2022-05-26

Of Snake Oil And Wash Trades

Today's Crypto World is a Wild West.

Its outlook of riches attracts many.

Some find their fortune here

and others find less favorable fate.

It's a playground for the ill-intended.

Insider trading is bad optics in any investment space…

…and it's happening in multiple organizations

and the law is struggling to keep up.

It's a vast new world with much land to claim.

You will stumble across many opportunities.

The question is which to trust.

Those who embark on a Crypto-Journey

should know about the lurking dangers here.

Cautionary tales illustrate the Dangers of the Wild Crypto-West with its most controversial contender standing out...

I'd like to talk about Image NFTs.

They became synonymous with NFT at large.

NFTs regularly trade in intense trajectories, both up and down

However, NFTs can manage anything. Right now, images simply are the biggest NFT market.

NFTs are more than Images and I find it worthwhile to appreciate the concept of an NFT in general before tearing into Image NFTs in particular:

NFTs (Non-Fungible Tokens) are objects on the blockchain that can prove ownership of something, and this proof requires no trust in any central authority (like a broker or a bank).

NFT ownership can be transferred and traded on the blockchain, allowing for exchanges without a middle man.

The something that's managed in most current NFTs is pictures. Typically, the image itself is hosted on an external service and the NFT is 'minted' as a link to the image on the blockchain.

That market, however, has shrunken significantly since its peak.

This comes as no surprise to many. You can build a strong case against image NFTs as investment assets:

Image ownership is a legally solved problem.

Any image you create - digital or not - is automatically protected by copyright. If someone were to steal an image you own and print it on shirts, you have had a legal avenue to be made whole for centuries.

Your image NFT can't do more than a plain image.

Practically speaking, your proof-of-ownership on the blockchain does not (yet) 'do' anything for you. Even when you own the NFT as proof of ownership, you'd still hit 'upload' to send your local copy of the underlying picture.

This can change with future products; a virtual für example museum might access users' NFTs to automatically generate personal exhibitions. How much value such products will add remains to be seen.

On the other hand, (non-NFT) images are a freely available online. These pictures from Unsplash can be used for anything for free.

Websites like Unsplash and Freepik offer quality assets for commercial projects for free and premium sites like Shutterstock make in-house designers almost obsolete. Ironically, their speculative nature in comparison makes Image NFTs near useless as design assets when in competition with reliable pricing or free picture access. From this utilitarian perspective, these NFTs' scarcity is purely artificial.

And yet, new NFTs go to the moon day in and out. You can make a simple case for the sky-high high prices:

Art is subjective.

What makes NFT less worthy than canvas or cave-wall?

Of course, there is more to this. NFT markets can be manipulated like any other.

like others, gaming outlet kotaku does not mince words in their article: this story invites Schadenfreude

It is plausible to assume manipulation behind some of these prices and we know several strategies to make this happen. In the spirit of Occam's razor (If someone can get rich by cheating, they will), I would like to give you a crash course on how to illegally inflate the value of your NFTs...

Let me share a tried-and-tested market manipulation strategy that works very well for NFTs.

This is the Anatomy of a Wash Trade

You will need conspirators and a target NFT you already own.

If you don't have enough friends, you can use automation as well.

Together, you'll target NFT auctions.

When the auction starts, you might get a legit offer. But that's lowballing. You wanna make Money here.

Your friends bid high and drive up the price. It doesn't matter if no one else joins the frenzy.

Rinse and repeat to bump up the price tag.

The auction house makes commission, your cost of doing business.

To the public it looks like an impressive price tag but you know the trick:

The assets move a lot, but it all stays in your cartel.

Public interest in the NFT increases with price. Now it's a matter of time...

...until an outsider bites.

Unlike your wash trades, this one gets you fresh money

and moves out the NFT. Not that you ever cared much about that.

The buyer will be as happy as any art buyer.

The big price tag serves its psychological purpose.

But what if the owner wants to cash out?

Come auction time, the now lack of cartel demand affects the bids.

The former owner sits on the loss. By now, you are long out of the picture.

If this makes you weary of investing in image NFTs, I think that's wise. They make a dangerous asset class.

The fact that:

Image NFTs do not hold tangible, intrinsical value (over traditional image ownership) and are very cheap to create and

Image NFT prices can be inflated with little to no expert skills.

has to bring an investor to the conclusion that Image NFTs as assets are speculation at best and rip-off at worst.

I think this is not an NFT problem.

We can find bad investments throughout history.

This is a speculation problem. Image NFTs just make an easy target for human tendency.

When it's not about chasing moon-high returns, Image NFTs are collectibles like baseball cards.

There's nothing wrong with engaging your inner collector.

And knowing the tricks of the outlaws keeps you and your wallet one step ahead.

If you choose to seek your fortune out there, I wish you the best of luck in the Wild Crypto-West.

If you'd like a refresher on the basics, I have written about the Blockchain before.