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Comment by a_shovel | Hacker News Reader

This leads to a pretty interesting comparison between plain cryptocurrencies and NFTs.

Cryptocurrencies are beanie babies: Once available for a trifle, their value has ballooned based on speculation. But that already happened, you missed out on it, and it has no bearing on their future prospects. And if a bunch of people ever feel the need to cash out at once, they'll find out just how much value they really have when there's nobody buying.

NFTs are Collector's Edition items: Their original purchase prices are artificially inflated (normally by distributor's decision, for NFTs by wash trading). An association with some pop-culture property or pretty artwork attracts eyeballs to it. You could buy it, or you could just get the regular edition (which, for online artwork, is free.) And the price they're available for doesn't necessarily have anything to do with what you'll be able to get for it.

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With Beanie Babies, you actually own something. You might not be able to sell it for what you paid, but you still have something to display or give away. With NFT, you own a URL to an image, but you're relying on the NFT marketplace to maintain that. You're not buying the artwork itself, but some token related to the artwork.

I think a better comparison for NFTs is a star registry. You pay a company to name a star after you (or someone else as a gift). That company will provide a star locator chart and publish a book each year with all the star names they registered that year. You don't own the star, but you do own an certificate saying the star is named after you. Unlike an NFT though, you can't transfer the star registration to someone else.

Yeah, the star registry comparison is common, and a good explanation of how NFTs work. I'm more trying to explain how their price works, and what forces drive their increases.

Bitcoins' price increase is driven by scarcity and speculation. NFTs' price increase is driven partly by speculation, but also by the appearance of speculation, a series of wash trades of increasing value that seem to outsiders to be actual people buying the item for increasing prices. The buyer doesn't know that those were all one person trading with themselves, so they expect that, even if they can't sell for a profit, they can still sell for a minor loss. Then, once they buy it, one of two things can happen: 1. They ride off the hype wave from the original seller, and build it up some more themselves, then find a bigger fool to flip the NFT to; or 2. They keep it a while, the hype wave dies down, and if they ever look to sell it they'll find the real level of demand is way below what they were expecting. Either way, the house gets its cut. It's all a gold-brick scam.

To play devil's advocate, this is a thing that could have said various times in the past 12 years as each previous peak look like "the bubble that you missed out on".

Also, financial instruments work differently from physical assets; if you have conviction that the peak has already happened ("the bubble happened, and there won't be another one"), you can take a bet against the price by shorting.

Of course, this leads to very different kinds of market dynamics which aren't directly comparable to the beanie baby bubble. Too much pressure on the short or (with leverage) long side can lead to liquidation cascades which result in very dramatic price movement. On the short side this would look like a short squeeze as a large fund can buy a bunch of the crypto to liquidate shorts, then sell it after the market moves at a profit.

> you can take a bet against the price by shorting.

John Maynard Keynes said, “the markets can remain irrational longer than you can remain solvent.”

I think it's apples/oranges. Beanie babies had your average joe mobbing the stores black friday style. Even grandma was in on it. With NFTs, everyone is talking about them, but few folks have gone so far as to buy one relatively speaking.

> Cryptocurrencies are beanie babies: Once available for a trifle, their value has ballooned based on speculation. But that already happened, you missed out on it, and it has no bearing on their future prospects. And if a bunch of people ever feel the need to cash out at once, they'll find out just how much value they really have when there's nobody buying.

Can you describe the situation where nobody is buying? People may abandon Bitcoin but some sort of crytocurrency will be used by criminals. I am unable to imagine a future where Cryptocurrency does not exist. I am curious what you imagine will happen to crypto that it will be useless for criminals.

Strong regulatory action that shutters most or all "legitimate" fiat offramps.

I suspect the vast majority of players, even in a criminal marketplace, are seeking cryptocurrency with the intent of cashing it our to fiat, or trading with someone who-- after possibly more exchanges-- cashes out to fiat.

Close the offranps, and the supply chains dry up.

The criminal buyers' plan is to buy bitcoin, maybe shuffle it around a bit to hide their tracks, and sell it as soon as they can. They don't want crypto, they want cash, and they need buyers to get that cash. That goes for everyone, in fact. The only way criminals are different is that they don't want higher prices, they want high volume, so they can sell it fast without losing too much.

A unit of cryptocurrency is a nothing. If you never sell it, it's useless and worthless. Everyone buying crypto is planning to sell all of it. They always need more and more buyers to keep driving the demand up, to in turn keep driving the price up. Eventually, there'll be a time when there are too many sellers and not enough buyers. Maybe a major recession hits and people decide it's a good time to cash out/bad time to make risky investments. Maybe regulation starts scaring people away. Maybe mainstream news coverage turns hostile. Regardless of which, people rush to sell, and as the buyers dry up, they start taking whatever price they can get. The price plummets. Sell orders accelerate. Line goes down. Pop. Then, stories of people losing everything circulate widely, cementing its reputation as worthless and scaring off any speculative buyers forever after. Just like Beanie Babies.

Just like Beanie Babies, there'll probably be some buyers and sellers forever. Just not at a high enough volume to make it worth a criminal's time.

> And if a bunch of people ever feel the need to cash out at once, they'll find out just how much value they really have when there's nobody buying.

This is a nice natural mechanism for the bubble to burst itself. Housing is not like this at all. Everyone can in fact get cash all out at once at the hyper-inflated prices (no real buyers needed!) by just doing a "cash out refinance" to the bank.

I explored this idea last year in a blog post

https://www.riknieu.com/nfts-are-the-new-beanie-babies/

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