Bubble?

Christie's auction house recently sold a piece of digital art by an artist known as ‘Beeple’ for $69 million.  $69 million—let that sink into your head brain for a minute!  As the name implies, digital art are not physical pieces like an oil on canvas painting or a sculpture, but rather a collection of code that forms a unique digital image viewable on a pc, phone, or tablet. 

Digital art falls into a larger category of ‘crypto collectibles’ that includes the better known NBA Top Shots.  Top Shots can be thought of as digital trading cards that are brief video clips of NBA players in action.  While not as pricey as Beeple’s piece, Top Shots can fetch some pretty hefty sums as evidenced by a recent LeBron James slam dunk moment that sold for $208,000.

Okay, the Unrepentant Capitalist is probably guilty of being ‘get off my lawn' old guy, but this feels like a bubble in the making.  Bubbles don't end well.

Maybe the most famous bubble in history was the Dutch Tulip Bubble in the 1630’s.  Plenty of good books have been written on this bit of history (Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds being one of the more famous accounts), but the quick version is as follows.

During the 17^th century, the Dutch established an international trading network that made them the global economic superpower of the day.  Flush with cash, the Dutch went crazy for tulip bulbs and were swept up in a buying/selling frenzy that, at one point, saw a single bulb sell for the equivalent price of a nice home in Amsterdam.  As with all bubbles, someone finally questioned things and said, “one bulb has equal value to a split-level 4/3/2 with a WBFP and a great view of the canal? I don’t think so”, and the panic was on.  

The Unrepentant Capitalist subscribes to the Warren Buffet school of thought that favors investing in income producing assets.  As the name implies, income producing assets are things that generate income like stocks (dividends) or real estate (rental income).  Buffet is known to not be a fan of gold citing the fact that gold doesn’t generate income.  Investing in gold (or tulip bulbs or collectibles) is making a speculative bet that the asset will appreciate in value, i.e., someone will be willing to pay more for that asset later.  Some people call this the ‘greater fool’ theory.  Stocks and real estate prices also appreciate, but their value includes that very important income producing component.

Are crypto-collectibles in a bubble?  Hard to say, but $69M will buy several nice houses in Amsterdam.