UKC

Is there a genuine market in these with traders making money buying and selling or is it just the originators selling to their fan boys who are then stuck with them? I understand there are some iconic images that have changed hands several times but I’m thinking more of the bored apes or the sort of images being pushed by footballers and football clubs that seem to exist only to create NFTs from. 

Yes there is clearly a market. It may even be a bubble.

https://www.bloomberg.com/news/articles/2022-01-06/nft-market-surpassed-40-...

Thanks for the link, it’s still not clear though if that was people sending money to celebs “such as singer Shawn Mendes, socialite Paris Hilton” or if, now they’ve bought them, there’s a ready market of people trading them. I guess the question is, should I buy an NFT off a celeb or is there a lot of buyers remorse out there?

There is currently a market for NFT in general but whether it is going to survive or not in the long or even midterm is currently unknowable.

For a lot of the celeb stuff then I think a lot would fall into the no market category. Lots of people are releasing the NFTs but not getting any interest/attraction from the public.

There are quite a lot of traders selling to themselves to inflate the price before selling on, there's a recent report on this 'wash' trading here:

https://blog.chainalysis.com/reports/2022-crypto-crime-report-preview-nft-w...

Yes, the Melinda Trump NFTs were accused of this this morning 

I think that one of the problems / benefits is that it is a new asst class. We saw that with bitcoin. People who got in early when it was double or triple digits per coin, were happy when it hit ~$60k. Other who bought at $60k were less exuberant when it fell to ~$40k.

The question remains, what can you do with it? My collection of Picasso's hang on my bog wall. When I die, they can be sold and someone else can hang them on the wall (or more likely keep them in a vault) and take pleasure from them. This experience can go on for hundreds of years.

With a NFT, which is essentially a jpeg, what are you going to do? Set it as desktop wall paper or print it out. One of the advantages of digital media is lossless reproduction. You can't dig up Picasso and ask him to paint another copy for you, but you can make a million copies of a jpg in a few seconds.  

Many artists lived in poverty, as people thought their art was crap. Only after their death, did prices rise to silly amounts. If you could buy a Van Gogh for the price of a meal, it would be considered a wise investment. I see NFT technology becoming commonplace, as a way to track ownership of media. Press photos first and eventually your holiday photos, will have cryptographic identifiers, possibly as stenography.

I've said it before, if you want to become an art thief right click and save as...

https://opensea.io/collection/nft-art

(Some are NSFW. Some are crap and not even worth the price of a burger... )

It's not all bad. The systems can ensure a fairer ongoing income for artists and can even fund art in a way that the major organisations won't risk. As for laundering... anything that's not properly regulated will attract crime. It also cuts trading costs.

https://101blockchains.com/advantages-of-nfts/

It's not just the caricature of digital 'paintings' as an example it's a massive disruptor  in  the music industry.

https://www.mi.edu/in-the-know/introductory-guide-nfts-music-industry/

They can apply to games, films and even physical art.

I was aware there was a market for 'merch'. Just like a had painted concert t-shirt by <famous muso> might be worth a few bob years later after they become famous.

I wasnt aware of this. It also open up another new potential asset class. Imagine selling shares in a new song. You get a micropayment of the revenue every time the song is played. Its all recorded on a blockchain. You can trade them as you might stocks. No more conversations like: ' I saw them in a back room of a pub, years ago, with only a handful of other people.' Support your artists directly. The band gets money early and if their song makes it to number 1, then you all benefit from it.

This incredibly long video will tell you all about it. It's very well researched and argued, but I didn't quite manage to follow it all.

youtube.com/watch?v=YQ_xWvX1n9g&

The best explanation for NFTs I've seen is that it is the same as paying to have a newly identified beetle or a distant galaxy named after you. No intrinsic value, just status. Not sure how accurate this is: there must be more to it, but I can't work out what.

http://web3isgoinggreat.com/

Cheers me up every day.

The main difference is you can sell it to someone else and hopefully make some cash.

First of all, that's a brilliant site!

Thing is most of the crazy shit they highlight really comes down to a failure to regulate. Even in regulated markets you can (and some do) run a cynical blog site showing the bad shit that happens.

...before the music stops, everyone else sits down, and you're left with a picture of a farting unicorn that has no use to the world.

It's really impossible to write an ending to the story that doesn't wind up with "... like a ponzi scheme". Try it. There isn't one. The game is not to be in the game when the cashing out starts.

