By now, the story of NFTs has been endlessly told: Seemingly valueless digital files, linked to a blockchain, begin to fetch hundreds of thousands, then millions, then tens of millions of dollars. 

The shock value of seeing digitally signed files change hands for ungodly sums of money is wearing off, although the money never seems to stop sloshing in. All the while, we’re left wondering why. 

Why are people spending tons of money on these digital tchotchkes? I’m not just talking about the record-breaking auctions held by Christie’s or the upcoming one by Sotheby’s — those are at the high end of an elite market — but the average sale price of digital collectibles are rising, too. 

Consider this data from Some 27,000 pieces of cryptoart changed hands in the last month at an average price of $2,300 apiece. One year ago, only about 60 pieces were traded at $84 each. And a year before that, eight pieces sold at about $48 each. 

Market observers quibble over the reasons for this meteoric rise. Where is the graphic file hosted: Is the URL etched in the file pointing to a server that can never go down? Is the blockchain sufficiently secure to be immutable—or indeed, is it so secure that its carbon emissions warrant an intervention? 

Is the art itself worth the price? Some critics have weighed in with a resounding no. Here’s the Washington Post’s art critic, Sebastian Smee, on Beeple’s record-breaking work auctioned by Christie’s:

“The work by Beeple … has no discernible artistic merit — or none that I can see.” 

Further down, the excoriation of Beeple continues: 

“As for the actual work that was purchased? Yawn. Beeple’s technique — collaging lots of colorful images in grid format — is a soporific cliche. Images like this, sometimes coalescing into other images, are ubiquitous.”

If it’s not the immutability of the object, and it’s not the aesthetic value, why on earth are people paying all this money for these intangible non-objects? Qiao Wang, a former trader who now runs an incubation program for projects in the booming decentralized finance space, or "DeFi," thinks he has the answer:

The "wealth effect" is what economists call an individual's increased spending when one's net worth increases. Interestingly, this wealth effect is believed to kick in both when someone actually has more spending money in the bank, or when the paper value of one's assets has risen. In other words, people can feel wealthy and spend more simply because their assets have, in theory, appreciated. 

With the wealth effect in mind, it’s easy to see how things like Beeple’s artwork could go under the hammer for $69 million. The price of Ether, the token on the Ethereum network used to pay for transactions and run the decentralized applications that live on its blockchain, has risen 1,226% in the last year, according to data provider CoinGecko. It was trading for $130 or so last March, and now changing hands for around $1,900. 

Ether is hardly the biggest gainer over the last year on the crypto markets. Coins like BNB, which is used by the largest crypto exchange Binance, rose 20-fold during the same period, double the growth of Ether. A token called Luna, used by the Terra blockchain, has appreciated 150-fold in the last year, from about 1.5 cents to $20 today. 

Crypto holders have accumulated immense wealth in the last 12 months, and it looks like they’re good and ready to spend it now. Indeed, the top two bids for the Beeple piece were from crypto natives: the pseudonymous winner MetaKovan has revealed himself to be a Canadian crypto entrepreneur in Singapore, while the second highest bid came from Justin Tron, the founder of a blockchain project called Tron. 

It’s not just crypto whales who got rich and can now afford to splash out on blockchain-linked JPGs. According to the London School of Economics’ Jeffrey Chwieroth and the University of Melbourne’s Andrew Walter, the wealth effect explains systematic distortions, like why big banks keep getting bailed out despite bringing our economies to the brink of disaster. 

In their paper and book The Wealth Effect: The Middle Class and the Changing Politics of Banking Crises, Chwieroth and Walter describe how average wealth in advanced democracies rose after World War II, with the middle classes being the major beneficiaries. This led to “great expectations” of governments, who were now expected to produce “financial stabilization” policies. 

The newly wealthy middle classes were plagued by money’s attendant risks— exposure to the financial markets through their pension portfolios, increased household debt, and stagnating incomes. They held not only wealth, but the voting power to pressure governments into policies that would help them preserve that wealth. This stood in contrast to previous eras, when the wealthy didn’t have the political clout to convince governments to enact bailouts. In the post-war era, if governments had to bail banks to keep the economy on an even keel, so be it. Main Street would bail out Wall Street. 

Chwieroth and Walter write that middle class anxieties over their wealth means “moral hazard” increases. As a result, banks develop financial strategies that tie themselves to middle-class wealth, ensuring that they’ll be able to take riskier actions and still receive a bailout. The bourgeoisie bailouts also mean that a potential new trilemma of politics and economics has arisen: balancing democratic politics, rising financialization and financial stability over time. 

It turns out that the wealth effect and its associated distortions are not just the domain of the crypto-wealthy. When we start to feel rich, we can all start to make some pretty strange decisions about how we spend our money. 

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