Dr. John Hawkins on NFTs as an investment opportunity
We recently invited Dr. John Hawkins, Senior Lecturer at the Univesity of Canberra, to participate in our feature What’s next for the explosively controversial and popular NFT? Here we share his full and in-depth thoughts on a broad range of issues when it comes to NFTs, the economics behind them, what’s driving their demand, and what might come next as the initial rush starts to fade.
By Dr. John Hawkins
There’s a definite whiff of ‘speculative bubble’ around NFTs and cryptocurrencies at the moment. But as with earlier bubbles (going back to Dutch tulip bulbs, South Sea bubble, railway stocks in the mid-1800s and more recently the dot.com boom of 1999 and mortgage-backed securities before the GFC), it is almost impossible to predict when the bubble will burst.
My guess would be that NFTs are new enough that they could run for another year, but I would expect the price of many to be much lower in ten years. It will partly depend on how aggressively central banks hike interest rates. The US Fed is likely to make some significant increases this year, but the RBA may only start moving in late 2022 or 2023. Higher interest rates will make borrowing for speculation less attractive, and a move away from near-zero returns on bonds and bank deposits will make traditional savings instruments more attractive.
NFTs (and most crypto) are close to a pure bubble in that many/most/all buyers are only or primarily buying because they expect the price to go up. There is no yield or other return like dividends on shares, rent on houses or interest on bonds. For most of them (stablecoins and some NFTs an exception) there is no fundamental value to underpin or set a floor on the price (as corporate assets do for shares or industrial and jewellery uses do for gold). So they are very vulnerable to changes in sentiment. Once some investors get nervous and sell, the price falls, in turn causing other investors to sell and lower the price further etc in a vicious circle. With shares when the price drops to a certain level there will be buyers who think the underlying assets of the company now make it a good buy but with speculative tokens, there is nothing to stop the price from going to zero. And this could happen very quickly if panic really sets in. I would also expect quite a bit of contagion between high-profile NFTs and crypto and some related tech stocks.
Some NFTs do have a component giving them some underlying value. But often it seems quite small relative to the prices. So the chance of getting a used tennis ball that may have been hit by Rafa Nadal (as was offered as part of an Australian Open NFT run earlier this year) is worth something, but I would think not that much. The ability to enter a chat room with other people who have bought ‘bored ape’ tokens may have some value to some people, but I do not see how it could be worth anything like $200,000.
The Damien Hirst ‘currency‘ NFT (disclosure: I was an unsuccessful bidder for one of these) is different as it entitles the buyer to exchange it for a unique, attractive physical artwork by a famous artist.
While I’m a sceptic on crypto and many NFTs, I think the blockchain technology has scope to be used for monitoring ownership of assets in some circumstances. Whether you call this an NFT is a matter of terminology.
I’m not an investment advisor, but I think a sound principle would be not to use money you can’t afford to lose in buying NFTs.