Why do people say NFTs are bad? Let’s dive in.

NFTs seem to be everywhere at the moment. People are buying digital art NFTs, music recording NFTs, and more. There’s even talk of video games starting to use NFTs for in-game products. However, along with all this, you’ll find lots of people screaming about how NFTs are bad.

If that’s true, then why are some people buying them? Why are enormously popular companies, celebrities, and organizations selling them? If you’re lost when it comes to all this, you’re in the right place.

In general, you shouldn’t spend money on something if you don’t understand what you’re buying. So before you buy an NFT, let me explain what you’re paying for. Once you understand what’s happening, you’ll quickly realize why lots of NFTs out there could be worthless or even a total scam — but the whole idea of them could be a good one at some point in the future.

Primer: What are NFTs?

In order to understand NFTs, you need to understand blockchains and cryptocurrencies. I’m not going to lie: These are difficult concepts to grasp. I can’t go over every nuance in this one section, but I’ll give the briefest of summaries and link to our more in-depth coverage if you want to dive deeper.

First, what is the blockchain? A blockchain is a series of chunks of data with each piece referencing the prior piece — like a chain (get it?). Because each “link” incorporates information from the previous one, it is difficult (but not impossible) to maliciously manipulate the chain. This is, fundamentally, how cryptocurrencies and NFTs stay relatively secure. To read more on this, check out our full guide on what is a blockchain.

Now, what about cryptocurrencies? Cryptocurrencies are a form of decentralized currency wholly reliant on a blockchain to back it. Each link in the chain is a transaction. Remember that each transaction links to the previous one, so it would be difficult to cheat the chain. This makes crypto relatively secure even without a centralized organization — such as the US Treasury — monitoring things.

See also: What you need to know about investing in cryptocurrency

However, the blockchain itself doesn’t give crypto any value. Without value, a cryptocurrency is just a series of transactions linking together into a secure string. In order for a cryptocurrency to have value, we (as in our collective society) need to give it one. We’ll touch on this later. In the meantime, you can read more about cryptocurrency and understand all its terms or dive into this Bitcoin explainer.

Finally, what are NFTs? Non-fungible tokens are unique tokens on a crypto blockchain. Since they are unique, they appear like an ideal way to designate ownership. The trend at the moment is to connect NFTs to digital works of art under the assumption that owning these digital works will prove more and more valuable as our offline lives become more intertwined with our online lives. You know the metaverse? You’re going to need art to hang on your metawall inside your metahouse, right?

Today, an NFT is not that work of art. Think of an NFT as a sort of certificate of authenticity or a signed contract: a unique identifier that you can connect to something else. A crude example would be the receipt you get when you buy something. The receipt is similar to an NFT in that it is proof you purchased a specific thing at a specific price on a specific date.

Once again, though, there is no inherent value to that NFT just like there’s no inherent value to a paper receipt. What you bought might have a value (that, once again, we as a collective determine) but the NFT/receipt itself is just proof of ownership of something. This is also important, and we’ll talk more about it soon. If you still want to know more, though, check out our NFT guide.

Beanie Babies, PS5s, and how ‘value’ works

In order to understand the primary reason why people think NFTs are bad, you need to understand how economic value works. To illustrate that, we’re going to talk about Beanie Babies and PlayStation 5 consoles.

The Beanie Baby craze of the 1990s was a peculiar phenomenon. Seemingly out of nowhere, a series of limited edition plush children’s toys skyrocketed in value due to collectors having a fervent desire for them. In a matter of months, Beanie Babies were all the rage. At its peak, roughly 10% of all transactions on eBay were related to Beanie Babies. In a popular news article at the time, a couple in divorce proceedings spread out their Beanie Baby collection on the courtroom floor to divvy out their heap of “wealth” fairly.

However, the Beanie Baby craze ended as quickly as it started. Now, it’s easy enough to find closets full of them collecting dust. Where once they were worth hundreds or even thousands, they now are worth pennies. Why?

What happened here is our society’s perceived value of Beanie Babies shot up and then dropped. At one point, a large enough group of people agreed that a specific Beanie Baby was worth thousands of dollars, so that’s what it became. Then, a large enough group of people decided they didn’t have value anymore and poof, they were worth nothing.

