NFTs as an Asset Class: Appraisals, Risk, Leverage, and Liquidity

Mark Lurie:

Welcome to WTF, Crypto, where we peel back the layers of the onion of the crypto universe to understand what's really going on and how it affects you and your portfolio. I'm your host, Mark Lurie. And as a caveat, nothing in this podcast is legal or investing advice. And to the listener, if you like this podcast, or even if you hate it, I want to hear from you. Our team works hard every week to find the topics you care about most. So please leave a review on Apple Podcasts to let me know what you think of the show. We read every single one. Thanks for listening. Today we're talking about NFTs and valuing them with Karsten Schroeder. Welcome, Karsten. Thank you so much for joining us.

Karsten Schroeder :

Thanks for having me, Mark.

Mark Lurie:

So NFTs are digital images that can be owned on the blockchain. In January, NFT sales were six billion dollars in that month alone. In May, they're down as all of the markets are, but they're still about four billion dollars in NFT sales. So it's a real thing, but where do these NFTs get their prices? Why are they valuable and how does smart money trade them? Today, we're going to talk through that with Karsten. To start off, what makes you such a credible expert and guide on this subject? Can you give us a little bit of background on that and yourself more broadly?

Karsten Schroeder :

Sure, absolutely. Well, look, to me, NFTs are a little bit more than just a digital image, to be honest. And I also would say that I'm probably a little bit of a late bloomer as it comes to the whole crypto universe, but I'm looking at it more from a trading perspective. I've run a systematic hedge fund for 15 years. I retired from it in 2019 and then went more and more intervention investing and running my own family office and by doing so, I had more and more touch points with crypto in general and decided to set up a trading house together with two other colleagues [inaudible 00:02:28] colleagues and a range of other partners. In May, 2021, we started talking a little bit more intensively about NFTs, and I think it was pretty much driven, I would say by the whole media hype in particular around the more famous collections and what intrigued me as somebody was a quantitative under trading background is the way how the price finding mechanism works because it's an interesting security when you look at it.

Karsten Schroeder :

It's unique, it has a collectible aspect. It has features on which are called different names in this space, but predominantly those features would be elements of our face as long as the face was the basis for [inaudible 00:03:26] NFT, could be the color of your eyes, the whatever, the hair color, the skin color and so on and so forth. And so their attributes that you can use to describe the asset, and we would have platforms such as OpenSea, which are very much like an auction platform, even when we compare them to digital auction platforms, which act as a price finding mechanism. But given that the asset class, [inaudible 00:03:58] said, gained more and more in popularity and the volumes became more significant, I believe and we believe that there has to be a bit more of a sophisticated pricing mechanism or at least the pricing guidance, because a lot of focus was on the floor price, which to be honest, doesn't really tell you much.

Karsten Schroeder :

It's essentially the lowest ask of a particular item in a collection. And that's about it. Now, if we just think about how wide the range of prices was in a collection is it doesn't really give you an indication on what your particular NFT might be worth or what you should be asking for. So that was kind of like the starting point when we looked at it and thought about maybe there's a smarter way, how at least to give a price guidance or how to generate a price fee, because it could certain be valuable to the participants in the space, both the ones who owned and minted NFTs, and that thinking about potentially selling them and asking themselves, "Hey, what could be a good price to at least ask for?"

Karsten Schroeder :

And equally to investors or collectors that wonder, "What should I be paying for it? What is a fair price? And can I at least have any form of guidance?" And essentially, we try to systematize and quantify a process that I guess a collector or an investor would do manually when they start bidding for these NFTs on the platforms.

Mark Lurie:

So this makes a lot of sense. And anytime you try to systematize an activity that humans are doing themselves, you learn a lot about how they're actually making decisions, but let's step back for a moment just for those who are listening to this podcast and need a little bit of foundational model. And let's talk about just briefly, like what is an NFT and why is it valuable at all? How do you describe to the uninitiated one NFT is, and why this weird thing even has any value?