I find this an obvious and accurate assessment. It's a scam from every angle, but some people are stupid, rich or desperate enough to buy into the inherently worthless, infinitely replicable, digital trinket market.

I'd quite like to see Dragon's Den episode with an NFT related pitch.

Aside from you dont even have that. You have a reference to it but I could have downloaded the picture for free and if whoever provided it in the first place cant be arsed to finance the website now they have made the money and you hadnt downloaded it you are shit out of luck.

I think there are some variants which at least try to give some usefulness to it eg possession of the nft does give you access to some additional media.

As always, South Park explains it best youtube.com/watch?v=6z98Rr8zCsA&

What you say would apply equally to regulated banks in 2008 which were in the MBS market. The history of investment is littered with such incidents.

Think Tulip Mania but with the added bullshit of crypto bros thrown in.

Avoid at all costs.

Cant remember who it was who said it first but it was along the lines of "I like cryptocurrency investing. Its a live reenactment of the last couple thousand years of finance in just a couple of years".

Not quite; clue is in the name with MBS. There's always some residual value in the underlying asset (ultimately a house), albeit volatile. Ownership rights of a doodle of a monkey in a hat that's very similar to but not quite the same as lots of other doodles of monkeys in hats, not so much. "There are many like it, but this one is mine." Sure.

This is more like the dotcom bubble, where people are investing in vacuous shit and some vanishingly small percentage of it will fill the niche that all of it was intended to fill. That said, on balance of probabilities the cryptocurrency that ultimately gains traction and becomes the future of finance doesn't exist yet, and if that is the case the ones that do exist now will be the betamax of money.

The credit default swaps that caused the crash in 2008 were repackaging MBS debt: often round and round in a loop, and at that point had virtually zero value. Goldman amongst other banks involved were still recommending them as a sales product to customers whilst hedging against them to cover their own prior foolish position. Only one banker was jailed. That's worse than crypto currency and NFTs in my book and was supposedly covered by regulation.

The question that I'd always ask for any blockchain-based proposal is why this couldn't just be done via some sort of centralized system run by some trusted third party? Or at least, given that the distributed and decentralized nature of blockchain is what makes it so planet-destroyingly energy intensive, whether the advantage of not needing to set up some sort of halfway trustworthy organization to run some databases is worth the massive energy cost of the blockchain. Because if you don't need to run it in a decentralized way, most of this stuff seems like it would have been possible to set up years ago.

Some?

And a lot are stolen artwork. 

I think your acronym soup may be slightly jumbled - I think you mean to say that collateralised debt obligations (CDO) were or can be repackaged MBSs. Credit default swaps (CDS) are either insurance or gambling (depends whether you are at risk on the underlying) on the credit-worthiness of an asset, not really a repackaging instrument

- You can take out a CDS on an MBS or CDO - that's what the various characters in The Big Short did, and the selling of these CDSs was as far as I recall one of the main reasons AIG got into trouble.

- You can package the cash flows of a CDS into a CDO (a "synthetic CDO", since it contains nothing of the actual pieces of the original asset within it). As far as I recall, this is something you might want to do as the seller of a CDS, because the cash flows of the seller mimic the cash flows on the underlying asset.

- A CDS in itself doesn't repackage anything, but it transfers the exposure to an asset from place to place. But because it is a derivative you aren't limited by the actual quantity of the asset available to buy and sell.

Thats easy to answer. How else could you get people to pay so much for simply being able to claim they own an artwork or tweet but not actually have any legal rights to it?

Its also hard for these decentralised system to avoid some centralisation eg OpenSea for NFT who then can chose to delete things at their whim as Moxie Marlinspike demonstrated or rather got them to demonstrate for him.

You have a point on slack semantics, my apologies, but the CDS system was toxic in itself and although the players pictured in The Big Short used them to expose the CDOs issues, the CDS use of the banks while recommending sale of CDOs to it's customers was part of the key criminality of the banks.

https://en.wikipedia.org/wiki/Credit_default_swap

The UK banking contribution to CDOs was special as we allowed more times around the 'bundling loop' of CDOs than the US did. Plus bundling made some of them worthless.