People who don’t care about Beanie Babies will be confused by all this. To most of us, a Beanie Baby doesn’t have a specific use besides its existence as a plush toy, so it ever having immense value won’t make sense. However, let’s put it into a context tech enthusiasts can better relate to: PlayStation 5 consoles.

From the moment it’s created, a PS5 has a distinct value to a gamer. The creator of the PS5 (Sony) pays a certain amount of money to design, produce, and ship the product. This earns it the right to determine the retail price of this product, which is currently $399 for the disc-less version.

Continued reading: Everything you need to know about PlayStation 5 pricing

However, as any video game console shopper will know, finding a PS5 for $399 today is a fool’s errand. Because of high demand and limited supply, a PS5 is worth way more than its $399 list price. This creates a secondary market, in which people procure PS5s at the retail price and then resell it at the market value, which is currently more than twice as much as $399.

Just like with Beanie Babies, a large enough group of people has determined the true current value of a PS5 is much higher than the list value. If that weren’t the case, a PS5 would be easy to get and cost just $399.

But, 10 years from now, the PS5 you spend $1,000 on today won’t have as much value. The PlayStation 6 will probably have come along by then, and a PS5 will be worth a fraction of what you spent. The whole process is just like what happened with Beanie Babies, but it’s happening at a slower and more predictable rate.

The important thing to note here is that this is all relatively arbitrary. There isn’t one person sitting in a room somewhere determining what has value, when its value begins or ends, and how much it’s worth. Value is determined by the collective, and it’s not so easy to predict how that value will shift for things that have no historical context — such as Beanie Babies.

NFTs could save your Beanie Baby

Today, NFTs are mostly connected to digital items, with digital art being the most popular. Ownership of a piece of digital art has a value decided and agreed upon by the collective. This value could go up or down, but people investing in NFTs hope it’ll go up so their return-on-investment will be sound.

To help hammer out how useful NFTs are for this, let’s imagine it’s 1997 and you want to invest in a “valuable” Beanie Baby, such as the one named Cubbie. You find someone on eBay who owns a valuable Cubbie and buy it for $1,000. Now, you own Cubbie. You can easily prove that you own Cubbie because he’s in your hands. You lost $1,000 but you have a physical product to show for it. Now you can attempt to resell him with the intention of turning a profit.

However, what happens if someone steals Cubbie and says he’s theirs now? How would you prove he’s yours? You wouldn’t have marked Cubbie in any way because that would have hurt his value, so you can’t point to some sort of ownership marking on the thing itself. You might have a paper receipt or contract from when you originally bought him from the seller, but that wouldn’t confirm you bought that specific Cubbie or that you haven’t sold it since. Even a photo of you holding Cubbie would only prove you once held a similar-looking thing, not the specific one in dispute.

Proponents of NFTs think they can solve this insecurity problem. If you’ll remember, NFTs are digital tokens on a crypto blockchain. Because every link is unique and part of a decentralized system, it is easy for anyone to check the authenticity of that link. If you created an NFT that links to your specific Cubbie, it would act almost like a certificate of authenticity. You could then use the NFT to prove that the specific Cubbie in the thief’s hands is yours.

In the best of scenarios, this is the core of what an NFT is supposed to be: a secure digital ownership certificate that proves a specific thing belongs to a specific person or organization.

This all sounds well and good — in a moral and ethical vacuum. Unfortunately, people are terrible and it’s very easy to take advantage of this system.

NFTs are bad: Hypothetical situations

Let’s go back to right before you bought Cubbie. Let’s pretend you skip eBay and meet up with the seller directly. When you arrive for the trade, you realize they don’t have Cubbie with them. Instead, they have a piece of paper that they say is proof of ownership of Cubbie. They want to sell you this piece of paper for $1,000. It will prove you own Cubbie, but Cubbie will stay safe in a locked vault somewhere far away.

This might seem preposterous to you. Why would you buy something if you don’t actually get that thing?