Karsten Schroeder :

Yeah. And keep in mind, I'm not your typical crypto nerd. When I describe it, I'll try to really describe it even for myself to make sense. So to me, this is just a digital placeholder for a digital asset or a physical asset that I would digitalize essentially IP and it's on the blockchain. So thereby it is transferable and the digital asset can be anything from an image that has been generated through an algorithm, or has been generated through a guided algorithm and minted with constraints. And I think that's probably what most people would associate or have initially associated NFTs with the CryptoPunks, certainly the most famous collection, but also The Bored Ape Yacht Club where we have this classical format of a base theme, which is a face with all the attributes to the face and then there's different varieties and so on and so forth.

Karsten Schroeder :

But beyond that NFTs can be a short clip, can be a gift, could be a movie, it could be an audio file. It could be source code. It could be a neural net, a trained up neural net. So essentially, as I said, just a placeholder for a digital asset in particular with gaming transforming into the metaverse and gaming characters and avatars becoming NFTs and thereby tradable and becoming an NFT that is actually cash flow generating, which is quite different to a pure image or at least how it's designed so far, this opens up a whole additional layer of complexity, but also a very interesting dimension from an investment in trading perspective, because all in sat, we are moving maybe a little bit away from a pure collectors in very subjective view on an item, but more to a real investment view of an item. I have a gaming avatar that scores points or becomes valuable, and it becomes much more quantifiable how you could sell that gaming avatar to other players, or even to somebody who just looks at it from an investment perspective.

Mark Lurie:

I see. So to those who say, "Well, what's the point of paying money for something that you can right click and save, and that anyone can right click save an image of," the answer is, well, this is IP. So you could make a copy of a photograph, but you don't own the IP for that and you don't own the original, and you could make a copy of a patent, but you don't own the IP to that patent and that could be quite valuable.

Karsten Schroeder :

I would even take a notch further. I mean, you could own a painting, which looks exactly the same as the original to the layman's eye, but you don't own the original. Actually, as a matter of fact, a fair amount of people who do own very valuable original paintings, they hang up copies in their house, whilst they have the original stored in a vault to preserve it. I think that's a collector's mindset, the ownership of something. I mean, you want to own the original, you want to own the IP. And to be honest, if we move a little bit away from the pure image, if we move to, let's say audio rights, song rights, if we move to cash generating NFTs, then it becomes very relevant because the cash that's being generated on this IP, you have to have the rights to that.

Karsten Schroeder :

So, I think that's how I would answer that question and keep in mind, yes, you can screenshot it, but it becomes obvious when you have your NFT in your gallery or you link it up to your LinkedIn, I mean, that's the original one. And I think for people who enjoy that or who have any sort of value from that, it's very different than just having a screenshot of it. I mean, you can look at any NFT on the internet. You can look at almost any painting in galleries in the internet.

Mark Lurie:

And the collecting mindset, when you put it like that, is really even pre consciousness, right? I mean, it's one of the oldest things we have as humans, even ravens collect shiny objects. So it's a very deep human psychology to just collect things that are rare and scarce.

Karsten Schroeder :

That is true. And there's also a community and a club aspect because collectors also in the non digital world, they are a community. They like to hang out together and talk to each other because they have a common interest. That can be in the art world, could be wine collectors who could be car collectors. They have a common theme and they like to talk about it and it forms the network. And certainly that aspect is a strong one, also in the NFT space.

Mark Lurie:

That's a great point. And we all know that the people who would collect trading cards and love talking about sports and metrics, people who love collecting wine and talking about wine, they don't drink at all. And so it's a very deeply ingrained pattern of human behavior. And then to your point, once you add cash flows into the IP, then that becomes a much more-

Karsten Schroeder :

Different ballgame.

Mark Lurie:

Yeah. Different ballgame. Yeah. Okay. Got it. And so how do you think humans are actually valuing these NFTs today? Before we go into the systemization of it, how do you think most people are valuing NFTs?

Karsten Schroeder :

And again, I think we have to differentiate a little bit between NFTs that have a functionality beyond collection. And maybe we should just focus on collection because that has a deep psychological component to it because it's more subjective.

Mark Lurie:

It's also probably most of the market today.

