NFTS ARE A SCAM
After Trump left office, America found itself on two sides of a gorge. It wasn’t solely Donald’s fault that our nation became so split (we can also thank social media, wealth disparity, a global pandemic, etc.), but four years of his polarizing presidency exacerbated a deep divide between ideological tribes. So much so that once Biden took the wheel many Americans didn’t know where to direct their passions. Trumpers were lost without a leader, but his haters may have been even more disoriented. My neighbor Tim’s entire identity throughout the Trump administration was to grumble about the president’s tweets and mishaps, but after the election he was rocked off-center. It was like watching a boxer roam aimlessly around the ring alone, swinging at GameStop stonks and anti-vaxxers. Just days after Biden’s inauguration, Tim approached me as I was taking out the trash.
“You know what I don’t get about NFTs?” He had been reading my tweets.
“What’s that?” I asked.
“Why would you buy something that you can’t hold? Look, I get art. If I want to buy a painting, I want it in my hands and on my wall. But I can just screen-grab an NFT. People are idiots for paying so much money for them.”
I chuckled and shrugged. I thought Tim was just trying to make small talk, so I turned to walk back up my driveway.
“No, really!” he shouted after me. “It’s such a gimmick. The new Pet Rock!”
Tim wasn’t asking for clarification. He was demanding an answer. The NFT thing was bothering him, and as the months went by and I delved deeper into the space, his ire grew.
“My PlayStation One had better graphics than the Metaverse!”
“Did you see Seth Green got his Bored Ape stolen? What’s he gonna do now?”
“I heard that NFTs can change. I thought the blockchain was forever!”
NFTs were the new Trump and Tim wasn’t the only dissident. His jabs mirrored the comments and DMs in my Instagram feed. Whenever I’d publish anything related to NFTs, hecklers would swarm my account, ridiculing me for promoting crypto and threatening to unfollow me “after all these years.” I wasn’t even mad about it. I was intrigued. NFTs started getting so popular and so noisy so fast that it fanned the flames from critics and trolls. To take the piss out of the tension, we printed The Hundreds T-shirts that read “NFTS ARE A SCAM” and also posted the statement on a digital billboard in the center of Times Square. During NFT.NYC week, we staged a protest in front of our New York pop-up shop. We hired Craigslist actors to march with signs that read “GOD HATES NFTS,” “MAKE FIAT GREAT AGAIN,” and “REPENT OR GET RUGGED.” The video went viral across TikTok and other meme sites. Of course, most of the likes and comments were by people who didn’t get the joke and sympathized with the anti-NFT sentiments. In the spring of 2022, once the market turned bearish, we printed “NFTS ARE DEAD” hoodies and the reactions were priceless. Wearing that sweatshirt through the airport brought so much joy and schadenfreude to travelers.
“Right on! Fuck NFTs!”
“I just wanted to say, man, I love your sweatshirt. They’re such a scam.”
From an anthropological stance, the fact that the topic of NFTs was eliciting such a visceral response was almost more interesting than NFTs themselves. This went beyond tribalism and side-picking. NFTs were making people uncomfortable. Perhaps they made people feel stupid or irrelevant. Maybe cynics felt like they were being left behind while all their friends were making money. It’s also possible that they felt like the only noncrazy ones. Whenever the issue was broached at dinner parties, I could see the disgust wash over people’s faces like they’d eaten a bad oyster. Half the table was amused by the conversation. The other half would leave for the bar.
We’ve survived so much tumult and disorder over the last several years that many of us just want the ground to stop shaking. After all the mandates, the illnesses, the racial strife, and gender debates, the last thing some people want is to hear that we’re going full Ready Player One on their ass. The majority of people don’t understand how the art, stock, or vintage markets work as far as trading and secondhand sales go. Yet here we are trying to force digital versions of those assets down their throats. Of course they’re gonna barf.
Whether or not NFTs are a scam poses a philosophical question that wanders into moral judgments and cultural practices around free enterprise, mercantilism, and materialism. If NFTs are a scam, what about the blue-chip art galleries and auction houses that charge millions of dollars for oils on canvas? What about mass-produced Air Jordans that fetch thousands of dollars on reselling sites—and they’re not even used to play basketball? If crypto is corrupt, what about the U.S. financial system that continues to benefit the rich and disenfranchise the poor? What about the ruthless throes of capitalism itself?
