The Breakdown - NFTs, Markets and What Happens Next

Episode Date: February 13, 2022

This episode is sponsored by Nexo, Arculus, FTX US and MELD.com. On this edition of “Long Reads Sunday," NLW reads three threads: Justin Kan on why NFTs are a better business model for games  RAC on what NFT skeptics should know  Chris Burniske on the 2022 crypto outlook  - Nexo is a powerful, all-in-one crypto platform where you can securely store your crypto. Invest, borrow, exchange and earn up to 18% APR on Bitcoin and 20+ other top coins. Insured for $375M. Audited in real-time by Armanino. Rated excellent on Trustpilot. Get started today at nexo.io. - Arculus™ is the next-gen cold storage wallet for your crypto. The sleek, metal Arculus Key™ Card authenticates with the Arculus Wallet™ App, providing a simpler, safer, and more secure solution to store, send, receive, buy, and swap your crypto. Buy now at getarculus.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - MELD is building the first-ever decentralized, non-custodial crypto to fiat lending and borrowing solution that will allow its users to lend and borrow both crypto and fiat currencies seamlessly. Users can stake MELD directly on the MELDapp, which will allow for governance voting for new protocol improvements, insuring the protocol, and earning up to 15% APY in MELD rewards. Start using MELD today at app.meld.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Vision” by OBOY. Image credit: Paul Yeung/Bloomberg via Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, February 13th. Happy Super Bowl Sunday. I hope you guys are watching the game. We will discuss what you see tomorrow. But for now, we are doing Long Reads Sunday. Before that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, join the Breakers Discord. You can find the link to that in the show notes, or you can go to bit.

com slash breakdown pod. A disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Finally, a last note before we dive into today's show, This week, I have been incredibly happy to have a special sponsor in Meld. If you've ever wondered how the rich are able to spend their money and still stay rich, well, it's because they borrow against their assets. Meld is creating a protocol that can be used by anyone, and which offers this exact service, but in a decentralized way. Users of Meld's protocol will be able to borrow dollars, euros, and other fiat currencies

against their cryptocurrencies. If you want to learn more about the first defy non-custodial banking protocol today, go check out meld.com. That's m-eld.com. And thanks again to Meld for their sponsorship and support of the show. Okay, so for today, we're doing a thing that I actually really enjoy on these Long Read Sundays, which is putting together a bunch of Twitter threads as the content of the show. Now, for anyone who's been following me for a really long time, Long Read Sunday has in fact gone through multiple iterations. And where it started was a thread of great Twitter thread. So this is sort of a return to its roots. I'm going to start with a thread from Justin Khan,

but I'm actually going to start with a tweet that he had, which went absolutely viral. This is from about 1am on February 8th when he wrote, Yeah, I built Twitch. It has millions of users. And gaming NFTs are way bigger. He gets into it a little bit farther in a different thread where he writes, NFTs are a better business model for games. Many gamers seem to be raging hard against game studios selling NFTs, but NFTs are also better for players. Here's why I think blockchain games will be the predominant business model in gaming in 10 years.

NFTs are a better business model for funding games. Example, recently I invested in a new Web3 game, Sin City HQ. They're building a mafia metaverse and raised 3 million in their initial NFT drop. NFTs give studios access to a new new game. capital market for raising capital from the crowd. NFTs can be a better ongoing model for games. Web3 games will open economies, and by building the games on open and programmable assets, tokens and NFTs, they will create far more economic value than they could from any one game. Imagine Fortnite, but other developers can build experiences on top of the V-bucks and skins.

Epic would get a royalty every time any transaction happens. As big as Fortnite is today, open Fortnite could be much bigger because it will be a true platform. NFTs are better for gamers. Allowing gamers to have ownership of the assets they buy and earn in-game allows them to participate in the potential growth of a game. It lets gamers preserve some economic value when they switch to playing something new. But what about the criticisms of NFTs? Here are my thoughts on the common fuds.

It's just a money grab on the part of the studios. Game studios already switched over to the model of selling in-game items, cosmetics, et cetera, to players long ago. But currently, the digital stuff plays. players aren't buying isn't resellable. NFT ownership is strictly better for players. The games aren't real games. This reminds me of the criticism of free-to-play in 2008 when the games for Mafia wars and Farmville. We haven't had time for great developers to create incredible experiences yet. Everyone investing in games knows there are great teams building. Game NFTs aren't really

decentralized because they rely on models and assets inside centralized game clients. Crypto is as much a movement as it is a technology. Putting items on a blockchain is what gives people trust that they have participatory ownership, which make people willing to buy into the game. These assets are backed by blockchain. The fact that these item collections are NFTs will make other people willing to build on top of them. NFTs are bad for the environment. Solana and L2 solve this.