Karsten Schroeder :

For the time being. That's right.

Mark Lurie:

For the time being.

Karsten Schroeder :

So the intrinsic value is let's just agree is very close to zero, right? So the value is defined through demand and supply. And because these things are unique, it comes down to the subjective demand who wants this super rare NFT and is willing to pay what for it. And I guess that is a little bit, that's a little bit the human psychology that you can see in so many aspects that people tend to want what's rare, even if it's not necessarily better. I mean, just take the example of a nightclub. The longer the queue and the harder it is to get into, the more people want to get into irrespective of what's behind the door, just because you can't get in.

Mark Lurie:

That's a great point. We all know that bouncers sometimes force lines to queue even if the bar is half empty.

Karsten Schroeder :

Absolutely. Because you have to create that urge. Now, same with cars. You can argue some of the very rare, limited cars are not necessarily the most desirable ones, but by the sheer nature of their rarity, they gain a lot of value. So that's definitely one dimension that the rarer the features are. And the combination of those features, the more valuable a particular NFT would become, say, particular eye colors or necklaces or any of these traits that have low representation in the collection. And I mean, OpenSea certainly publishes all these statistics as a guidance. If they weren't be published would be quite interesting how people would go about it, because then the subjectivity becomes more relevant. And there are elements for subjectivity, even if they are frequent, it plays a big role. So any form of zombie themes, even if they have a frequent or high representation tend to be more desirable and hence more expensive.

Karsten Schroeder :

And I think certain colors might be preferred and others might not be preferred. So, they're such subjective element, which by the way, from a systematic point of view is pretty hard to price. I mean, you will just figure out through regression that those kind of features seem to be desired, but it is not necessarily correlated to their frequency. But generally I would say, yeah, people price it according to how rare it is and that's what's in a collection. Now, when you compare one collection to the other, it is a combination of what added benefits you get from a community perspective and how well the collection is marketed and what it actually does. And I think we need to move a little bit away from the very, very early stage ones, just because they were the first movers and they became famous and desirable.

Karsten Schroeder :

If you launch a collection now, you have to think about what are you actually representing here because I think what people grew very tired of, it's just like the money making aspect of it. So where they feel that whoever launches them is just in for the quick dollar, but it's not in for creating a community or even having some sort of charitable course or a greater course or whatever you want to connect to it. So that is becoming a more and more important aspect I think beyond the actual aesthetic of physical attraction of particular images.

Mark Lurie:

Makes sense. And I guess you see that in traditional art world too, right? I mean, people want to like new artists because they're cool. And they like going to the gallery shows for that artist and there's like-minded people and there's maybe interesting parties. So it all kind of maps-

Karsten Schroeder :

Yeah. Accessibility, I would say is very important. What do you gain through owning a piece? I mean, as you already said, this gives you access to the artist, because you find their thoughts relevant and interesting, and you would like to have a conversation. That's an important aspect.

Mark Lurie:

For those listening, I previously, before I was in crypto, ran an online art and collectibles marketplace. So, I have a lot of parallels for the traditional-

Karsten Schroeder :

So you are very qualified for this.

Mark Lurie:

Well, from the traditional art market, yes. And one thing that's quite interesting is most people who build collections over time, they don't even do it to trade. They do it because they genuinely like the pieces and they accumulate and they like the community. And then what happens is at the end of life or there's something called the four Ds, which forces sale, death, divorce, debt, and displacement. So you die and you have an estate, you're in debt and you need to sell, you're moving or downsizing, so you don't have space or divorce also forces you to sell. And those are really the times when people will sell their pieces because they often buy, buy, buy and accumulate. And it's not even for the purposes of trading all the time, which is quite interesting because you have multiple players in the market, these collectors, and then you have traders.

Karsten Schroeder :

Yes. And it's a challenge for the physical market, because as a, I would say, as an artist and as a brand, you want as much as possible of the owners, the true owners that are really interested in your piece. At the same point in time, I think nobody wants to burn money or lose money. So it's a kind of like a combination. I agree. The primary motivation for a collector should be the genuine interest in the piece and everything around it. But I would almost flag it as a side condition that we all assume that at least there's a value retention. It's not necessarily a massive value appreciation, but I think you want to have some sort of value retention because otherwise you have to ask yourself, why would I pay the original price if I know that on a secondary market, I can eventually get it much cheaper?

