Controversial, compelling crypto creations

09 September 2021

In 2019 a piece of art by Italian artist Maurizio Cattelan was sold for US$120 000 (that’s about R1.74 million). Normally this would not be a particularly notable occurrence, but in this case the work consisted only of a banana duct-taped to a wall. The absurdity of this was on a par with the 2014 auction of a white paint on white canvas creation by Robert Ryman, which sold for US$15 million (R217 million).

THE QUICK TAKE
At the time of writing there were more than 6 000 different cryptos in existence, excluding the range of related assets known as non-fungible tokens (NFTs).
The entire crypto space seems to be a mixture of programmers attempting to create new tools and protocols and investors seeing it as a strange blend between art and an alternative to gold, or even a get- rich-quick scheme.
It is advisable to treat crypto like a new asset. Watch it carefully, learn what you can, but don’t be overconfident.

While you may well shake your head in disbelief, the modern art world has long been opaque, confusing and occasionally absurd when it comes to the price tags attached to certain controversial works. In this respect it has a lot in common with the current crypto craze.

The cryptocurrency craze of the last five years is a strange mixture of new technologies which present potential uses, the creation of complex and unique assets, and a flurry of add-ons that range from legitimate options to meme stock or even fraud. At the time of writing there were more than 6 000 different cryptos in existence, excluding the range of related assets known as non-fungible tokens (NFTs).

Non-fungible tokens (NFTs) are the art of the crypto world. They are part of the Ethereum blockchain and can be almost anything digital – drawings, pictures, songs, you name it. As Reuters explains it: “An NFT is a crypto asset which records ownership of a digital item, such as an image, video or text, on blockchain. While anyone can view or download it, only the buyer can claim ownership.”

In some ways NFTs represent an evolution of the collection of fine art, sports memorabilia or the mementos of the rich and famous. Jack Dorsey, the founder of Twitter, for instance, created and sold an autographed tweet, while an NFT representing Scottish tennis player Andy Murray’s 2013 Wimbledon win sold for US$177 000 in July this year via the WENEW platform. There are also 10 000 tiny and unique pixelated images (called CryptoPunks) available for sale on the ethereum blockchain, which can sell for anything up to US$7 million. One of the first NFTs, CryptoPunks, have become increasingly sought- after collectables with the likes of celebrity musician Jay-Z among the holders.

For the average investor, however, NFTs just add to the confusion around what exactly bitcoin, ethereum and the blockchain are making it increasingly difficult to navigate the broader crypto environment.

WHY DO THESE ASSETS HAVE VALUE?

In 2008 Bitcoin: A Peer-to-Peer Electronic Cash System, a white paper was written by an unknown author/s under the pseudonym Satoshi Nakamoto. This paper detailed the underlying mechanics that ultimately led to the creation of the crypto asset class. Bitcoin was first introduced in 2009 at a price of US$0. At the start of 2013, bitcoin was trading at US$13.30 and since then has risen in price to peak at more than US$63 000. 

“Those who bought bitcoin in 2013 are up 150% per year, every year, even after the recent fall. In other words, every R1 000 invested in 2013 is now worth R2.4 million.”

There are several theoretical underpinnings for why these virtual assets should have value. The original argument is that the people and institutions mining bitcoin are providing the processing power for the maintenance of the decentralised network, which allows the blockchain to exist. They encrypt and store the information without the use of a centralised party. This network is potentially enormously powerful as it could disintermediate centralised parties in transactions and reduce the institutional power of governments and banks all over the world.

Others argue that the combination of its capped nature (there can never be more than 21 million bitcoin), its freedom from government control and the ability to easily move money around with limited oversight, makes it a hedge against the loss of value in government-issued currencies (which are all essentially unbacked by anything apart from governments anyway).

Then there are those who are completely unconcerned for the true value or use of Bitcoin, and who just see it as another asset and way to make money.

As such, the entire crypto space seems to be a mixture of
programmers attempting to create new tools and protocols, investors seeing it as a strange blend between art and an alternative to gold, or even a get-rich-quick scheme. Regardless, it is certainly an area that bears watching while still requiring a healthy dose of caution since every new gold rush has winners, losers and scammers.

WHAT ARE MEME COINS?

When people first heard about bitcoin around 2010, the almost universal reaction was incredulity. “This could never work,” was an oft-heard response, alongside:

“Those who bought bitcoin in 2013 are up 150% per year, every year, even after the recent fall. In other words, every R1 000 invested in 2013 is now worth R2.4 million.”

“Why would this have value?” Yet, just eight years later, those who bought bitcoin in 2013 are up 150% per year, every year, even after the recent fall. In other words, every R1 000 invested in 2013 is now worth R2.4 million.

Notably, bitcoin are not the only assets that have made some people multi-millionaires seemingly overnight. There are thousands of success stories out there. Of course, since it was inevitable that people would try to profit from crypto assets in any way that they could, some of the success stories are more worthwhile and legal than others.

One of the best-known examples of this is dogecoin. Created as a joke (to poke fun at bitcoin) in 2013, dogecoin took both its name and logo from a popular meme at the time.

Since then, dogecoin has gained both in popularity and assets, although it lacks a concrete use case like bitcoin or ethereum. Early in 2021, there was a massive spike in prices after the coin benefitted for some tweet-boosting by Tesla and SpaceX founder Elon Musk, who wrote that his son was “holding his doge like a champ”. Not all coins out there are lucky enough to have a billionaire in their corner, however, as there are thousands of coins in existence today with no practical use, and which exist either as a joke or to make money for insiders.

There are also scams ranging from frauds in hedge funds, to founders disappearing with the money. Therefore, it is important to always remember that this space is complicated, sparsely regulated and littered with the unscrupulous. As medieval mapmakers might have put it when attempting to understand the lie of the land: Here be Dragons.

THE FUTURE OF CRYPTO

While for many outside the crypto market, or those looking for an orderly ‘map’ of the universe, everything may seem a bit disorganised. To the untrained eye, there appears to a lack of clear purpose or use case. Yet, if you look long enough, some of the parallels to the internet boom of the mid-1990s to the early 2010s becomes clearer. In those early days of the internet, people were still trying to figure out what it could be used for. Some of those ideas were certainly derided at the time, “why would you sell books on the internet?” being just one which has gone on to be hugely successful.

This is what technology looks like in its infancy. While the potential is certainly there, it’s just not quite clear where the impacts will be most keenly felt.

Given this, it is advisable to treat crypto like a new asset. Watch it carefully, learn what you can, but don’t be overconfident. Just like the history of the web is littered with failures, the burgeoning crypto space will see its fair share of losers. For those who want to be involved, choose a recognised exchange and keep your position sizes reasonable. Unless you are an expert in this space, treat it as you would art or gold – and reduce those holdings proportionately.

Whatever direction things take, rest assured that it will be extremely interesting to watch the evolution of the crypto space over the next decade.

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