Why NFTs Aren't the Next Asset Bubble

From Beanie Babies to Tulips, CryptoPunks to Bored Apes

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Why NFTs Aren't the Next Asset Bubble

In a Las Vegas courtroom in 1999, a divorcing couple undertook an important task: dividing up their Beanie Baby collection. The Beanie Babies were worth thousands of dollars at the time and a judge was forced to preside over divvying up the valuable assets.

This scene—tiny stuffed animals strewn across a courtroom floor—embodies peak Beanie Baby mania, which hit in the late 90s.

But let’s rewind for a moment. Beanie Babies were created in 1993 by a man named Ty Warner (yes, this is why every Beanie Baby has a tag that says “Ty”). Warner was the company’s sole shareholder and, within three years, he was the richest man in the American toy industry. In 1998, Beanie Baby sales were $1.4 billion, almost all from the $2.50 wholesale price. That year, 64% of Americans owned at least one Beanie Baby.

Ty Warner was savvy, and he began to boost demand for Beanie Babies by forcing scarcity. Every once in a while, he would abruptly “retire” certain Beanie Babies—say, Patti the Platypus or Humphrey the Camel—by halting all manufacturing. Warner was so obsessed with scarcity that the company once filled a 370,000-square-foot warehouse with $100 million worth of Beanie Babies that were “retired” early.

With supply fixed, Beanie Babies already in circulation began to soar in value. A robust secondary market formed, coinciding with the rise of eBay. In the late 90s, Beanie Babies made up 10% of all eBay transaction volume. The most coveted Beanie Baby, Princess the Bear, was listed on eBay for $500,000.

McDonald’s partnered with Beanie Babies to include the toys in Happy Meals, and demand was overwhelming. From the book The Great Beanie Baby Bubble:

Some customers ordered a hundred Happy Meals and asked the cashier to keep the food. So many calls came in that one store in Ohio had employees answer the phone with, “Good morning, McDonald’s. We have the moose and the lamb.”

In 2000, the bubble burst and prices plummeted. Many people lost their shirts. One former TV actor, Chris Robinson, had invested $100,000 in Beanie Babies, hoping an appreciation in their value would for pay for his kids’ college educations. In 2000, he lost every penny and he still has 20,000 Beanie Babies in his home.

Beanie Babies weren’t the first asset bubble (though they are arguably the cutest). The most famous example might be tulip mania in 1630s Holland 🌷 . That bubble was a product of heightened demand (tulips were new to the Netherlands and had become a sought-after symbol of the elite) combined with constrained supply (it takes seven years to grow a tulip from a seed, and a virus wiped out much of the existing crop). At the peak of the tulip bubble, a single tulip sold for this staggering amount: “Two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of beer, two tons of butter, one thousand pounds of cheese, a complete bed, a suit of clothes, and a silver drinking cup.”

While we’re no longer trading rye and oxen for tulips, we’re now trading ETH for JPEGs. Over the years, people have compared first Bitcoin and now NFTs to historical asset bubbles like tulips and Beanie Babies. But this time is different. That isn’t to say that there aren’t elements of irrational exuberance today; we’re likely at some local maximum. This hype cycle may be partly because we’re moving from an era of uncertainty and despair, with COVID, into a brighter future. Both the Beanie Baby bubble and the internet bubble took place around the turn of the millennium at a similar moment of excitement. The economist Robert Shiller writes: “Speculative market expansions have often been associated with popular perceptions that the future is brighter or less uncertain than it was in the past.” A shifting global attitude could be a contributing factor to today’s exuberance, as could low interest rates, soaring stock markets, the speed of innovation in crypto, and many other factors.

But most fundamentally, we’ve seen a permanent mentality shift to thinking like an investor, paired with the ability to frictionlessly trade nearly anything. I wrote about this in Everyone Is An Investor, and it’s what John Luttig calls “the financialization of culture.” We see this is in WallStreetBets, in GameStop mania, in “Doge to the moon.”

Let’s start with a non-crypto example. Over the last year, the collectibles market has undergone massive growth. Michael Jordan sports cards are selling for $800,000. A Funko Pop of Darth Maul sold for thousands. Pokémon cards routinely sell for exorbitant amounts.

Part of the boom in collectibles can be attributed to nostalgia. Pandemic nostalgia is a thing: nostalgia helps us cope during crises. A popular recent trend on TikTok is to post mash-ups of the 2000s and 2010s—videos of the mannequin challenge and the Harlem Shake, of Livestrong bracelets and the Spice Girls. (I’m particularly irked by the 13-year-olds commenting “omgggg I miss this sooo much.” You were two 🙄.) Collectibles have always been partly fueled by nostalgia, and that tailwind is supercharged right now.