Karsten Schroeder :

So I think that is equally true for all the traditional collectibles, from paintings to sculptures, to wine, cars, watches even rare items from fashion brands that they are really trying to curate the supply and demand in a way that they can create and support a stable market situation. And I think that as somebody who launches a collection, you want that collection also to be successful in terms of a stabilized value. And I think you don't have an interest in an overhype and then the burst of the bubble. You ideally want the collection to sell out quickly and then have somewhat of a controlled flow, free flow if you want at solid stable prices, ideally slightly upward sloping.

Mark Lurie:

Interesting. So that brings up whole nother conversation, which I'll flag and let's come back to, which is how the issuers of these NFTs create value. I'd love to dig into what you brought up earlier, which is how you price NFTs. Let's put aside the collector and think from a financial perspective, how do you think about trading, valuing, pricing these NFTs?

Karsten Schroeder :

Yes. And I mean, it could even be relevant to the collector, right? Maybe actually to bridge some of the events that you had listed your four Ds, you could just draw cash on by collateralizing them in case of maybe a divorce or a debt situation. And that's when pricing becomes a very relevant question. You might not want to get rid of your collectibles because it might be very hard to get them back. So if you could collateralize them, that could be an interesting option for you. So when we look at the value or at the price, kind of like the Blue Book price from a traders's [inaudible 00:21:17] perspective or the market's perspective as such, because this is what we're trying to reflect, given the nature-

Mark Lurie:

And Blue Book, just for those who aren't in the US, I actually am not sure if Kelley Blue Book is global or not, but it's like the Bible for how much your car is worth. So you put in all the ... what color it is and what kind of transmission it has and the model and the mileage. And then it has a database of all the cars that have sold in the US and then it spits out of value and it's pretty reliable. People really go by it.

Karsten Schroeder :

Right. Yeah. Let's move a little bit away from that term. Let's just call it fair value. So I guess there is ultimately two approaches that you could use. There is a rarity approach and there is a similarity approach. And without going into too much detail. When you take the rarity approach, you are essentially looking at all transaction within a collection. And if we maybe take the analogy of houses, we would look at all house transactions and then try to break it down to the contribution of a particular feature. How much is a top floor worth? How much is underfloor heating worth? How much is a beachfront worth, where it's an ocean view or whether there's like none of that, or how much is a mountain view worth? So you basically have tons of dimensions that help you to figure out the price of real estate.

Karsten Schroeder :

And it's similar here in particular with NFT is where you have those traits, where you can say, "Okay, I basically look at similar data points that have a similar combination of those traits. And then of course it gets more complex because I need to adjust for the market beta and the drift that has happened in the market, but that's obviously all possible." So you will arrive at a volume. So that's a similarity. That's why I'm basically looking for similar features. Now, when I take the rarity approach, I basically take the assumption that whatever is rare is expensive. All these features I have, I will basically score according to how rare is my particular value in that feature. So if it's a red laser eye, is that only a 1% representation or even other percent representation was a 50% representation. So I'm looking at all those values.

Karsten Schroeder :

And I may also have a [inaudible 00:23:45] how important are particular traits like background color, for example, is not particularly relevant. So, you may isolate those ones that are not particularly important and the other ones you may overweight. So those are generally on a high level speaking, the approaches conceptually we would use to price up an asset and challenge of course, is that in comparison to more traditional financial markets, you are not having a lot of data points here and I'm ignoring for the time being the fact that this is not even an audit book item because it's unique. And when it's unique, you can't build an audit book because it's only that one item, but in general, in terms of data points and volume, comparing it to traditional market, it has a relatively short history. So that kind of makes it just creates a higher error, random value around your prediction.