"In some cases, the assets held by one CDO consisted entirely of equity layer tranches issued by other CDOs. This explains why some CDOs became entirely worthless, as the equity layer tranches were paid last in the sequence and there was not sufficient cash flow from the underlying subprime mortgages (many of which defaulted) to trickle down to the equity layers."

https://en.wikipedia.org/wiki/Collateralized_debt_obligation

By "use" do you mean "buying", or "selling"?

- if they're selling CDS, then they're effectively taking on exposure to the asset in question, and so sensible risk management might suggest you want to offload the asset itself to limit that exposure. In and of itself, limiting your exposure to the asset doesn't necessarily indicate that you think it's going to tank - a sensibly run firm probably ought to have limits on how much risk it is prepared to take on any given position

- if you mean buying, then buying CDS and offloading the asset is doubling down on a view it's going down. Which if you're offloading to an equally informed third party is one thing, but if you're selling it to a client who is relying on your investment advice then as you say, morally/ethically/criminally dubious!

Anyone buying the equity tranche of a securitized loan should really know what they're getting into - the equity tranche is there to take the first wave of losses which is why you get a higher return for buying it. That's hardly a secret. 

Anyone buying a CDO probably ought to check what the underlying asset pool is. If people bought CDOs without understanding what the underlying assets were, then that seems to me to be poor due diligence.

Maybe this is semantics, but I don't think the process of bundling is in itself always a bad thing. When it works right, you get greater predictability from 10,000 mortgages than you do 1. It's the same underlying principle as insurance, but that means deep down it relies on one of the same underlying assumptions as insurance, which is a degree of independence between the individual assets (or at least understanding what the correlation between them is and under what circumstances).

One way of describing the problems of the whole MBS mess in 2008 is that people thought mortgages from around the US wouldn't behave in a highly correlated way and wouldn't all default at once. Once you make that assumption, you can look at even a load of pretty rubbish mortgages and see a moderately predictable income stream in it, because you can assume a predictable level of defaults. You can even take the riskiest layer of those mortgage cash flows, jam those together with dozens of others, and extract a degree of predictability from it (your CDO of equity tranches). But what you're doing is constructing a whole infrastructure that at its root relies on the idea that there won't ever be a US-wide housing crash, or anything similar which causes those mortgages all to start behaving in a highly correlated way.

People thought securitization could turn muck into gold, but that's because they saw a level of independence between the assets that just didn't turn out to be the case.

I agree with the rest but I think the quotes above in terms of 2008 are a massive misrepresentation. There were AAA rated assets which were absolute  junk. They were only spotted by absolute financial geeks (albeit the potential risks were identified more widely); ordinary investers didn't stand a chance, especially for some whom their bank recommended them knowing they were junk whilst hedging against them. Everything failed... regulation, the ratings agencies, the banks, the state mortgage organisations; only one banker went to jail.

A securitisation is generally structured in tranches. Each tranche is effectively a bond issue, and is rated separately. The most senior tranche has first call on the income on the underlying assets, and that’s the one you might decide to make AAA. Broadly speaking, you can control the rating by how secure you make each tranche, which you do by controlling the size of it versus the risk of the underlying assets. So a pile of junk won’t be able to justify a very large AAA tranche because you can only get that degree of certainty over a very small portion of the income stream. You then get a variety of lower tranches of different sizes and ratings, and then at the bottom you get the equity tranche, which may be equity or (I think) could alternatively be some form of subordinated debt with more flexibility over repayments (so equity-esque). You don’t get AAA equity tranches. Whilst I have slightly more sympathy on the second point (see below) I absolutely stand by the idea that if you are “just” buying the equity tranche of an MBS or other securitisation you will know you’re taking on a fairly high risk asset, this is just securitisation lesson 101. Why would anyone design the equity tranche to be low risk, that’s a waste of security that could be instead used to generate a bigger slice of a more secure tranche further down the pile.

Yes, AAA assets turned out to be a pile of junk. There was a wide misunderstanding of the risk of the assets by banks, institutional investors, rating agencies and regulators, amongst many others. That is a fairly obvious truism, but seems to be something you think I’m arguing the opposite of - I’m not. There’s a difference between not understanding how the riskiness of the output of the packaging process, and not looking at the riskiness of the assets being input into it.
 

As a more peripheral observation, I’m not sure there were any “ordinary investors” involved in this process. Everyone involved will have been a professional investor or been being advised by one. Everyone thought they knew what they were doing. 

