collector base has to their work.
Put differently — if the supply of a particular collectible is held mostly by people who truly love it, then it will maintain its value. But if it’s held mostly by people who are trying to sell it for more money, it will lose its value.
This is the fundamental reason that investing in collectibles is so weird and complicated. Just by opening an art fund, promising returns to investors, and buying some art, you’re risking making the fundamentals of art you buy for that fund worse.
This is also why the largest collectibles industries, especially the art world, intentionally keeps flippers out. They know that an artist’s paintings being owned by mostly flippers will be disastrous for the value of that artist’s work.
There’s a much better customer type the industry should focus on
Does this mean that NFTs, and other collectibles, can never become large or impactful? Absolutely not.
Collectibles companies have become large and impactful by convincing more and more people to fall in love with the products they create instead of convincing people to see their products primarily as investments.
Handbags, like physical art, are another collectibles case study that we can use to learn about the NFT world. They are not popular because they are a financial instrument. They are popular because their creators have become incredibly good at selling “the dream.” Buying a $10,000 handbag signals to the world that you are high-status and wealthy. This is the fundamental appeal to the “luxury goods” customer type.
The luxury goods customer type is basically the exact opposite of the speculator customer type. They are customers who buy things to signal to the world their sophistication and cultural knowledge. Many of them have all of their financial needs met, and they use the luxury goods they buy as a way of subtly showing that to the world.
And in fact, having speculators around will probably actively deter luxury goods customers. And all else being equal, luxury goods customers would probably rather own collectibles that make them part of a club of people like them rather than collectibles that make them part of a “let’s get rich by flipping this asset” club.
The NFT industry can be much larger if it breaks out of this local maximum and focuses on selling luxury goods instead of speculative assets.
Back to my original point. The NFT customer base is mostly speculators, which means that industry participants – marketplaces, builders, and investors – are incentivized to build for the speculator customer. But building for speculators doesn’t help you attract luxury goods customers. In fact, it probably actively makes it more difficult to do that. At best, appealing to speculators is a distraction. True luxury customers are not buying to make money. They’re buying because they want to signal that to the world.
It probably feels unintuitive to someone reading this article, but as I’ve outlined, the overwhelming evidence from the physical collectibles industry is that selling collectibles as luxury goods is a far larger business than selling collectibles as investments. This means the NFT space could be much larger if industry builders shift their focus to luxury goods.
A tough shift to make
I’ve come to realize that speculation is fundamentally built into many different parts of the NFT space. It’s hard for me to even conceptualize what the NFT industry would look like without a focus on speculators. Even the vocabulary that people commonly use to discuss the industry itself would have to change.
Luxury goods customers are not very interested in day-to-day fluctuations of the floor price. They don’t mind if there is no liquidity for what they buy. If there is ‘utility,’ that might be a net negative for them. In short, truly pivoting to appeal to luxury goods customers would require NFT degens to slaughter a lot of their sacred cows.
The shift would almost definitely make some existing NFT participants upset. That is part of what makes it a trap for the industry — it’s a significant adjustment that many entrenched interests don’t want to happen.
NFTs have a number of significant material advantages over physical collectibles: guaranteed authenticity, ease of transportation and storage, and unique creative opportunities. But the first principles of why NFT collectibles exist in the world are the same as the first principles of physical collectibles exist in the world. This means that the fundamental advantages of NFTs can’t be fully realized while the majority of NFT collectors are speculators.
Making this shift is far easier said than done. But I predict that the builders, marketplaces, and NFT innovators who are not afraid to rip off the bandaid and make the leap to a totally different type of customer will be the ones who are the most successful in the long term.
Duncan Cock Foster co-founded Nifty Gateway in 2018 alongside his twin brother, Griffin Cock Foster. Nifty Gateway pioneered many important parts of the NFT world, including crypto art drops, open editions, and more. Nifty Gateway was acquired by Gemini, and Duncan recently left to start another company.