NFT games are better for players and for game developers. Like the free-to-play revolution changed gaming, so will blockchain. The games of the future will be fully robust with open and programmable economy. So I am actually, believe it or not, not particularly deep in the game space. I've never been a video gamer. Magic the Gathering is pretty much the only game I've ever loved and continue to love. However, I am watching this particular conversation closely. I think in many ways it seems logical that gamers would be the most obvious crowd for crypto

for NFTs. These are folks who already spend a huge amount of time in what basically is the proto-metaverse inside game environments. They're used to virtual curtail. currencies, digital assets, just with a different set of parameters than the things we're talking about now in Web 3. However, the intensity of the antagonism from many parts of the gaming community towards NFTs and towards crypto in general is pretty fascinating to me.

Part of the reason that I'm watching it so strongly is that if games actually win out with these Web 3 models, if they can win over some of those skeptics, it suggests to me that other communities of skeptics are likewise going to eventually capitulation. as well. Nexo is a trusted and easy-to-use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 18% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it.

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Just crypto security, made simple. Buy now at getarculus.com. That's G-E-T-A-R-C-U-L-U-S.com. The breakdown is sponsored by F-TX-U-S. F-T-X-U-S is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDX-U-S is also the only leading exchange. that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show.

All right, next we're going to stay a little bit on the NFT train and move over to a thread from RAC. RAC is a recording artist who has been on this show before. He's a super smart guy. He's been involved with Web3 for a really long time. dating myself quite a bit here, but I saw him numerous times at places like South by Southwest and in San Francisco back in the day, which was 2011, 2012, 2013. In any case, he wrote this great thread that also went viral called, Okay, so you hate NFTs. And I thought it was worth sharing here. Okay, so you hate NFTs. Cool. Let's talk about it.

I'm not going to convince you, but at least I can offer the perspective of an artist who has been involved in the space since 2017 before any. of you heard about it. First off, ecological concerns. This is basically solved pending imminent implementation. A lot of people seem to miss that the entire point of NFTs is to make content free while making ownership scarce. Nobody is forcing you to pay for an NFT. You can still enjoy it for free alongside everybody else. You like my music? You can have it for free. Scarce ownership empowers artists to make way more income without stupid ad-based models. It eliminates the exploitative models of Spotify, Apple, Amazon, etc. Unit-based slash per-play economics in an infinitely copyable medium makes no sense whatsoever.

This is a drastic economic shift, and it flips the entire model that we've grown accustomed to, a model that has held back several generations of artists predating the internet. This is a profound change. I think of NFTs as a pseudophile format. It's completely open to anybody. Because of this, there is a very wide spectrum of projects that have surfaced. Some great, some not so great. That's how the internet works. It's up to the individual to filter through these. Claiming all NFTs are a scam is about as tone-deaf and uninformed as it gets. It's pure ignorance.

It's like saying all cheese is bad or that all music sucks. Yeah, some are bad, but like anything, there are tasteful and smart and interesting ways to do anything. We're in the first real wave of mainstream adoption, and the tech is still kind of janky, and some questionable projects are having success. The market is not weeded those out yet because we're in year one of a multi-decade wave. Do you think a 10K PFP project is a Ponzi? Here's a thought. Don't buy it. If you squint hard enough literally everything is a Ponzi.

Every person that took Econ 101 is now suddenly an expert. Stock market, the U.S. dollar, etc. I've personally taken a more fine art collector kind of approach than mass marketing my NFTs. It's more of my speed and I can focus on a smaller subset of people. I have 3.5 million unique listeners per month on Spotify, yet I made more income from five collectors. Am I scamming them? Would you like to ask them? NLW note, he then tags those five people. I put everything I have into creating something that is moving and artistic, and we just sold a piece alongside Banksy and Basquiat. Meanwhile, Web2 platforms that exploit gamers and their makers come out saying it's scam.

It's not a scam, it just makes them irrelevant. We don't need to convince you to join the Revolution. just continue to enjoy the free content we make for you, except this time we're actually getting paid for it. How that is offensive, I do not know. You guys, if you've been listening to me for a while, you'll know that this in particular, this power balance, is what got me interested in paying attention to NFTs in the first place.