However, remember that your whole intention of buying Cubbie is to resell him and earn a profit. It’s an investment, not a purchase. If you buy this piece of paper from this guy for $1,000 and can convince another person to buy that same piece of paper from you for $1,100, you would make your intended profit. If that’s your end goal, isn’t this a good deal? You get what you want, the seller gets what they want, and you don’t need to risk someone stealing the actual product or the product becoming damaged in some way.

Stay with me here as we take things several steps further. What if when you meet with the seller you find 99 other buyers there? The seller tells all 100 buyers that Cubbie is in a vault but you can all own him. The seller produces 100 sheets of paper, each numbered and verified. Cubbie will still stay in the vault, but each of the 100 buyers can then turn around and sell their pieces of paper in an attempt to earn their own profits.

For the final step, let’s imagine what you’ve most likely already guessed: The seller doesn’t really own Cubbie. Perhaps someone else owns Cubbie and the seller is simply fabricating the pieces of paper. Perhaps Cubbie is intangible — a digitally saved file of Cubbie’s schematics, for example. Or maybe Cubbie never even existed in the first place.

The hypothetical Cubbie situation is, at best, an unethical way to artificially create value for the purposes of earning profit. At worst, it’s a pyramid scheme. In this imaginary scenario, the seller using simple pieces of paper would be an obvious sign that something is wrong and most people likely wouldn’t fall for it. However, if you swap out the piece of paper for a non-fungible token — something a lot of people don’t fully understand — it makes the whole concept seem fresh. It’s the same trick but with a new polish.

Remember what really happened with Beanie Babies? People thought they were worth a ton and then, suddenly, they were worth nothing. With at least some NFTs, the last person holding it will be just like the last person holding a Beanie Baby: they’ll have spent a ton of money on something that now has no value.

“But what about the blockchain? Doesn’t its uniqueness make it different than a simple sheet of paper? Isn’t an NFT much more secure?” Well, yes but that doesn’t matter. A unique block on a blockchain is certainly more secure than a piece of paper since it can’t be easily copied or destroyed. The fact that anyone in any part of the world can verify the authenticity of a block is also more secure than a piece of paper.

However, the piece of paper and the NFT are no different when it comes to value. They both simply point to a thing that we have agreed currently has value, such as a work of art, a Beanie Baby, or a PlayStation 5. The piece of paper and the NFT are both worthless on their own because they are not what you’re actually buying. This becomes extremely problematic when the thing connected to the NFT has a volatile value.

“But doesn’t the security of the blockchain make it easy to stop these problems?” No, it doesn’t, because decentralization is at the very heart of crypto blockchains. In other words, there’s no organization backing the chain — it’s just the chain itself. If you get conned on the blockchain, there’s not much you can do about it because there’s no regulatory body to call. It’s like a Wild West with little oversight and accountability, which makes it ripe for malicious activity.

Imagine the stock market having no regulation at all

While reading this, you may have recognized that NFTs aren’t too dissimilar from stocks. If you buy stock in Google, for example, you’re buying an intangible portion of the company — not unlike when our hypothetical Beanie Baby seller sold 100 “shares” of Cubbie.

The big difference between stocks and NFTs, though, is regulation. In the United States, you can’t just start selling shares of your company willy nilly. You can’t even buy shares of a company without some paperwork and identity verification. There are also multiple regulatory bodies that oversee the trading of stocks to ensure things are legal (with varying degrees of success).

Even with all that oversight, we still have pump-and-dump schemes. We still have insider trading, stock market crashes, and government bailouts of companies “too big to fail.” We still have the US housing market bubble bursting in 2007 causing a global crisis. Even with tons of regulation, it’s still only a step above high-stakes roulette.

Buying and selling NFTs, though, requires no hoops. Pretty much anyone could mint an NFT and sell it within minutes of its creation. Likewise, anyone could buy that NFT and resell it for a profit — or lose their shirt.

Somehow, a major portion of NFT proponents thinks a completely unregulated blockchain will be better than the stock market. They think the unethical people who toy with stocks in order to make lots of money as quickly as possible by any means necessary won’t do the same thing with NFTs (and crypto, too). Unfortunately, the NFT market hasn’t panned out in the way proponents hoped.

