Digital delirium From Bitcoin to NFTs, investors going bananas over anything blockchain — and no one knows how the financial frenzy will end
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Hey there, time traveller!
This article was published 23/04/2021 (525 days ago), so information in it may no longer be current.
JD Hawk is an accomplished artist, able to actually make a living selling his works all over the world. Yet the 50-year-old Winnipegger recently dipped his feet into a nascent domain of the art world: non-fungible tokens, or NFTs for short.
“I’m probably one of the older guys who entered the NFT thing. I’m a traditional oil painter and stoner carver,” he says. “Those are the two things I’ve been doing most of my life, so when digital art first hit, I didn’t think too much of it.”
But curiosity got the better of him, and as he learned more about how digital artists were using blockchain technology — an online ledger that can authenticate digitized artwork (i.e. verify who made and owns an art piece) — he recognized its potential.
“I wanted to combine traditional artwork with this new NFT world.”
As such, he took high-resolution photos of two of his paintings — G.O.A.T. and Observation — and created NFTs of them, now selling on an NFT site, Rarible.com. The buyers get the NFT and the actual painting, but the catch is they must buy the NFT and pay for it in Ethereum — a cryptocurrency, Hawk says.
It may all be an experiment for Hawk, but NFTs have become big business in art. In fact blockchain rocked the art world in recent months with one NFT piece selling for about $75 million.
Then again it’s hardly surprising that anything remotely connected the long-running Bitcoin craze — which has cooled slightly of late — is catching fire with speculation.
Nothing illustrates the investor enthusiasm — or madness — more than Dogecoin, a cryptocurrency created in 2013 on a lark, that year to date has increased more than 6,000 per cent.
If this all sounds a bit (or tremendously) insane, you’re in good company.
The investment industry is struggling to make sense of it too. The recent launch of futures markets for Bitcoin and cryptocurrency exchange-traded funds (ETFs) may mark industry-wide acceptance that these fintech upstarts are here to stay. Yet many advisors and analysts admit they in the dark about what the future holds for these assets.
The challenge, notes one economist who tracks the space, is valuing assets for which there is little to compare them to on financial markets.
Consider Bitcoin, says Jules Boudreau, economist at Mackenzie Investments, which published a report earlier this year arguing cryptocurrency is more an investment than currency.
Even then, its role in a portfolio is debatable.
“We think it has certain potential, but in 2021 it’s way too volatile to have a role in the portfolio of a long-term investor.”
Furthermore, as replacement for the dollar — a case made by boosters — Bitcoin, as it currently stands, would probably be an epic failure.
“If you compare it with other currencies, it’s by far the most volatile,” he says.
“And volatility is a problem because it leads to hoarding where users don’t want to spend it because it could soon be worth two times as much.”
What’s more, Bitcoin can only handle a few transactions per second, far from the thousands of transactions it would have to be capable of managing as a true currency replacement, he says.
Then again, if not a currency replacement today, what about a store of value, or hedge against inflation — much like gold?
Again advisors are trying to make sense of this question too, says Doug Nelson, Winnipeg portfolio manager with Nelson Portfolio Management Corporation.
“If we can have a good understanding of what the future value may be, and how this… might also correlate with other investments, then we can begin to determine where it fits in a portfolio and how much… (to) allocate to this area,” he says.
If that cannot be answered clearly, then cryptocurrency is speculative and does not fit in a traditional portfolio. Not to mention, he adds, Bitcoin, unlike gold, tends to rise and fall with the stock market, making it a poor choice for hedging against falling stock prices.
That doesn’t mean Bitcoin, or other blockchain-supported assets like NFTs, have no promise and should be ignored. Just ask an early Bitcoiner lamenting the millions of dollars he or she missed out on after buying a few Bitcoins a half decade ago — at the time worth much, much less than today — to purchase something… just for kicks.
Still, everything crypto today bears the stench of the greater fool investment premise, says Nick Waddell, editor of the Cantech Letter, which covers Canada’s tech sector.
“The reason that Bitcoin is going up is that one person is buying it from another person… but my fear is that the vast majority of crypto investments will eventually go to zero.”
But a rout in pricing doesn’t matter much to Hawk. Rather, the artist sees the technology as a means to further explore art’s and interplay with an increasingly online society.
“It’s like any other fad; they come and go, but never fully go away… and the ones that stick it out will probably make money in the end,” he says.
“I just figured I would give it a shot and see what happens.”