Mark Lurie:

So, that makes sense. And all of this data is on the blockchain because the NFTs are on the blockchain and they're transferable. And so you can run a bunch of progressions and you predict value of things. And I think that makes a lot of sense, and this is great because it adds liquidity to the market. People always hopefully know there's someone who'll buy and sell because they'll buy and sell according to these kind of algorithms. But it also strikes me that you might have a bifurcation of pricing in the market, which is also what tends to happen in the traditional art market, where you have wholesale or fair market value pricing. And then you have retail pricing and retail pricing is often a dealer or gallery will have a relationship with a client. There's a sale involved.

Mark Lurie:

There's a story, there's a sale, there's a relationship, there's an emotional purchase. And then that person will buy for a retail price. And then there's a fair market value, which is what a dealer or a pure financial investor will buy or sell pieces at. And so you have these kind of two levels of pricing and often people's expectations are very different because a lot of times people anchor on the retail, but actually what's mostly going on in the market is the fair market value. And it sounds like when you predict price, you're really predicting it around the fair market value, as opposed to this kind of retail more emotional purchase. Is that right?

Karsten Schroeder :

Well, I think there is an additional dimension here that we need to consider and I would just label that as risk. And that essentially leads to your bid off spread, which as you describe it as a difference between what I would buy an asset for as a professional, as a dealer, and I'd be willing to sell that asset forward to the retail market. And in financial terms, it's kind of like a market maker because a market maker would essentially go out there and bid for all the assets for a price that they would be willing to hit. So they're taking the market risk for a starter because things move and pretty massively in crypto. So when I have things on inventory, I'm fully exposed to that and I'm taking the risk on the specific asset because I might have mispriced that, and that risk has to be compensated.

Karsten Schroeder :

And that risk will be different depending on what item and what collection we are talking about. And there are metrics that we can can look at. So let's again, take maybe a non-digital example. Let's just say you have a very exclusive location with a very expensive house. So you would be willing to take that house on the book. Then you're bid asked, even in percentage terms is going to be wider than if you take your standard two bedroom flat in Manhattan that you might, I don't know, sell for $2 million. So you may be willing to buy it for 1.7 million. That's enough. If you have the house where you think you can sell it for 20 million bucks in a very specific location, you would not buy that for 17. There are too many risk factors. It's a thin market.

Karsten Schroeder :

It's too specific. It's non diversified. I mean, we can talk about all sorts of them. So you'll probably apply a bigger discount. And then the question is how active is the location? If you had a lot of turnover in the location, you might be more comfortable to be tighter on the spread. If you haven't seen any turnover in particular on that price pound for the last two years, you probably go like, "Well, I don't know, probably apply wider spread." It's kind of like the same logic, how you would look at these items. You can also translate that to wine and to cars.

Karsten Schroeder :

So the thinner things become less volume, higher concentration. Also, keep in mind if somebody, if you have an artist and 80% of the inventory is owned by one person, if you take an item on the book, you are fully exposed to let's say the credit risk of that one person, because if any one of your 4 Ds kicks in to that individual and the market gets flooded, gets flooded with 80% of the inventory problem. So that's another important consideration. And I think we're not reinventing the wheel here when we look at it. We're basically applying metrics that you, as a collector or sensible collector, doesn't want to lose money or an investor would look at when acquiring those pieces in the traditional world.

Mark Lurie:

Interesting. Okay. That makes a lot of sense. There is one other big difference from the traditional world, which is leverage and liquidations.

Karsten Schroeder :

Yes, yes.

Mark Lurie:

It's not totally different because there are asset backed loans for traditional collectibles, but it's pretty different. I mean, it's tough to take custody. It's a long process. It's tough to prove ownership and provenance and it's much harder to liquidate. You often have to wait for an auction or something. And so the asset in one market and the traditional art collectibles market is not huge just because it's difficult to execute, but it's much easier here because you can prove ownership. I mean, inherently by who controls the NFT and you can take custody digitally. And so how do you think leverage is coming into play here? And how does that create macro differences in how this market operates versus the traditional collectibles markets?

