Remember, none of this is financial advice.
Written by: Kristina Markulin
On Monday, Nov. 6, the bipartisan infrastructure bill passed the senate. In it is a clause stating that all digital asset transactions over $10,000 will need to be reported to the IRS. This sent a shockwave through Twitter, with a swath of people (mainly artists) rejoicing in the decision, and another group (mainly crypto advocates) concerned for their future.
Why is that?
What’s an NFT?
In the simplest of terms, it is the crypto world’s digital equivalent of an object.
NFT stands for “non-fungible token.” In the simplest of terms, it is the crypto world’s digital equivalent of an object. Something that is fungible retains some value once it is broken into smaller pieces. For example, if I exchange one dollar for four quarters, those four quarters retain a fourth of the value of a dollar. However, I can’t cut a $5,000 painting in two pieces with each half worth $2,500. The painting would become worthless since it has effectively been destroyed; ergo, that painting is non-fungible.
Okay So, Just Why Is This Bad?
Regardless of your perspective, the cons of NFTs almost always overwhelm any positives they could have. To fully explore this matter, let’s break it down...
Part 1: Ecological Issues
Crypto mining is a technologically taxing activity. Cryptocurrencies are generated (referred to as “mining”) by computers solving complex equations. The more tokens mined, the more complex the equations. This process, however, is unstable. The rise of crypto has applied stress to mining technology, meaning more complex equipment, and more electricity consumption. For example, Business Insider released an article on Sept. 6, 2021 stating that “bitcoin mining consumes 0.5% of all electricity used globally and 7 times Google’s total usage.” NFTs take even more energy to mint than Bitcoin.
...the carbon footprint of an NFT purchase is one of the largest of any purchase in the world.
NFTs are mostly powered by Ethereum, a blockchain similar to the one that Bitcoin is bought and sold on. Etherium, according to Statista, takes 178.89 kilowatt-hours for one transaction. Compare that to 100,000 VISA transactions, which takes 148.63 kilowatt-hours of electricity. That is a staggering amount of energy for a single transaction, and with hundreds or even thousands of transactions per day, the carbon footprint of an NFT purchase is one of the largest of any purchase in the world. Something must be worth all that energy, right?
Part 2: The Art (or lack thereof)
NFTs have manifested as a digital art marketplace. The art comes about in a few ways:
1. An established artist with a large following on platforms such as Twitter, Instagram, and DeviantArt begins to mint their preexisting work as individual pieces. 2. An artist (or a conglomerate such as Bored Ape) creates a collection of NFTs to sell as part of a collector’s set. 3. Large companies make NFTs of their properties
Most often, NFTs are created in the second method: collections of various prices and rarities that are marketed as a branded set. If you’ve ever scrolled through Twitter and seen similar-looking lion profile pictures that look like some sort of demented Picrew, that is what’s being described here. These collections, most notably Bored Ape, Lazy Lion, and Cryptopunks, have a very similar design. Incredibly similar. Almost … too similar.
Most of these pieces are derived from a template. These NFT collections, to keep aesthetic cohesion, are built on the same base. There are images online where people have taken multiple, sometimes even hundreds of NFTs from the same collection and superimposed them onto each other. When you do that, the base image these NFTs are built on is obvious. Under normal circumstances, this wouldn’t be that big of an issue. However these works go for exorbitant prices, sometimes even reaching millions of dollars. But what do you really get with that purchase?
Part 3: “I own this image!”
If the characteristically ephemeral nature of NFTs isn’t enough to turn you away, consider this: NFT purchases do not guarantee you any actual rights to the image
No, you actually don’t.
When an NFT is minted, the image is not the token, or what is being bought in the transaction. If the blockchain (the digital ledger cryptocurrencies are tracked on) is to remain readable, it must be kept simple, so the image itself is not tokenized due to the complexity of image files. The token that you own is actually a note in the blockchain that says you own the image, but that image is held on a server separate from the blockchain. So if, for instance, you buy an NFT from a marketplace like OpenSea and the website goes under, the token effectively becomes useless because the image is no longer available on its host website.
If the characteristically ephemeral nature of NFTs isn’t enough to turn you away, consider this: NFT purchases do not guarantee you any actual rights to the image.
Say you were to commission an artist directly. Within that commission agreement, important legal information such as redistribution rights, commercial vs. non-commercial use, etc. can all be dealt with directly. But when buying an NFT, these discussions don’t take place, meaning usage rights are unclear to the buyer. It places the situation in limbo; with no clear boundaries set with use and ownership, the owner of the NFT can’t really use the image outside of regular Fair Use, something that could be alleviated by directly buying from an artist. NFTs are ripe with legal ambiguity — which, to be clear, is by design.
Part 4: “No one wants a stolen NFT.”
On Oct. 30, Twitter user Calvin Becerra (@calvinbecerra)’s crypto wallet was hacked over Discord through a phishing scheme. This led to the theft of three Bored Ape NFTs directly from his wallet (the digital equivalent of three Mark Rothkos, if Mark Rothko didn’t understand color theory). To combat this theft, Becerra petitioned the three major NFT marketplaces (OpenSea, Rarible and NftTrader) to ban the sale of the stolen tokens. Becerra then proceeded to state that no one wants to buy stolen art, but there’s a problem with that.
So many artists’ works have been stolen and minted as NFTs without their permission, blessing or knowledge, that an entire call-out Twitter page needed to be made. Artists who are against NFTs are having their art stolen and minted — against their copyright and explicit values. In fact, art theft in the NFT space is so rampant, that an NFT minter stole and minted the work of popular DeviantArt artist @qinniart, even after she tragically died from cancer.
With the energy consumed in their production, the rampant art theft, and no rights transferring in the purchase, NFTs are more trouble than they’re worth. Then what’s the point?
Part 5: Money Laundering and Money Woes
There is one, most notorious use for NFTs: money laundering.
The Nov. 6 passing of the bipartisan infrastructure bill was so devastating to NFT advocates because if someone in the United States spends over $10,000 in digital assets (Bitcoin, Etherium, Doge, etc.), they must report that income to the IRS.Failing to do so is a felony. The main draw to crypto wallets is that they’re anonymous. There is no information in a crypto wallet where the owner can be traced and found in the real world. One person can anonymously operate two wallets, use one to buy illicit material, then use the other to sell an NFT to the first — cleaning the money in the process.
With the high prices NFTs sell for, this is a probable outcome for many NFT buyers, even if they aren’t necessarily doing anything illegal. However, most people who jump in now aren’t going to make much; the market is constantly at risk of bottoming out, crashing the worth of the NFTs they own. NFTs being built on a flimsy financial foundation will lead to a crash in the market. High-profile adopters like Elijah Wood and Jimmy Fallon can take that financial risk. Can you?
Part 7: Where Do We Go From Here?
NFTs are the hot new fad. The Beanie Babies for the technological age, a virtual collectible for a virtual world. And like Beanie Babies, their value is held together by ferver, sustained by FOMO and cloaked in delusion. The NFT market (and crypto in general) is incredibly volatile, controlled by influencers and celebrities one tweet at a time. But one thing is clear: nothing that is supposedly a public good should be worth this much energy.
At this point, you’re better off buying Beanie Babies.