None of the people who shorted the market had any unique access to information. Partly they looked at the information in more detail than anyone else, and partly they believed that things could happen that others didn’t. The idea that the MBSs would fail if defaults went high enough is hardly a surprise - again to some extents it’s securitisation 101, if the underlying loses enough value the tranches will start to fail in ascending order - part of the problem was a failure to imagine that the rates required could happen, since it was widely assumed that a nationwide crash couldn’t happen.
 

Edit: this is all going wildly off topic, so I will attempt to avoid further sidetracks. The original point LSRH made is that even the most convoluted CDO has some sort of convoluted link back to an underlying asset - somewhere at the bottom of it are some people paying mortgages. If you understand enough of the structure, you can try to build a model of what income those mortgages produce, how it feeds through the convoluted securitisation pathway, and understand what it means for the value of the asset you hold based on the legal structure. That doesn’t preclude the answer to that process being zero at a particular point in time. But there’s a mechanism by which you can attempt to objectively figure this out. It is this which is missing with NFTs - the only way of assigning it a value is via a buy/sell value. 

Wasn't it just as much the asset backed commercial paper that brought down the house of cards anyway? Which is (in my possibly simplistic understanding) slightly more analogous to NFTs than MBS are?

Whilst there was obviously massive failings in the banking system in 2008 it was due in part at least to a)regulations being rolled back because who wants red tape and b)people pushing those rules as much as possible.

Even as heavily rolled back as it was no one suggested lets say sod regulations altogether which is closer to the cryptocurrency ideal proposed by many in that area.

The idea of smart contracts is also nuts. I am not quite sure why "writing a bit of code" somehow becomes smart and it shows a touching belief in developers ability to write bug free code (speaking as a dev not a chance unless its not much more complicated than "hello world").

In the financial world smart contracts have been done in terms of contracts with the added bonus that we have courts which can go and pull up all the "requirement documents" etc and figure out whether something was a bug or not.

Why do you say that? (I’m not saying I’m disagreeing with you, I just don’t quite follow your train of thought)

Line Goes Up: youtube.com/watch?v=YQ_xWvX1n9g&

Long and a little annoying but poignant and accurate. NFTs are a "bigger fool" scam -- as is crypto currency in general.

Released today from the author & journalist Tim Maughan. And like all his work a compelling if disturbing read.

https://www.noemamag.com/line-go-up/

I mean, the thing about cryptocurrencies is that if you're a fundamentalist anarcho-capitalist and dead set against governments having any ability to levy taxes, freeze assets, trace transactions or apply monetary policy to influence the economy then they're an extremely useful idea and almost worth the massive environmental cost. Otherwise, as far as I can tell, they're essentially just tulip bulbs.

Or rather, tulip bulbs with massive environmental costs which have the potential to remove any ability for states to do useful things like levy taxes, freeze assets, trace transactions or apply monetary policy to influence the economy.

Just in the sense that it's abstracted jazz hands woo woo vehicle invented to allow access for more naive investment in something that was, by design and for good reason, hard to invest in

I wrote a reply to your first response but you edited it before I could post!

Are they not just the short term version of a covered bond of some sort? I.e. you get a promise of some level of return, with security provided by some combination of an assigned pool of backing assets and a varying strength of sponsor guarantee to make up the shortfall. Everything goes fine, you get what you’ve been promised. Then if the SPV/conduit/whatever you call it defaults you get to take the collateral assets.

they’re not exactly my area of expertise, mind you, so I am happy to accept I may be misinterpreting something in the structure! And yes, I can see the jazz hands thing to some degree.

But it still feels like it’s something you can try to build a model to value. 

Yes, sorry, refined my understanding in the last few mins. Seems to me they're a way of bundling the things offwidth is taking about into something that a pension fund can, but shouldn't, buy.

As far as I'm aware a pension fund can buy whatever it wants.

In most circumstances I don't think the purchaser of the paper takes on any exposure to the assets, unless things go badly. Depends a bit on the strength of the sponsor guarantee. Regardless, I think the target audience for these is short term money market style funds, isn't it?

As far as I've understood it its more complicated than just lending to the bank directly, but the offsetting benefits are the bank gets to play capital arbitrage and the purchaser (in theory, if the collateral is any good) gets a bit more security (and probably gets paid a bit less interest) because if the bank goes tits up they have a defined pool of collateral assets rather than having to scrap it out with the rest of the insolvency creditors.