Music is an area where we literally have artists like Andre, who performs under the name RAC, telling us, explaining to us how these platforms are disrupting, power in their industry. I love his point that you don't have to care, but if you're going to pay attention at all, at least listen to what folks like him who are on the other side of that power shift are saying. All right, one more that I think hits on what has been a theme and through line throughout the week, which is just what the hell we're supposed to feel about markets right now. Are things going to be bearish this year because of the shift in monetary policy? Are they going to be bullish because

people still keep coming into this industry and getting excited about what's being built here. Chris Berniske tweets, The 2020s may be the decade where value goes bust, growth turns into value, and crypto reigns supreme. That doesn't mean 22 won't be rocky, but in rockiness there's tremendous opportunity. Some thoughts on how to navigate. While you could fully allocate your crypto portfolio at current levels, wake up in five years and be reasonably happy, In the meantime, you may have to endure a 50% drop, leading to Bitcoin at 22K,

Eth at 1550. Nonetheless, buying now is better than never buying. The rally's on, Chris. It could be, and I could be wrong. But 22 feels like too much of a powder keg for me to be comfortable saying the bottoms in for crypto. Rate increases, balance sheet easing, a recession in the United States, question mark.

Inflation crushing consumer sentiment. War. Combine the powder keg of 22 with a few, the cheap money casino excesses of 20 and 21, and it feels like this is the year that we pay our dues. In my crypto experience, dues are never fully paid in one sell-off. Dues are paid crushingly in waves of sell-offs until the sole of the bull is nearly broken. Furthermore, the private markets of crypto are more developed than the public markets, and so we have less scaled capital sopping up the asks of bloated private sellers.

Everybody wants another crypto bull, but no one can answer where the tens of billions in public market buyers will come from to offset the structural selling of tens of billions of private allocations. Greed and fear always take things to the extreme. So while there is a mean that we oscillate around, we always overshoot that mean to the downside in bear markets, and overshoot it to the upside in bulls, spastic monkeys. Will rallies happen throughout? Of course, this is crypto.

In 2018 slide after we first hit 6K, we bounce 100% up, then fell. Bounce 50% then fell. Bounce 50% again, then fell. bounce 25% before falling, from 6K to 3K. Currently, Bitcoin is 33% off its lows, so while innovation is on sale, that doesn't mean it can't go lower. Briefly, on equities. Arc invests Big Ideas 22 is phenomenal, and I recommend watching, as it will give innovation

enthusiasts hope. This decade will change everything and you want to be allocated on the right side of change. Although Arc strategy is not currently in favor, when things aren't in favor is typically the best range to accumulate them. One major thing Kathy Wood has taught me is that while people retreat to value when they're scared, in the climate of extreme change, such a strategy will eventually not work, as many value stocks experience a slow death due to their disruption by growth names. As multiples compress on growth names, which they have been, we may see a world where growth names become the true value stocks if you have a long-term view.

Bringing me to Bitcoin. Bitcoin is the only thing that could buck the chaos if the world goes to hell. But the market decides 2020 is the year it'll stop treating, Bitcoin as a growth asset and instead as a disaster hedge. For this to be the case, we'd have to see Bitcoin dominance moon. People are understanding that Bitcoin's major proposition is its conservativism, that it will not change in a world that's changing at an accelerating rate. Conservativism is materially different from any other crypto assets value at. And so what to do? I never exit the market fully. Stay focused on growth. With dry powder, be patient, don't spend it all at

once. Buy on the bloodiest of days. Filled orders two weeks ago, great. Make sure you have more to do the same if synthetic blood runs in the streets again. So there's obviously a lot here, but I think the thing that I want to hone in on is this sense that Bitcoin will at some point differentiate and be seen in a fundamentally different light than other assets. No matter how exciting some of these new opportunities and protocols are, and no matter how much I think that something like NFTs could bring a new wave of people to the digital asset space, Bitcoin is undeniably maturing into what it's supposed to be. It is getting more and more Lindy and bringing more and more people along with it as that happens. It's easy to see short-term correlations with Bitcoin and equities. It's easy to understand why those

correlations exist as the holder base gets overlapping with equities holders and institutions. who have mandates to make decisions based on things like what Jerome Powell says. It's harder to recognize that that is completely not mutually exclusive from its long-term trajectory as this fundamentally safe and sound money for what is going to be a wild couple of decades at the very least. Anyways, there's a lot of food for thought contained herein, but I thought it would be fun to do this. I hope you enjoyed it. I want to say thank you again to my sponsors, nexo.io, arculus, FtX, and meld.com.

com, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.