In 1944’s The Great Transformation, the Hungarian American political economist Karl Polanyi contends that some commodities, like land and human labor, are entirely concocted to be bought and sold on the market. What’s worse, it’s morally wrong to put price tags on these things when they should remain public goods and necessities to live. If we leave it up to the market to determine their value, the ramifications for humankind can be devastating. Fred Block summarizes Polanyi’s thoughts: “Polanyi insists that this sleight of hand has fatal consequences. It means that economic theorizing is based on a lie, and this lie places human society at risk.” Money is the third of these “lies” that Polanyi zeroes in on. “Money … is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance.”
I don’t disagree with Polanyi. Many commodities begin as myths, fictions, and lies but then they become normalized and deeply embedded in our social experience. Nowadays, it’s customary to pay for land, hire labor, and exchange money without a second thought of these transactions being based on completely fabricated phenomena. So much changed over time in order for land to be considered ownable and labor to be more than “the human beings themselves of which every society consists.” Polanyi would’ve abhorred the idea of crypto and NFTs, but only time will tell how broadly they’ll be adopted and normalized in the years to come.
So, are NFTs a scam? Or are they just new?
* * *
There are two faces to radical technology, and the hopeful future promised by crypto and Web3 is undergirded by controversy. For one, there are dire environmental concerns around the methods by which cryptocurrency is mined. The United States mines over a third of the Bitcoin in the world, creating over forty billion pounds of carbon dioxide alone. Globally, Bitcoin’s CO2 emissions are the equivalent of energy used by 2.6 to 2.7 billion homes in one year. There are even studies that suggest Bitcoin could push global warming beyond 2°C.
Another cause for concern: Like any technological upheaval and nascent marketplace, Web3 is fertile ground for bad actors and scams. Crypto is assembling at light speed, so the opportunity for rapid wealth is bountiful. That also means there are ample ways to be drained, “rugged,” and scammed. Since the creative conversations and ideation are outpacing the infrastructure (facilitated by town squares like Twitter and Discord), the systems are being built hastily, resulting in flimsy and porous scaffolding, exposing security holes and vulnerabilities. Factor in the snake oil salespeople, the anonymity, the froth and hype, and the lack of education and regulation in the space, and it’s a perfect storm of swindling.
If you’re predisposed to hating NFTs because of the scamming connotations, there are plenty of reasons to support your position. Since July of 2021, more than $100 million worth of NFTs have been stolen, primarily through phishing scams where NFT owners are duped into handing over the keys to their wallets.1 In the spring of 2022, North Korean hackers plundered a half billion dollars from the NFT-based video game Axie Infinity. Even Kim Kardashian was penalized $1.2 million by the SEC for promoting “pump-and-dump” crypto scams on her Instagram. It’s no surprise, then, that NFTs are often called out as gambling, Ponzis, and pyramid schemes propagated by cutthroat day traders, avaricious capitalists, and con artists.
NFTs have blown up so quickly and with such little understanding and footing that they beg suspicion and disbelief. From 2021 to 2022, the number of NFT collections went from fifteen thousand to over eighty thousand.2 By mid-2022, there were hundreds of thousands (if not millions) of NFT collectors, trading volume over $54 billion. To a doubter or critic, that’s a lot of money associated with JPEGs that anyone can just right-click and save to their desktops for free. In fact, when your brain plugs into the Matrix, you realize that NFTs are just a string of letters and numbers (hash token), coded on the blockchain. So, the monetary value of the NFTs has nothing to do with the virtual asset itself. What makes these NFTs worth so much money rides on the same question regarding value as any other art, novelty, or collectible.
Unlike NFTs, many physical goods have obvious, inherent utility and much of their worth is baked into their functionality. There’s little debate that a hammer should be exchanged for money because the purpose and usefulness are apparent and socially agreed upon. A cup of coffee can be overpriced, but we rationalize its cost by how delicious or effective it is in waking us up. However, when the same logic is applied to most JPEGs, their price is impossible to justify since they don’t actually “do” anything.3 Without any immediate or obvious utility, NFTs can be quickly dismissed as scams or “rugs” (short for “rugpull” and slang for fraud, as in “getting the rug pulled out from under you”).
