Why Pay $200,000 to “Own” a LeBron James Video Clip?
The psychology of sky-high Non-Fungible Tokens, aka Niftymania.
Posted Mar 08, 2021 | Reviewed by Lybi Ma
“Objectively, a video clip of LeBron James dunking isn’t worth $208k. A cartoon cat isn’t worth $100k+. A selfie of Lindsey Lohan isn’t worth $59k.” – Zachary Crockett.
Non-Fungible Tokens, or NFTs, are digital collectibles. These days, they are all over the news for the astronomical, bizarre-seeming amounts of money people are willing to shell out for purchasing them. Here are three examples of NFTs you can own right this minute and how much you would have to pay for them:
- Twitter CEO Jack Dorsey’s first tweet from 2006, “just setting up my twttr,” is currently up for auction on a platform called Valuables. The high bid for it as of this writing is $2.5 million.
- On NBA’s Top Shot platform, a video clip of LeBron James dunking a basket is on sale for $213,000, and another one of a Vince Carter three-point shot costs $200,000 or more.
- A collage titled Everydays: The First 5000 Days by the artist Beeple that includes 5,000 pictures created by the artist daily over 13 and a half years is currently up for auction at Christie’s. The high hid for it as of this writing is $3.75 million.
What exactly is an NFT?
A non-fungible token is a digital collectible. In a nutshell, it is blockchain-based, incorruptible evidence of ownership of a unique digital asset like the LeBron James video clip or the Jack Dorsey tweet. As Zachary Crockett points out in his highly readable discussion of the recent popularity NFTs,
“An NFT can represent any kind of digital asset: a piece of artwork, an audio file, a video clip, a plot of virtual land. The NFT isn’t actually the piece of artwork itself; it’s a piece of code on a digital ledger (blockchain) that points to where the artwork lives — usually on a server somewhere else.”
Owning the NFT of the LeBron clip or the Dorsey tweet doesn’t give the owner any copyright or licensing rights over these digital assets. These items are widely available for viewing all over the internet regardless of who owns their NFTs. Unlike other assets like rental houses or the library of Beatles songs, owning a renowned digital asset with an NFT does not generate royalties or other revenue types. This begs the question:
Why are people paying absurd sums of money to own Non-Fungible Tokens?
Some observers have explained the astronomical values of NFTs with situational reasons like an exponential increase in the number of deep-pocketed (and Covid-19 weary) consumers clamoring to purchase NFTs, the tremendous enthusiasm for cryptocurrencies that are also based on blockchain technology, and a broad-based pandemic-induced shift from the physical to the digital. Others have given what appear to be reasonable psychological reasons, like the fact that by their very nature, NFTs are authentic and scarce (See the video below of the owner burning a physical Banksy artwork to disproportionately increase its NFT’s value).
However, absent academic psychological examinations of NFT valuation, which may be months or years away, none of these explanations are compelling. Many things are authentic, but few items merit shelling out vast sums of money. LeBron James has likely dunked and made momentous baskets hundreds of times over the years, and Jack Dorsey has tweeted thousands of times (and countless celebrities of equal pedigree have tweeted for the first time). The scarcity of these digital assets is questionable; on the contrary, one can argue that no matter how they are defined, digital assets are abundant.
The Speculative Motivation: Niftymania
As an academic interested in pricing psychology, I support a far more parsimonious explanation: speculation. The only clear-cut economic benefit of buying an NFT is that, like any other possession, it can be sold to another interested buyer in the future.
At the moment, the prices of many NFTs are increasing rapidly, doubling, tripling, and even more within weeks. Many NFT buyers have already resold their purchases for gigantic profits. Current NFT buyers and potential buyers will expect this trend to continue and make a killing by reselling their acquisitions in the near future. This is the exact same psychological reasoning that led to a small bouquet of common tulips to cost as much as a house in early 1637 in the Netherlands, the price of a house to double within five years in California in 2005, and one share of the struggling retailer GameStop to cost $483 in early 2021.
In explaining the value of an NFT on their site’s FAQs, the founders of the Valuables platform say:
“Owning any digital content can be a financial investment, hold sentimental value, and create a relationship between collector and creator. Like an autograph on a baseball card, the NFT itself is the creator’s autograph on the content, making it scarce, unique, and valuable."
How can owning a few lines of computer code have sentimental value or create a relationship with a sports superstar, a renowned artist, or a business tycoon? At the present moment, it seems to me that the possibility of a financial windfall from an appreciation of the NFTs’ value is the main driving force for the stratospheric prices. We are in the middle of a speculative frenzy. The only fitting name for it is NFTmania (pronounced Niftymania).