NFTs Are a Pyramid Scheme and People Are Already Losing Money

By Andy Day

Photographers, filmmakers, and digital artists are falling over themselves to mint NFTs in a get-rich-quick scheme that will do little beyond transferring wealth from artists to tech billionaires. Why are so many people buying into the idea that something is rare because everyone says it is?

If you’ve yet not minted your first NFT and you’re wondering how it works, here’s a quick summary of the process: you create a wallet, buy some Ethereum, and choose a platform. You then pick one of your digital creations and pay around $70-100 to “mint” this artwork into a Non-Fungible Token. You choose a starting price and wait for the bids to come rolling in. You may even like to build up to a “drop” to create some hype.

One of the easiest places to get started is Rarible, which is bewildering, thanks to the crypto aesthetic made up of nightmarish visions of randomness and memes. Certain tropes emerge: Pepe the Frog, rhinos, and rainbows proliferate, creating a nonsensical soup of chaos and confusion that feels like a terrifying mash-up of kids cartoons and 4chan.

If you’re one of the early adopters or have some friends who were ahead of the curve, you might have landed yourself an invitation to a platform such as Foundation.app. These sites create a degree of exclusivity, as there’s a level of filtering to ensure that only a small number get to mint their work. If you don’t know anyone with an invite, you can head to a specific channel on Foundation’s Discord server and ask politely, though such is the FOMO, meaning requests have been piling in at more than one every 30 seconds.

Whichever platform you choose, you won’t be able to ignore the fact that a lot of people seem to be selling a lot of questionable digital art for ludicrous amounts of money. That’s a very strong nudge for you to get involved.

Incentivization is such a feature of these platforms that many of the artworks being minted and traded reflect it in the aesthetic. Pieces involving the letters FOMO proliferate in a self-referential sea of urgency to buy, sell, and be sold. This sense that you’re not on board with the beginnings of something big underpins the entire NFT experience, and it’s a marketing masterstroke. Almost every tweet telling you about an auction that you should get involved in will remind you that artwork will only be available for a brief window. The FOMO is so powerful that you probably feel like you're already losing money by having not signed up yet.

NFTs offer a new type of ownership and an exciting way for digital creators of all sorts to sell their work. As a concept, it has some appealing aspects such as the fact that whenever you mint a token, you can determine the royalty that you will receive each time that it’s sold on in the future (typically around 10%). Cryptocurrencies offer an alternative to an economic system that is dominated by Wall Street bankers, politicians, and insider dealing, promising a degree of democratization of economic structures that offers freedom and flexibility. This upstart, new-contender, f***-you mentality also infuses the artworks being created with seemingly endless celebrations of how this new system will redistribute power.

To many, it’s a means of overthrowing the existing regime; when you look a little closer, you realize that it’s just an extreme manifestation of neoliberalism. Instead of convincing you to buy stuff that you don’t need, they’re convincing you to buy imaginary optimism based on a mass enchantment. In addition, as a generation, we have the fervent belief that every single one of us is special and that therefore our creativity must have innate value; NFTs are our chance to sell it.

The rhetoric is compelling if a little naive at times. I stumbled upon a statement accompanying the forthcoming drop (i.e., the beginning of an auction) of one reasonably well-established digital artist, which, like many NFT artworks, ties the concept of the NFT into the artwork itself. This is how he described his animation of a futuristic character and his flying car: “NFTs are a rallying call for creatives,” it read. “A call to explore, to dream, and to leap into a world where our solitary dreams become a collective reality.” He added: “Collecting and creating NFTs is not an act of defiance but a tribute to a historical moment of a movement that is changing our lives.”

I’m not sure anything can be more meta than the simulated ownership of a digital copy of an artwork that describes itself as a tribute to a historical moment of a movement. It also conveniently ignores that these platforms are owned by millionaires such as the Winklevoss twins, who famously sued Mark Zuckerberg for stealing their idea for Facebook.

OpenSea rare digital items

“Buy, sell, and discover rare digital items,” reads the strapline on OpenSea.io. If you’re wondering how a digital item can be rare, you’re asking the right question. Last century, philosopher Walter Benjamin explored how the authenticity of art was tied to its uniqueness and that photography — along with mechanical reproduction — brought instability. I’m not sure what Benjamin would have made of NFTs, but this disconnect between our love of authenticity and the virtual world’s inability to provide an alternative isn’t resolved by owning tokens that barely even exist. Digital rarity is a pretense.