Therefore, the best way to justify value around most current NFTs is by classifying them differently, as art or novelty collectibles. Under this context, price is more plastic, contingent on abstract factors, and has more to do with how the market subjectively perceives it. “Art is in the eye of the beholder.” When you buy art, you pay a price that goes beyond the mere materials employed or labor involved in its composition. And there are a multitude of reasons as to why we exchange money for art. Art provides aesthetic enjoyment and entertainment, like music and movies. Since art can be emotional, there’s a price we put on that meaningfulness. Fine art can be deemed special due to the artist’s significance or the gallery’s cosign. We’re not just paying for a pretty picture, we’re compensating the sought-after artist for their time, technique, and storytelling. Art, like collectibles, can also have high value because of rarity or exclusivity. The marketing and branding that package the art can increase the art’s profile, and therefore the demand and price for it may rise. It can also work the other way around, vis-à-vis Veblen goods, whereby raising the price of the art may make it more esteemed. This is often what we see with luxury goods or streetwear.4
If NFTs are precious art, however, how to make sense of PFP-style NFT collections where there are ten thousand near duplicates of the same image? And if they are fun, novelty collectibles, why are they trading for colossal amounts of money? In the summer of 2021, NFTs accelerated by virtue of crypto’s surge, COVID surplus checks, and a reexamination of traditional systems. Practically overnight, JPEGs were selling for tens—if not hundreds—of thousands of dollars on marketplaces like Bitski and Foundation. The game suddenly went from fun to finance as the professionals (crypto, stocks, blue-chip art) sauntered in and gamified the gambling aspect of NFT mints and reveals. While some NFT collections transcended the fracas and developed into legitimate brands over time, the staggering number of NFTs that quickly turned and burned called the space’s integrity, legality, and morality into question.
Football cards, Squishmallow pillows, and exotic cacti all operate off the same rare distribution and collectability principles as NFTs. They experienced reselling booms during the pandemic as well, fetching prices on par with popular NFTs. Yet they weren’t dragged or canceled by a vocal majority. People selling classic cars and Nintendo cartridges in their original packaging were making out like bandits by selling sheer sentimentality and childhood nostalgia. Meanwhile, NFTs were mocked by Elon Musk and Bill Gates and parodied in an SNL skit. Why?
It wasn’t the confusing concept or the technical hurdles that hamstrung NFTs in the short years leading up to 2023. In my opinion, more than anything, it was about the astronomical price tags that NFTs were fetching on the reselling sites. If the market had priced NFTs to remain affordable, or at least escalate in value organically, both the scammers and the mainstream opinion may have stayed neutral. Even if skeptics didn’t understand how you could own something digital, they would have been more indifferent about the technology if it was a low-risk pastime like collecting gaming skins or in-app purchases. The high prices that NFTs commanded, however, were impossible to leave alone.
The art form’s digital nature also lowered the barrier of entry for both creators and collectors to participate. Fairer access is one of Web3’s virtues, but for some founders, the overnight success—facilitated by digital interfaces and computer-aided design—implied illegitimate and maybe even unscrupulous means. “Get rich quick.” Take, for instance, high-end art. Contemporary paintings and sculptures can go for more than NFTs. Although the general public might not appreciate the art’s value the same as a collector (“My kid can paint that”), the sticker is normalized by generations of customs, practices, and industry.
Or how about retro sneakers? They also command absurd bids on the secondary market, but that phenomenon has been cultivated over the course of decades. There were years for the culture and storytelling to foster organically before a halo floated above the vintage product. Also, for the majority of the time only a handful of corporations and retailers profited from sneakers. In NFTs, thousands of everyday folks have gone from “rugs” to riches. Furthermore, they’ve done it within weeks and months with very little foundation for the art.