But more important than nostalgia are the emergent platforms that facilitate new forms of commerce. New marketplaces provide liquidity. Whatnot, a livestream commerce marketplace, has emerged as the go-to place to buy and sell collectibles online—and its focus on collectibles has actually propelled it past horizontal livestream marketplaces like Popshop, Talkshop, and ShopShops.

In the past, buying and selling collectibles was full of friction. Now, there are vibrant, liquid marketplaces like Whatnot that make it easy to own these goods. More people can be an investor by making a smart bet on something they think will go up in value.

While collectibles are booming in the analog world, they were also the predominant early use case for NFTs. The winter NFT boom came largely on the back of NBA Top Shot, which bills itself as “Officially Licensed Digital Collectibles”. Top Shot has done over $700 million of transaction volume in its lifetime.

But what’s unique about NFTs—and where they differ from tulips and Beanie Babies—is that NFTs are a type of cryptographic token. NFTs use blockchain technology to denote digital ownership—of anything. NFTs aren’t a fad themselves; they may power a fad, but they aren’t the fad. They’re more akin to the technology behind Beanie Babies (the manufacturing facility, the conveyor belt, even plastic) than to the stuffed animals themselves.

The past month has seen a surge of NFT volume, built on the backs of popular projects like Meebits, CryptoPunks, and Bored Ape Yacht Club. The most popular projects regularly make up 10%+ of NFT transaction volume in a given week. And many are transient: they may be huge this week and gone the next. But there’s almost always a new project.

In other words, Meebits may be a fad, but NFTs are not. Bored Apes might be Beanie Babies, but NFTs are not. Projects will come and go—prices will soar and plummet—but the enabling technology (which is groundbreaking) will continue to power new projects that emerge in their place.

NFTs are interesting in that they have built-in provable scarcity that ensures value. In the analog world, scarcity is something either circumstantial (the virus that wiped out tulip production) or mandated (Beanie Babies being “retired”). With NFTs, it’s in the code. CryptoPunks are valuable, for instance, because there will only ever be 10,000.

I don’t expect CryptoPunks to go the way of Beanie Babies; I expect they’ll hold their value long into the future given their place in history as pioneers of NFTs. (Though the comparisons to the Mona Lisa may be a bit much.) Other digital goods in this hype cycle might not be so lucky. I have a hard time believing a JPEG of a rock will retain its value.

(By the way, the owner actually paid $1.3 million.)

What’s key about the NFTs that retain value over time is that they will serve a purpose. And many do serve a purpose—many have more utility than Beanie Babies or tulips ever did. “Purpose” and “utility” can be broadly defined. CryptoPunks, Meebits, and Bored Apes, for instance, can serve as your Twitter avatar and confer upon you status. Packy McCormick wrote a wonderful piece about the convoluted status games that people are playing with NFTs—a refresher of Eugene Wei’s iconic Status-as-a-Service. (A constant truth: technologies change, but humans rarely do.) Your Facebook profile pic in 2009 could’ve been straight 🔥 , but it only gave you status—good luck selling it for a profit down the line. NFTs marry economic and social capital.

And “purpose” and “utility” can get more tactical too. When Bored Apes launched, the project clearly outlined the benefits of ownership, such as members-only merch. Over time, the team behind Bored Apes periodically injects fresh innovation: for instance, in late August every ape holder received a free “serum” to create a Mutant Ape. The new drop raised $96 million in an hour. These actions incentivize ongoing ownership.

More NFTs will unlock certain perks or privileges, making them not a fad but a long-term asset that both delivers and accrues value. The holy grail will be shifting the $150 billion virtual goods market—largely comprised of microtransactions in Robux (Roblox), V-Bucks (Fortnite), and Minecoins (Minecraft)—onto blockchain so that digital assets you buy in-game become interoperable. People are already willing to spend enormous amounts on digital items—what will happen when those items exist outside of centralized worlds?


Final Thoughts

Everyone now wants to be an investor. We saw this with meme stocks and with crypto, and we see it with everything being financialized—everyday events with Kalshi, cultural items with Otis, decisions with NewNew.

NFTs are still (mainly) limited to crypto enthusiasts and early adopters. They aren’t truly mainstream yet. But that’s starting to change, and important developments like fractional ownership through companies like Fractional will make investing in and owning digital assets more accessible to more people. There’s clearly demand: after selling off part of its ownership, the original Doge meme is valued at $225 million.

What’s unique about NFTs is that you can make an economic decision (invest / own an asset) while also purchasing status, belonging to a community, accessing a perk. It’s easy to look at the massive growth in the NFT market and shout “bubble”. And transaction volume will almost certainly go down (probably soon), before surging again down the road. But when you step back, you realize there’s a broader trend at play—people thinking like owners, both within and beyond crypto—and that many tokenized goods have real purpose that will ensure their value in the long run.


Sources & Additional Reading

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