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This mania might have one last leg up, but that's it. The main thing to remember with markets that have ponzi characteristics is that there are tons of latecom
by gizmo 5y ago
This mania might have one last leg up, but that's it.
The main thing to remember with markets that have ponzi characteristics is that there are tons of latecomers and few early adopters. While the early adopters might HODL in the face of a 70% downturn, the late adopters won't. They FOMOd in because they couldn't stand seeing their friends make easy money any longer. They don't have conviction because the only reason they're in is because they didn't want to miss out.
This doesn't just apply to NFTs but to everything from crypto to meme stocks (AMC, GME, BBBY, EXPR), to SPACS and to ESG stocks, to shipping and commodities, and to leveraged or speculative ETFs.
When this bubble pops many assets will be priced way below their actual value. This overreaction won't make any sense on the way down just like it hasn't made any sense on the way up.
For this it doesn't even matter if NFTs provide real value and are here to stay. It doesn't matter whether a market behaves like a ponzi because it's fraud or because it just got too much social media coverage. The only thing that matters is whether a large enough percentage of the market consists of latecomers who will panic sell. If so, any bad news and POP!
- phist_mcgee 5y agoJust a little correction. NFTs, and crypto in general are critiqued as ponzis, but they are more accurately described as pyramid schemes, whereby early adopters rake in the lion's share of profits. Ponzis are where later investor money is used to pay out early investor money in a fraudulent never ending cycle.
- gizmo 5y agoI think pyramid scheme would be a better description if people had different incentives depending on when they got in. With a pyramid scheme people who invite many others personally benefit, and those who join but don't invite others don't gain anything. Think multi-level marketing.
- phist_mcgee 5y agoI mean NFTs fit that bill perfectly. Incentives for the late comers are to buy continually more dubious tokens that are produced by the initial round of creators. Those buyers then create a new market of lower tier creators who create even more valueless creations, and so the cycle continues. Crypto without NFTs have no creators and instead relies on the network effect of public interest to raise the value of their initial purchase. In this way, it's more akin to inventing a product and selling it on to another person and promising them that it will be worth more if they do the same.
- maaaaattttt 5y agoHonest question: I fail to see to difference between this (the pyramid scheme part) and let's say buying stock in early Apple or Google?
- gizmo 5y agoIf you consider the market a casino there is no difference. Buy low sell high. But if you approach the market like an investor you try to estimate the intrinsic value of the assets and liabilities of a company, their cash flows, their growth prospects, and their management. Then you find those companies where the market price doesn't match what you think the business is worth and you go long/short those businesses where you think the mismatch is the greatest.
- notahacker 5y agoIf (when) new people stop buying into a pyramid scheme, all they have are worthless tokens nobody else wants. If new people stop buying into AAPL or GOOG, all shareholders have is a share of a massive pile of cash and a business which generates billions in profit every quarter. For related reasons, people are likely to continue buying into AAPL or GOOG, AAPL and GOOG can buy back their own shares or find other investors easily if a major investor wants out, and even if for some strange reason nobody at all wants AAPL or GOOGL, shareholders would still expect to get back what they paid in dividends in the long run by holding. Of course, the businesses can still underperform expectations or fail, but there's a difference between an investment that underperforms because the company isn't good enough at making money and an "investment" that will eventually fail because there isn't actually anyone making money out of anyone other than "investors"
- jtolmar 5y agoThe value of stock comes from a several things: - A voting share lets you participate in company decisions (not that anyone votes for much other than the board recommendations / increasing profits) - The company may pay dividends - The company may participate in stock buybacks - If the company is sold, the profits are distributed among shareholders - The value of all of the above grows if a company grows, so stock in a growing company is worth more - The same "get in early before other people get in and raise the price" mechanism as a pyramid scheme And then all of those factors are awkwardly summed together into a single number.
- bart_spoon 5y agoDoes that not describe crypto? Bitcoin is only making millionaires if more and more late investors are buying in and driving up the price for earlier investors.
- rsynnott 5y agoA true Ponzi scheme requires intent and organisation (at least at some point; some things normally categorized as Ponzi schemes start off with the intent of being legitimate hedge funds or similar). Crypto things, particularly bitcoin, tend to behave rather like a self-organizing Ponzi scheme, but pedantically, they're not one, quite.
- bart_spoon 5y agoThere's a joke in there about crypto and decentralization.