The core sticking point against NFTs, however, isn’t about their designation as art or even their environmental implications. I don’t even think it’s because it’s a new, bewildering technology or disruptive mindset around art and ownership. It’s that something about NFTs feels illicit, like contraband. The government is scrambling to regulate them. The institutions are slow to adapt. The celebrities are afraid of endorsing NFTs because of the vehement hate in the comments. And yet, there are massive amounts of money being transacted around them, which is reminiscent of the black-market drug or sex trades.
Compare NFTs with other collectibles, even the expensive ones. Logan Paul bought his 1998 holographic Pikachu “Illustrator” card for over $5 million and it was written off as a stunt. Over the pandemic, my children became obsessed with trading Pokémon cards, with some selling for hundreds of dollars in the name of fun. However, if they were trading Gengar VMAXes for ETH, the hobby would be taken in a different light and would lose its innocence. That’s because crypto continues to carry a stigma as antiestablishment and subversive, even anarchic and insidious.
The primary reason why NFTs are seen as a scam is because they are enmeshed with cryptocurrency. Some critics see crypto as a tool to skirt the system, evade taxes, and wash money. Others consider crypto a speculative bubble, in which the price rises unsustainably and without justifiable reason. At the start of 2022, the YouTuber Dan Olson produced a video called “Line Goes Up—The Problem with NFTs,” in which he rails against NFTs for their bad art and tacky, play-to-earn video games. At ten million views, “Line Goes Up” fast became doctrine for the anti-NFT crowd and was covered by The New York Times, NPR, and The Verge. To this day, commenters on the video thank Olson for effectively killing NFTs, citing the release of his video as the catalyst for the NFT bear market. But “Line Goes Up” wasn’t just about NFTs. Olson’s driving thesis for why NFTs are problematic is that they are a Trojan horse to dupe more people into adopting cryptocurrencies. Crypto is what truly irks Olson. In his opinion, it’s not unlike a multilevel marketing scam whereby 99 percent of participants lose money in a pyramid scheme.
It’s hard to refute Olson’s claims primarily because … in many ways, he’s right. Crypto has shady elements. Many—if not most—NFTs really are a wholesale scam and so many of them are purely speculative, grounded in thoughts and prayers. Participating in the NFT collectibles space over the past couple of years, I’ve witnessed fraudulent collections dominating the conversation with the support of venerable corporations, likable celebrities, and influencers. The money distracts, then it distorts. There’s so much easy crypto to be made that branding principles are ignored, long-term business decisions are forsaken, and moral boundaries are smudged. Many of the project leaders who are lauded for making their communities large returns on their investments did so through ethically cloudy practices. Even if a founder has virtuous intentions, the tech and culture are so transparent that you get to see their capitalist motivations on full, naked display.
The softest corner of Web3, to me, is also the one that has had the most money pumped into it: the Metaverse. In the winter of 2021, collectors were buying virtual land from metaverse companies for prices that rivaled physical real estate. This, even when most of these founders and teams admitted that it would be several years before their worlds would be built and operable. One of the companies quoted us (The Hundreds and Adam Bomb Squad) hundreds of thousands of dollars for a plot of digital pixels the size of a virtual basketball court. We were flabbergasted. When they teased a preview of their metaverse weeks later, it was evident that it would be ages before they accomplished their project, if ever. To this day, that specific metaverse is nowhere close to being built and the price for that rectangle of land is in the gutter.
Mark Zuckerberg is facing similar problems over at Meta. The company formerly known as Facebook has lost over $27 billion in operating costs over three years building their own version of the Metaverse. Yet only 58 percent of the staff understand Zuckerberg’s metaverse strategy, and he has admitted that the process has taken a lot longer than anticipated. In the fall of 2022, a report estimated that Decentraland, one of the most prominent metaverse companies, had 38 active users a day. Sandbox, a competitor, had 522. (Both Decentraland and Sandbox have disputed these numbers.) Meanwhile, both companies tout billion-dollar valuations. Another study reported sales for eighteen metaverse companies were down 98 percent from 2021 to 2022.
