Recently, I have a chat with a friend and we shared some thoughts on NFT with each other. I am getting very busy at work, so I will keep this post short.
The essence of Ponzi Scheme is that earlier investors’ profits are paid by funds from more recent investors. Usually, the investment offers an unrealistically high return, for example, 10% per week. It is quite obvious that the investment is not sustainable. But people are still attracted by such investment because most of the investors will get paid unless you are the last one.
NFT is a unique token representing an underlying object. It can be a drawing, a tweet, or a music file. The funny fact is that owning the token does not mean you own the underlying object. Twitter CEO Jack Dorsey first-ever published tweet sold for 2.9 million as an NFT. But the owner of that NFT cannot delete the tweet from Twitter. He basically has no control over the underlying object. Why are those NFTs still worth a lot of money? Maybe some people are rich and they do it for fun. But most of the people who ain’t that rich (after all, most of us are not rich), participate in the NFT market because they expect the price of a computer-generated graphic will go up very quickly. People get excited after seeing their friend’s “investment” double overnight, and the media is reporting this crazily.
I think Crytocurriencies are similar. They are not a media of exchange at all. The exceptionally high return and volatility represent the boom and burst of this Ponzi Scheme. The high return is contributed by crazy investors who think Bitcoin will double tomorrow. If there are enough people believing this, it will happen indeed. But after releasing some bad news or the price is too high to be true, there are fewer people entering the market and the price drops.
But I am not saying blockchain is no value.
In the stock market, it also happens. The boom and bust cycle happens over and over again. When the return of your investment is mainly coming from the more recent investors willing to pay you a higher price instead of the fundamental capability of the business or macro-environment improves, it is indeed quite dangerous for you to enter the market since you never know you are not the last one.
Price can go ups and downs but the accumulation of “Wealth” is not an overnight process. In a country, “Wealth” means the quality of their people, the advancement in technology, and the power of the military. In a company, “Wealth” means the quality of their employees and their core capabilities. Those things cannot be changed overnight, and those are the fundamental drivers for growth. As an investor, we should not be attracted by Ponzi Scheme since you never know you are not the last one who leaves the party. We should instead focus on fundamentals and invest in “Wealthy” companies.