Society is becoming less physical and more virtual, and it’s no coincidence that NFTs have taken hold at a time when our social interactions have never been less tangible. Furthermore, the creative industries now play a significant role in the economies of major nations, and yet despite the supposed value of artists’ contributions, employment is largely precarious (which itself is made to look appealing) and often supported by mundane jobs. The carrot dangled by the world of NFTs is incredibly alluring: let’s all sell something virtually so that we can collectively pretend that it is now owned by someone else.

The art market has always been about making enough people believe that something has value. It’s also been a shadow banking system that facilitates the movement of large sums of money across borders or hides it from tax inspectors. The value of the artworks that are now being sold as NFTs have acquired value thanks to marketing, FOMO, and a massive pile-on of unwitting minters and buyers trailing eagerly after celebrities and huge brands. Money washes through this system, and as a bubble, it’s unsustainable.

What doesn’t get seen among the flashy websites and occasionally beautiful artworks is the huge volume of minted pieces that do not sell. Selling an NFT is not that different from selling a print: it’s far easier if you have an excitable band of fans keen to part with their cash, and with NFTs, it’s even simpler if those fans are already tech geeks. If you’re a digital artist with a large following, you might do quite well, and it works in your favor if you indulge heavily in the crypto aesthetic. That’s a tiny minority of sellers; the vast majority will only lose money, as minting isn’t free, and you can be sure that someone somewhere is making a tidy profit as a result.

Being friendly, supportive people, artists are encouraging fellow artists to buy each other’s art, salvaging egos, and giving you a sense that the money you spent on gas hasn’t been a complete waste. However, gas fees aside, most platforms add a 3% fee to the sum paid by the buyer and then take a 15% cut of that received by the seller: this generous, mutually supportive act of buying each other’s art is doing little more than line the pockets of the millionaires that set up these platforms in the first place. Artists would be far better off simply sending each other checks, posting a photo of the checks on social media, and then just keeping those checks in a drawer.

What many artists are conveniently ignoring is that NFTs have a vast carbon footprint. To her horror, one environmentally conscious artist calculated that minting her six tokens was the equivalent to running her studio for two years. There’s plenty of discussion about the precise impact of NFTs (though the platforms seem predictably reluctant to get involved), but any conversation about this marketplace that doesn’t mention its potential environmental impact is massively irresponsible.

On the surface, the NFT marketplace is made to look like everyone is making money, and while crypto might be rewriting the rules of economics, there is one dictum it cannot escape: for someone to make money, another has to lose money. NFTs do not magically generate wealth from nowhere; they’re taking it from those buying into the idea that everyone who’s getting in early is making a killing. As David Gerard, author of Attack of the 50 Foot Blockchain explains, “NFTs are entirely for the benefit of the crypto grifters. The only purpose the artists serve is as aspiring suckers to pump the concept of crypto — and, of course, to buy cryptocurrency to pay for ‘minting’ NFTs.”

Eventually, this pumping will tail off as the number of people willing to keep plowing money into Ethereum and NFTs will begin to ease. Given that this system relies on constant growth, it seems a safe bet that the value of these "rare" items might start to fall, and those countless investors who spent thousands of dollars on low-res pictures of a puppy might want to get their money out before it collapses completely. Otherwise, what are you going to do with that puppy? Print it and hang it above the toilet?

Prices might not even need to stagnate for people to sell. They just need to stop rising as rapidly, and suddenly, it will seem like a safer option to have dollars in your Chase account rather than Ethereum in a wallet where its value has already been seen to fluctuate by 20% in a single day. Once investors’ confidence is dented, the collapse could happen quite quickly.

Ethereum increases in value when people keep buying Ethereum, and this simulated ownership of supposedly rare digital assets has manufactured demand. Cryptocurrencies are desperate to find a reason for people to swap their dollars for a slightly more imaginary monetary system, and NFTs are the latest solution. When it reaches saturation point, the market will adjust, and it could be messy.

This bubble will burst; it’s just a matter of when.