Karsten Schroeder :

I think you will see the same, shall I say negative effects, just more amplified. So when we go back to the traditional markets, I would call those people speculators. So their participants that will acquire an asset was the sole intention to sell it for a higher price, which is different to the collector. So they have a shorter time horizon. They rely on the fact that yes, that depreciates. And if it doesn't go their way, because they might not even have the budget to buy it in the first place, it's almost like a margin call that hits them immediately. And they need to liquidate at almost any given price because they might have borrowed money from their friends. So I was just way beyond their financial capabilities. And you see that happening with the traditional items. You see that with watches, with cars, probably also with wine, that essentially that's the reason why the prices drops, right?

Karsten Schroeder :

Because you would not have more four Ds in a recession and the collectors shouldn't sell because they're collecting them. So why would they care? So you have a share of market participants who have acquired those assets because they weren't collectors. They were speculators. Now the more leverage, obviously they could get, the faster this becomes a problem for them. And the more this accelerates up. So if we translate this now into the digital world and in the automated world, accelerates it, and it amplifies the magnitude of the price impact. So of course, with any financial instrument, any derivative, there's a lot of positives around it. I mean, that's why they exist. They make financial markets efficient. They create more liquidity in the first place, but when things go the other way, without any protective mechanism in place, they go the other way pretty badly.

Karsten Schroeder :

And let's say, when we apply the derivatives and highly leveraged mechanisms onto assets that have a true intrinsic value, that's kind of like a natural floor. I mean, a commodity will have a natural floor price because it will be utilized a stock because there's a business behind, it will also have some form of intrinsic value because you would argue, "Hey, what's that cash flow. I'll become a buyer. I mean, it's a profitable company. I'll become a buyer, no matter if somebody has to cover their shorts and sorry that they are their long positions when they get a margin call in the [inaudible 00:33:10]. But with an asset that has essentially no intrinsic value, you run the risk of this going all the way down to zero. And the more market participants that hold these assets in a leveraged way, the faster price drop can lead to a vicious cycle.

Karsten Schroeder :

And I think that's the issue when you allow derivatives. And when you allow too much leverage on those assets and because all the pricing, the way how the pricing mechanisms would be designed, it becomes reinforcing. All your risk permits go up, the spread widens up the market make us become less and less tolerant towards inventory. So everything accelerates the market down. And you have to ask yourself, where is the natural buyer that's stopping this? Are there enough collectors in the market that would say, "Yeah, we want it. And if it's that cheap, we'll just buy it." And once the market is dominated by investors and people who speculate, it becomes a pretty painful scenario.

Mark Lurie:

I see. Interesting. And I guess you, any market where the fundamental value comes from psychological demand and is somewhat vulnerable to this. As long as you have some buyers who can plug into a financial model and make a value based purchase, then you'll always have some sort of floor that prevents a vicious cycle to zero. But when you don't have that, then you can have a vicious cycle to zero. And that creates a very dangerous environment.

Karsten Schroeder :

Yes. And I mean, you could make that case for gold. Why are we not seeing gold going to zero? I think my argument would be, there is not this a hundred percent trust into central banks in particular, there was all that money printing going on. So people would always argue, there might be a scenario where we need an alternative storage of value. And then we flip back to rarity and we flip back to something that's commonly accepted. You could argue, why is gold a commonly accepted storage of value? I mean, we could take minerals from the moon, maybe.

Karsten Schroeder :

They would be rare. They would be hard to regenerate, but gold is there. It has always been there. And people have a general, I would say, desire to hedge at least partially themselves against central banks, because with the experience that we've gone through, particularly over the last couple of years it's not in your control and their inflation management hasn't really been the best. So-

Mark Lurie:

That's an understatement.

Karsten Schroeder :

... plus they have been defaults. So I think there is a value. I would say with gold, you have a psychological factor that you wouldn't necessarily have with an NFT that doesn't generate a cash flow.

Mark Lurie:

Yeah. Makes sense. I mean, it's a much stronger brand, gold, obviously than any NFT-

Karsten Schroeder :

For the time being.