Whenever NFT criticism arises, the cheeky rebuttal from the crypto community is “We’re still early.” When NFT influencers are outed for stealing funds: “We’re still early.” When crypto coins collapse, taking hundreds of millions of investors’ dollars with them: “We’re still early.” When blockchains like Solana periodically crash and go offline: “We’re still early.” In the early days of 2021, there were rah-rah rallying cries like WAGMI (We’re All Gonna Make It) and GM (Good Morning) that spirited the fervent enthusiasm behind Web3 mania. While most of the mantras sank to the bottom of the ocean with the market tides, the sweet and sanguine “We’re still early” continues to live on. Because it’s the truth. In the grand scope of modern history, the premise of crypto—Web3, NFTs, and the Metaverse—has barely just materialized. Cryptocurrency was invented in 2008. NFTs were invented just a few years ago. We are still incredibly, profoundly early.
* * *
Long before NFTs and crypto were invented, whistleblowers were sounding the alarm on another scam: the World Wide Web. Whether it was catfishing or catastrophically failed start-ups like Pets.com, the internet’s first days were clunky and rife with duplicity. Most of us thought twice before entering our credit card information, and if we ordered something on eBay, we were mentally prepared to never receive the shipment. If you had an email account in the 2000s, you remember the Nigerian prince scam or the “Nigerian letter.”5 The phishing email was purported to be delivered by a high-ranking government official or person of royalty from Nigeria, notifying you about a transfer of money in exchange for help. It seems absurd nowadays that anyone would fall for such a blatant scam, but at the time, spam emails like these successfully bamboozled billions of dollars from gullible internet noobs.
In Bill Stewart’s early guide to the web, Living Internet (published in 1996), he exhorts a strong disclaimer regarding safe email practices:
Never … respond to an email that asks for personal information like a phone number or address, never send money to anyone who contacts you by email for any reason whatsoever, try to never open or preview any unsolicited email, and do not give your email address or anyone else’s to any website (news, greeting cards) unless absolutely required and worthwhile.
The admonition is strongly reminiscent of modern-day Web3 disclaimers that accompany Ledger cold wallets, OpenSea navigation, and Discord login pages. Meanwhile, the traditional internet has become so overrun with scams and phishing that we have separate email receptacles to collect junk mail. We’re also required to enter a password to unlock our phone, another to access our inbox, which sends a two-factor authentication text back to our phone, so that we can solve a CAPTCHA puzzle, in order to receive an email, which asks to confirm that yes, indeed, we are the ones holding the device. We do this countless times a day on every website and app we use. Yet we still get targeted, manipulated, and even robbed, whether it’s by terrorist hackers or Big Tech selling off our data. NFTs are a scam, sure, but so is the internet, so is the world.
The Nigerian letter actually predates email and started in 1989 or 1990 when British businessmen were tricked into paying cash up front for Nigerian crude. In fact, the inspiration for that rugpull originated hundreds of years before in the eighteenth century. With the Spanish prisoner scam, an impostor pretends to be a wealthy, reputable person imprisoned in a Spanish jail under a false identity. The scammer fools the victim to keep paying money to help him out for a variety of circumstances, until they realize it’s a hoax or they’re out of funds.
The sharpest difference between the Spanish prisoner scam, the Nigerian letter, and contemporary NFT or crypto rugs, however, is the speed of the con. Fraud’s motivation and intended outcome have remained the same for generations—to divorce a victim from as much of their money as possible. The means, however, are accelerated by a new wave of technology. This isn’t unique to crypto and NFTs, however. It happens with every innovation renaissance. Web3 is an expedited version of Web2, which was leaps and bounds ahead of Web1. The purpose of technology is to get faster and be more efficient. When used for good and positive reasons, tech makes for better products and happier lives. Conversely, if used for evil, technology harms people and the world faster than ever before.
In the beginning, email enabled quicker communication and reduced paper waste, but bad actors also used the technology to disseminate viruses and wreak havoc on the greater internet. The tech wasn’t inherently bad, it’s just that there weren’t enough guardrails in place to thwart bad actors. The email companies eventually built stronger protection around their services, but it took time. Today, we don’t even think twice about logging on. We use email confidently without anxiety of password leaks or security breaches (although they still happen).
Copyright © 2023 by Bobby Hundreds
