A Greater Sage Theory

Just a few wondering thoughts on the latest techno-investing development--non-fungible tokens or NFTs.

What gives a collectible object value? Are NFTs like Beanie Babies or Picasso paintings? 

Think of this as a spectrum between pure speculation and pure intrinsic value. An object never lies entirely on one end or the other of this dimension. Where it resides is also not necessarily stable.

Fine art is "fine" in that it has a low degree of speculation relative to perceived intrinsic value. 

Gold is the ultimate financial consensual hallucination – – we can easily, reliably believe that it will have value across societies and well into the future. It is much more difficult to believe that Beanie Babies will have that quality. Picasso paintings are somewhere in between.

Scarcity is an important quality for determining marginal value, but it doesn't say much of anything about intrinsic value. This is the crux of the diamond-water paradox. I think there are two important subtypes of scarcity as it relates to collectibles: organic and manufactured.

Organic scarcity is producing 10,000 Babe Ruth cards and only 1,000 survive decades into the future. Manufactured scarcity is knowing that 10,000 Derek Jeter cards are desired but only producing 1,000 of them. 

Organic scarcity might be thought of as "authentic", but that too is in the eye of the beholder. The 1,000 Babe Ruth cards aren't any rarer in the example above given those parameters.

NFTs are a manufactured scarcity. However that is not very important except to the extent that someone values genuine authentic scarcity--the organic kind--as opposed to fabricated scarcity. Yet I can easily see an appreciation for the manufactured scarcity nature of NFTs. So don't be too quick to dismiss the limited denominator as a factor for these collectibles.

To the extent you can believe that people will continue to value the interestingness of NFTs along with the thing (art work, sports moment, etc.) that a particular NFT is associated with, you can credibly and reliably believe that that specific NFT will have value. 

At this point they are obviously deep on the speculation side of the speculation vs intrinsic value spectrum. Time will tell.