Mark Lurie:

For the time being, certainly. And thousands of years of brand building, I guess, puts it in poll position for rotating out of central banks, cash and central banks and banks in general and into something of rarity then, well, I guess obviously you plug the chances of that and the impact of inflation in your financial model and then you say, "Okay, well, this doesn't make sense." You look for something rare and it's the most deeply ingrained thing. And so it gets value that way from a financial model, essentially.

Karsten Schroeder :

Right.

Mark Lurie:

So we have this systematic risk in the NFT ecosystem because you could have this downward spiral and by the way, that is obviously a risk. And I think there's clearly been a bubble in NFTs, but there's a lot of naysayers who think there's no value, but I would point out that I don't know where the NFT market is today. My data's, I don't track it enough, but even last month, given all the market crashing still, there was $4 billion of volume. So, it doesn't even seem like here in the peak fear that there is a complete collapse. So, that's pretty impressive unless you disagree, but still you have this kind of risk of market collapse. And how do we as an ecosystem manage this systematic risk to the NFT market?

Karsten Schroeder :

Well, I think as an ecosystem, we can't be responsible for a collection essentially going down to zero. I think that would be a wrong mandate and it would be a wrong expectation. And compared to the art market, I mean, who takes the responsibility that the art of a particular artist will always be valuable?

Mark Lurie:

No one, I guess.

Karsten Schroeder :

Yeah. It's no guarantee. And I think there shouldn't be, let's see, you believed in an artist, you like the art and you wanted to support the cause when they have changed and when they are not there anymore, then I think it's just natural that asset goes to zero, if nobody wants to have it. And I think that's part of the job of the collector to be a little bit on top of the game, as far as your artist goes, I mean, otherwise it's speculation. Why would you want to support an artist and a message that's a problem. So I think that cannot be the responsibility of the ecosystem. I think the responsibility of the ecosystem should be to avoid mechanisms that could accelerate this be beyond control. And I think that's a question that crypto in general has to ask themselves and maybe comparing a little bit to traditional finance.

Karsten Schroeder :

I think it's a combination of education of access to particular instruments in particular, when they become highly leveraged and limits that are probably a little bit tighter than what they used to be. So it cannot be the business model to basically liquidate wallets left, right and center in order from market makers, just to get rich on it by basically lots of retail clients losing all their assets. I think that is a wrong approach and anything that can be done from a design perspective to avoid that is necessary also in terms of credibility of the ecosystem. But it doesn't mean that you're generally protected from a collection becoming worthless.

Mark Lurie:

And just because that's what we should do, of course doesn't mean that's always what will happen. So if you look ahead to the potential coming recession and the longer five, 10 year, 20 year time horizon, how do you think the market evolves?

Karsten Schroeder :

Well, I think with everything that's coming up on the NFT market there, I have a pretty positive outlook. I think it's going to grow way beyond collectable images. I think it will make things tradable that were not tradable before. I mean, don't forget as roughly $70 billion that are spent per year for in game purchases, if just for the sake of argument, every game would transform its character into an avatar that's a tradable NFT, hence also all the add-ons become tradable assets, then that's creating a massive market.

Mark Lurie:

Okay. So it's here to stay. There's real value there. There's real ways to price it. That is very reassuring.

Karsten Schroeder :

I have no doubts that NFTs as an asset clause and as a technology will stay. And actually, I believe it's going to be a great catalyst for blockchain applications.

Mark Lurie:

I mean, it's a real use case, right?

Karsten Schroeder :

Yes.

Mark Lurie:

It drives interest in crypto and smart contracts and development. I mean, in a lot of ways, it's the first main street application for which a Wall Street can provide financial services and serve.

Karsten Schroeder :

Yes. I agree.

Mark Lurie:

Anything else you'd like to share with us about the topic?

Karsten Schroeder :

I personally hope that the market is other people don't lose hope and don't lose faith in the market. We have some rocky months ahead of us undoubtedly. [inaudible 00:42:17] we've seen the bottom, but there will always be a recovery after what we're going to see happening in the next few weeks.

Mark Lurie:

The world marches forward. Thank you, Karsten. I really appreciate your time and wisdom.

Karsten Schroeder :

Thank you, Mark.

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