Another Block in the Chain

Friday Reflection | March 12, 2021

Stock prices moved higher this week as optimism about economic recovery recaptured the narrative. After a few weeks of fretting about rising interest rates, the market is recognizing the factors that are pushing rates higher: an improving jobs landscape, vaccination progress and the impending dose surplus, and the official passage of the long-awaited $1.9T stimulus bill. Value stocks, including manufacturing and banking sectors, continue to lead the way in a reversal of last year’s performance, and the tech sector did recover some recent losses this week. As we’ve said previously, diversification allows us to calmly navigate this rotation for our clients.

More noteworthy than the stock and bond markets this week was what happened in the art market.

Christie’s sold a piece of digital artwork for $69.3M – the third-highest price ever for a living artist. The artwork, called “Everydays — The First 5000 Days”, is an NFT, or Non-Fungible Token, and only exists in digital format. Instead of a physical painting, the buyer gets a long string of numbers and letters that electronically verify their ownership of the original (digital) copy. Meanwhile, other people can search Google and download a mere (digital) copy for free. Is this anything more than a mania?

The value of art is a tricky thing, and modern art built upon an emerging medium even more so. Further, let’s not underestimate the power of an auction and the skill that has kept Christie’s in business for 255 years – the price more than tripled in the final 15 minutes of bidding.1 More interesting to us are the waves of change that underpin this headline, including novel uses for blockchain technology which is better known for supporting bitcoin and other cryptocurrencies.

Blockchain: A New Frontier

We aren’t going to try to explain the nitty-gritty detail of the technology, it is both complex and unnecessary for the point of this reflection. If you are interested to learn more about this emerging tech, we’d recommend this graphical explanation from Reuters or this explainer from the NYT. The simplest version is that this technology provides a novel and reliable way to track transactions and verify the accuracy of data.

Much like the early days of the internet, the potential for blockchain as a technology is easy to recognize. Much harder to know at this point is how that potential will be applied. The early internet entrepreneurs had big dreams, but it is unlikely they saw the ubiquitous rise of smartphones, internet-connected cars, and virtual learning at a national scale. Unfortunately, also like the internet, you cannot invest in the technology directly, only the companies that are using it. The timeline may be similarly long for mainstream use cases to emerge, but this speculative phase is part of the adoption cycle for any transformational technology.

Beyond providing the ledger for cryptocurrencies including Bitcoin and Ethereum, blockchain technology is also being explored for usage in healthcare, monitoring of supply chains, and even creating tamper-proof voting systems. This sounds like the future, but work is already underway. A company called Everledger uses blockchain technology to verifiably track diamonds through the entire supply chain, allowing customers to confirm a diamond did not originate from a conflict zone (and have recently expanded to track minerals for EV batteries to support sustainable supply chains in that industry).2 Everledger even allows a buyer to see the sale history of that particular gem. Walmart is already working with IBM to similarly track pork and other food products through the entire supply chain as a way to better improve food quality and safety.3 Storing land records on a blockchain could cut down on costly title transfers and, in politically unstable places, it could even help prove ownership.

Then there are the more speculative applications that have started to arise. A blockchain company called DapperLabs has partnered with the NBA to sell the master copy of certain highlights using NFTs, similar to this digital artwork sold through Christie’s. These highlights, which are essentially short video clips, are already trading for hundreds of thousands of dollars as collectors’ items.4 Another potentially transformative example is how this process has provided musicians with a new avenue to sell their creative work directly to fans this past year without concerts.5

Mike Winkelmann, the artist behind the “Everydays” NFT, has described its application for art and music by saying “You can have a copy of Michael Jackson’s ‘Thriller,’ but you’re not going to be able to convince people that you own the master recordings of ‘Thriller.’ Similarly, you can still have copies of digital art online and everybody can view them, but the blockchain, the NFT, is the thing that proves this one person owns it.”

A Tale as Old as Time

Arguably the most fundamental concept in economics is the law of supply and demand. By creating scarcity, supply is reduced, and prices should be pushed higher if demand exceeds the available supply. That last part is an important “if”. Regardless of how scarce a product is, there needs to be sufficient demand for the price to remain high. The 1990’s internet startups Pets.com and Webvan.com were high-profile failures in the first internet boom, and we expect certain NFTs and cryptocurrencies won’t survive this initial blockchain boom. The demand has not solidified yet, but as the technology matures it will grow to meet demand in yet unknowable ways.

For our clients, we help maintain balance in their financial lives. That means balancing stocks and bonds, the pursuit of growth with the security of stable assets, and maintaining a disciplined approach when the market crashes or falls in love with a new technology. Our goal is to help our clients feel a sense of calm that they are participating in many avenues of market growth, but are not taking undue risks with their portfolios to do so. While the early NFT offerings may go the way of the 17th-century tulip frenzy, we are eager to see how blockchain’s technical innovations will create financial benefits for the companies in our client portfolios.

1 WTAF? Beeple NFT work sells for astonishing $69.3m at Christie’s after flurry of last-minute bids nearly crashes website. By Kabir Jhala. The Art Newspaper

2 Everledger Offers Diamond Industry Blockchain-Based Carbon Offsetting. Coindesk.com

3 How Walmart Strives For Food Quality And Safety Using Blockchain Technology Solutions. Published October 21, 2020. pixelplex.io

4 What is NBA Top Shot and why is a LeBron highlight worth $208K? USA Today

5 Kings of Leon Will Be the First Band to Release an Album as an NFT. Rollingstone.com

Brian Kozel, CFP  

About Brian Kozel, CFP®

Brian Kozel works as a partner and lead advisor at North Berkeley Wealth to help his clients feel confident in their financial decisions.

Read more about Brian

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2021-03-26T14:16:55-07:00March 12th, 2021|