As mentioned in last week’s post, I’ve decided to pursue a home-made study programme – the “NFT MBA”.
Instead of spending $119,964 (!) and 9 months to do an MBA at Stanford, I’ll spend $20,000 and a few weeks buying and selling Non-Fungible Tokens. Absolute bargain. (See what I did there? That’s the power of a good reframe for you).
The last post was an introduction to NFTs in general, and why I’ve embarked on this quest to learn more about it. This post is about why NFTs are valuable. In the next posts of the “NFT season” of this newsletter, we’ll look at how to develop investment strategies in the NFT space, and I’ll share which NFTs I’ve bought so far and explain my thinking behind each purchase decision.
But first things first.
Why NFTs are Valuable
To understand why .JPG pictures of penguins and rocks can have any value whatsoever, a surprisingly good place to start is from the world of philosophy.
More specifically, from the work of a French man named René Girard. Let us explore what René has to teach us – first about ourselves, then about NFTs.
Mimetic Desire and Why We Want What We Want
Girard is famous (in nerdy philosophy circles at least) for coming up with the notion of mimetic desire to explain much of human behaviour.
“Mimetic” comes from the same linguistic root as “mimickry”, and simply means to imitate other people.
Desire means, well, desire. To want something.
Put the two together, and you get mimetic desire – the idea that we want what we want because other people want it too.
Luke Burgis, an expert on Girard, explains it better than I could:
“The value of objects is not objective—it’s subjective. And that subjective value is determined mimetically, based on our relationships with others. We could say that value is intersubjective: we assign value to things (and therefore desire them) according to what other people want.”
Mimesis All Around
There are a few big ideas out there that share a funky characteristic: once you become aware of one, you see it EVERYWHERE.
Mimetic desire falls in that category for me (together with antifragility, compound interest, skin in the game, Pareto’s Law and a few others).
I believe mimetic desire has been around since the first humans walked the Earth. Mimicking what other people do is how we learn to survive – and mimicking what other people want is how we learn what to value.
I also believe mimetic desire has gone into overdrive in our modern, hyper-consumerist culture.
Very few people wanted an iPhone until they knew someone who had one. In fact, very few people wanted one before they knew someone else who wanted one, as other people’s desire for a thing typically comes before their decisions to purchase it.
Nobody would have wanted a Hermès bag if nobody else wanted one. Just head over to a tribe of indigenous people anywhere on Earth and show them your fine handbag – you’ll receive exactly zero social proof, because nobody there wants such an item.
NFTs as a Medium of Pure Mimetic Desire
If you are in an argumentative mood, you could counter the previous two examples (the phone and the handbag) with the following argument: these objects are intrisically valuable because they are useful. “You can use the phone for calling people, and you can use the handbag to carry stuff.”
Fair enough, there is some marginal utilitarian value there, I’ll give you that. However, it’s very difficult to make similar arguments for today’s topic, NFTs.
Non-Fungible Tokens have practically zero utilitarian value. You can’t use them for anything useful. They just kind of… sit there, tucked away on a blockchain somewhere.
But they are valuable regardless. Often, very valuable indeed.
Why? You guessed it – because of mimetic desire.
NFTs are perhaps the closest we get to something that has value purely because of mimetic desire. To put it simply: people value NFTs because other people value NFTs.
Internet nerds want them because other internet nerds want them. Gary Vee fans want them because other Gary Vee fans want them. Art collectors want them because other art collectors want them. And so on.
This is true in traditional finance too, of course. People want “hot stocks” because other people want them – but NFTs take this collective desirability pricing mechanism to a whole new level. That is exactly what makes the NFT space so weird and wonderful from an investment perspective.
How to Form Investment Theses for NFTs
Mimetic Investing – Breaking Free From “Fundamentals”
In traditional finance, many rationalists argue that the market is “efficient”, which means the price of a stock will be “correct” in the long run, which means the price will accurately reflect the value of a company’s “fundamentals” like expected future cash flows, profit margins and so on.
In the short run, however, most rational(-izing) finance bros will admit that human psychology and and other irrationalities may cause a stock to be mispriced for a little while, until the magic of the market swoops in to correct it again.
In other words, “fundamentals” are important, and human psychology is noise.
What if we flipped that on its head?
What if “fundamentals” were noise, and human psyhology was all that mattered?
That, my friend, is the NFT market. Welcome.
In this asset class, there are zero financial “fundamentals” involved at all. In a weird way, this is very liberating. When you can’t lean on any quarterly reports, or fancy cash flow calculations, you can only base your investment decisions on one simple value driver: human psychology.
Get Paid for Knowing What’s Soon-To-Be Cool
Your job as an NFT speculator is therefore simple, but not easy. You must find the next big NFT that other people will value (ideally before they start to value it), then buy, wait, sell, profit. Repeat.
If you can do this consistently, NFT trading provides you a chance to get very wealthy pretty fast.
If you can’t, NFT trading provides you a chance to lose a lot of money pretty fast.
Here is a simple metaphor to drive this point home: in every high school there are some kids who intuitively predict what will be cool pretty soon, and act accordingly. They stay ahead of the curve, always one step ahead of the Zeitgeist of the school yard. NFT trading represents the financialization of this ability. Instead of just using his or her superpower to buy cool shoes just before they become cool, any kid of any age can now use his or her predictive superpower to amass serious wealth.
Move From Predictions to Metapredictions
“What is your investment thesis?”
A simple question, which in traditional finance circles could set you up to receive any seemingly random combination of letters as a plausible response – DCFs, EVs, WACCs, ROICs, or seemingly anything else that might come out if you hit caps lock and then give your computer to a cat.
As sophisticated as your average, over-confident finance bro may sound, if you scrap away all the tribal lingo, you realise that what he is trying to do is simply this: predict what other people in a market will do in the future.
It doesn’t really matter if a stock trades at a low P/E ratio. If the rest of the market is fine with it being that way for the foreseeable future, good luck betting against it. You can have your efficient market hypothesis and eat it too, but you won’t make any money – unless, of course, other people ultimately do what you predicted they ought to do, which is to buy the stock and drive the price up.
This is level one game theory. Pretty basic stuff.
Where it gets a little more interesting though, is when you add another layer of predictions on top of the first one.
Now you don’t just predict other people’s behaviours. You predict other people’s predictions. You move from predictions to metapredictions.
Here are the two layers of analysis in all their glory:
- Layer one: what do I predict other people will do?
- Layer two: what do I predict other people will predict other people will do?
In the market for NFTs, “meme stocks” and other highly speculative assets, I believe moving from the first to the second level of analysis has the potential to dramatically improve your results.
Because (take a deep breath, this is about to get extremely meta) crowd predictions tend to become self-fulfilling prophecies. If enough people predict that many other people will buy pictures of penguins soon, the original predictors will themselves buy penguins now, to capitalise on the coming price increase. Before you know it, the predictors made their own predictions come true, by pushing the price of penguins up.
Therefore, if you can get in and buy a penguin even before the predictors predict what other people will do…… yeah, you get the idea. If you’re in early, you’ll profit more.
To Be Continued: Examples of NFT Investment Strategies
If the value of NFTs is driven by mimetic desire, and the entire NFT speculation game is simply about spotting the next cool thing before everyone else… what do some actual, real-world NFT investment strategies look like?
That is a question for another day – specifically, for Monday in a week, when I’ll share some of the strategies I’ve concocted and tried out so far.
Until then, stay curious – and don’t buy JPGs with money you can’t afford to lose. All this NFT talk is still not financial advice!
Also published on Medium.