See more: The best stock market apps on Android

No hypotheticals: Real-world examples of NFTs being bad

Now that you understand what NFTs are and why they can be bad when manipulated by nefarious people, let’s move away from the Beanie Baby analogy. Here are real-world examples of the kind of thing we’ve just discussed:

• In November 2021, an artist created NFTs connected to “MetaDeckz.” These digital art cards featured likenesses of popular Twitch streamers, which gave them an air of value. However, the streamers had no involvement with the art or the NFTs, which the artist neglected to mention. At least one of the streamers threatened legal action.
• In January, scammers using an exploit on OpenSea (a large NFT market) purchased NFTs at a deeply discounted rate. They immediately turned around and sold the NFTs for exponentially higher prices than they paid. The creator of the NFTs wasn’t happy.
• In February, NFT marketplace Cent halted most transactions on the platform. The company’s founder admitted the shutdown was because people were selling NFTs connected to content they did not actually own. Cent called this “a fundamental problem.”
• A popular scam right now is the process of “wash trading.” Essentially, the owner of an NFT posts it for sale and then buys it back themselves using a different crypto wallet. This can happen any number of times, with the NFT appearing to increase in “value” each time. Eventually, a real buyer enters the picture to grab the NFT as it seems to be a good investment. It is speculated that Melania Trump may have performed a wash trade.
• A group called Cityverse launched a series of elite NFTs earlier this year. The premise was that only a very select group of buyers would be able to get in on the ground floor to buy these hot new items. Buyers who got on the VIP list scooped up the NFTs at high prices as soon as they landed. However, it turned out the promises of exclusivity were lies and anyone could buy the NFTs. Within a matter of hours, the NFTs dropped in value significantly, while Cityverse cashed out for a tidy profit.

These are just recent examples. You can go back months and find dozens more.

Even when they’re not scams, NFTs are bad

This article might make NFTs seem scary. That’s because they are, and we strongly advise deeply investigating any NFT you’re thinking about buying. Before pulling the trigger, you should feel secure in knowing everything is on the level.

Let’s assume you do find this unicorn: a legal, ethical, and solid investment in an NFT. Well, unfortunately, in most of those situations, NFTs are still bad.

I’m not going to go over why proof-of-work crypto mining is such an energy hog (you can find out more in the linked guide). Just know that Ethereum — a proof-of-stake cryptocurrency that is by far the most popular platform for NFTs — currently uses disgusting amounts of energy for each transaction. The collective even acknowledges that its energy consumption is “too high and unsustainable.”

Unfortunately, this problem is only going to get worse as time goes on until NFT platforms successfully transition to regulated proof-of-stake systems. We’ve seen this be successful with the NBA Top Shot platform, for example. But this is an anomaly at the moment, and most NFTs out there are still based on environmentally-destructive systems with close-to-zero regulation.

So even if you’re not getting scammed, you’re likely still doing damage with most NFTs.

NFTs are bad now, but they could be good

The two biggest problems with most NFTs as they are today are a lack of regulation and an unacceptably negative impact on the environment. These two factors make the buying and selling of NFTs problematic even when the transactions aren’t scams.

However, would NFTs stop being bad if we solved these two problems? Would a well-regulated NFT system that operates with no effect on the environment be good? Yes, it absolutely would.

Right now, NFTs are capable of holding small amounts of data, such as serial numbers. This would be a terrific way to prove you own something in the real world. It would work well for physical things of immense value, such as unique works of art, automobiles, land, homes, or yes, even a Beanie Baby named Cubbie. With an NFT, you would have rock-solid evidence of ownership, which would certainly be a big step up over the flimsy and unreliable systems we have today.

In the future, though, NFTs could hold larger chunks of data, such as pages of text, a photo, or even music and video. This would allow you to literally buy a piece of music and easily prove you own it. Imagine an artist being able to write a song, mint it, and then sell it on their own. 100% of the profit from their art goes straight to them. That would be way better than what we have now with the problematic low-royalty rates dished out by Spotify.

NFTs could be the future of ownership. However, that’s the future. Right now, the value of NFTs is incredibly volatile. They are terrible for the environment and the marketplace is rife with con-artists ready to milk as much money out of the trend as possible before the unregulated days are over. If an NFT is on your radar, you’d be wise to keep all this in mind before completing a transaction.