I still you are understating the scale and seriousness of the problems in the 2008 crash and overstating how easily ordinary investers could have avoided risk.

This is from the causes section of the crisis on Wikipedia.:

https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008

I'd agree with all of that, as for investment in an unregulated market the risk is very much in your face... you risk losing everything. People should expect way better in regulated markets and that new areas will be regulated quickly. I'd certainly rather that NFTs and cryptocurrency access were regulated. I don't have any crystal ball but things will happen to change investment products and it's possible cryptocurrency (that doesn't require the energy damage of mining) and something at least equivalent to NFTs will still be there (but under regulation) in a decade. Problems can be resolved by system improvements. Back now, its depressing how slow regulators and financial policing are in dealing with obvious criminal action in these areas.

I am doing no such thing. If you think that, then to be blunt you don't understand the point I'm making. Given that, it would make for a far less antagonistic discussion if you asked me to expand or clarify rather than doing as you're currently doing.

I'm not honestly sure what bit of the text you've quoted you think I disagree with, nor what bit of it wouldn't broadly fit into what I have already said:

Where is any emphasis in what you said on the complete failures of ethics at all levels, and significant failures in governance, transparency and accountability or that some assets were toxic by definition... all as the commission pointed out. If mistakes were only around risk it would have been a much smaller problem, spotted much earlier. When people effectively normalise what happened in 2008 trying to look at risk in a more isolated way, albeit in good faith (as you have), I object to that as being a selective position. The bigger picture issues were the bigger problems that led to the huge loses, and although improvements in regulation have happened the system improvements are not enough to stop some other problem causing a future crash. Governments paid for their mistakes with our money, nearly all the banks limped away with bail-outs and only the one banker was prosecuted.

I really think it's best if you stop presuming you understand the points I'm making, because you couldn't demonstrate more clearly than this that you don't! 

In reply to lilyy909:

Hahaha, that didn't take long.

I bet it's life changing.

I can only go on what you say and you seem to be focussing on detail and ignoring the obvious larger scale evidence that the entire regulated system is faulty due to lack of action from the world's main economies:  routes for  obvious criminality are left open and are much larger than in the unregulated market, be it in tax havens, London launderettes or the reminders today from the old favourite Switzerland.

https://www.theguardian.com/news/2022/feb/20/credit-suisse-secrets-leak-unm...

<Sigh>

As I've observed several times now, you're going on what you think I'm saying, and setting that up as a straw man to argue against. It's a bit tiresome.

As I've observed several times now, I've commented on things you said that I disagree with, giving reasons: there is no straw man. You should maybe focus on what I said instead of getting personal. I agree with most of what you say here.

I think the modern western financial system deliberately supports kleptocratic aspects give the history of failure to regulate and prosecute when facing known system failures, especially wrt tax havens, major investment banks and monopolies. It's no wonder some honest investors seek unregulated products (which should already be regulated if the financial system was working properly), alongside the criminals, given such circumstances.

It's that yawning difference between "things I've said" and "things you think I've said" that's the thing I object to. I don't like my words being twisted into something they aren't.

You obviously claim not to be arguing against a straw man, but I guess as the person who is making the points I'm the one to provide an informed perspective on it. There's two options:

1. You're responding to a misunderstanding of the points I'm making; or

2. You understand the points I'm making but for some reason are making points in response that are not really related to them and happen to look a lot like you haven't really understood them.

Either way, I see a resolution to this as fairly remote, and I've wasted far more of my time on this than I originally envisaged when I entered the discussion to make a few factual corrections, so I shall bow out now. 

Flounce away if you must. I was very sloppy with terminology and your initial correction was spot on. Yet I stand by my points in the link below: that those first two points you made are completely unfair given the terrible multiple failures listed by the commission*:

https://www.ukclimbing.com/forums/off_belay/nfts-744384?v=1#x9596594

*"Ordinary investers" being to me the mainly professional investors who ordinarily invest in such products, since your later post indicated you thought I meant something else.

Your reply to mine claimed  "Yes, AAA assets turned out to be a pile of junk. There was a wide misunderstanding of the risk of the assets by banks, institutional investors, rating agencies and regulators, amongst many others."

Which is doubling down on the same issue... you can't judge risk in a complete system failure that completely ignores and hides it. 

Never underestimate human greed and stupidity