Creating NFT Value out of Thin Air

What's worth more, a one-off Tiffany & Co gold pendant studded with diamonds and gemstones. Or the computer-generated pixel-art image of a face on which it is based? Old-fashioned common sense would suggest the former. But in today's upside-down world, it's not so simple. The pixel-art face wins, and by a long way. I'm talking about NFTs (non fungible tokens), in particular about CryptoPunks, and NFTiffs, their real-world counterparts.

CryptoPunks could loosely be described as online artworks. I say loosely because they're randomly generated by an algorithm with no human intervention. Each CryptoPunk is the image of a face depicted on a 24 by 24 pixel grid.
Canadian software developers Matt Hall and John Watkinson wrote a few lines of code back in 2017 that led to the creation of 10,000 of these faces.

They were originally offered online for free. Anyone who wanted could claim one.  CryptoPunks were among the earliest NFT (non-fungible token) artworks. NFTs are a unique unit of data (in this case each of the 10,000 CryptoPunks) that cannot be replicated. Each unit of data is stored on a blockchain, where it can be sold and traded. Anyone who claimed a CryptoPunk at the time saw their value surge as they rapidly achieved a cult status.
Each CryptoPunks comes with its own number and label - such as CryptoPunk 4947 (female) Thin mohawk, classic shades; CryptoPunk 4328 (male) Beard shadow, fedora; CryptoPunk 4432 (female) Horned-rim glasses, blonde bob. Different attributes make them more or less popular with buyers.
Anyone who's anyone in the CryptoPunk world will know about CrytoPunk 5822, an alien wearing a bandana. Back in in June 2017 someone took a fancy to 5822 and posted a bid of 0.05 ETH, the cryptocurrency equivalent of $14. The following month it sold for $1,646. Four years later it sold again, this time for $23.7m.  You read that right. Deepak Thapliya, CEO of blockchain company Chain, paid a world record price to assert his ownership of the alien with a bandana, 5822.

So how do Tiffany & Co fit into the story? They'll be producing "real" versions for the first 250 current owners who want their virtual CryptoPunks as gold pendants, set with diamonds, Sapphires, Amethyst, Spinel and enamel to replicate the pixel art designs. They're priced at $50,000, which adds up to $12.5m revenue for Tiffany.
Bear in mind that the cheapest and least desirable of all the 10,000 CryptoPunks is currently available for $126,891.55, two-and-a-half times the price of its real-world equivalent. Mr Thapliya's CryptoPunk is worth 474 NFTiffs (although they're now sold out, just days after being launched). The total value of all CrytoPunk sales stands today at $1.71bn.

I've grappled long and hard with what I'd be acquiring if I handed over $126,891.55 for an entry-level CryptoPunk. The right to assert ownership? The right to have my name on the blockchain? The right to sell it on at a profit? As an investment opportunity it's not hard to see the attraction.  But I'm troubled by the fact that value is being created out of thin air. We go to great lengths to retrieve rough diamonds buried deep in the earth, fashion them into things of beauty and value, and maintain highly sophisticated marketing operations. Maybe we'd be better off writing a few lines of computer code, putting our feet up and watching lots of Netflix.

Have a fabulous weekend.