Memo: The Newly Rich

In 2020, OpenSea, the world’s biggest NFT marketplace, recorded $21 million in transaction volume. On August 8, 2021 alone, it transacted $79 million. Countless articles have been written to highlight what’s now known as the “digital flex”. Market forces are converging in ways that will impact consumerism for years to come. The global supply chain is crumbling, our online time has peaked, and the American consumer is bifurcating at the fastest pace in history. There is a coming wave of the newly rich, bolstered by the NFT trade. What happens when H.E.N.R.Y. becomes rich?

The aphorism “The rich get richer and the poor get poorer” is incomplete. The phrase, attributed to 19th century author Percy Bysshe Shelley, was inspired by a much older text. We hear about the rich growing their pools of wealth. We hear about inflation eating into the wages of the poor. The inspiration behind the Shelley quote was about the wealth creation tools, known by the rich, but applied to the rest. From OpenSea trading volume to Metamask wallet adoption, the NFT craze has been likened to every historical asset bubble by skeptics, from Dutch Tulipomania to POGs. There is a point of distinction; this era of discretionary investments may be different than the others because it is a movement built on collectivism.

The “Parable of the Talents” has roots in the principles of community-based investing. The story centers around a dwelling owner who left his home for a time. He assessed each servant’s abilities and rewarded each with talents (a form of currency). The three servants were awarded a total of eight talents. The two servants who put those talents to work (by depositing them in the market) doubled the value of the property in the owner’s absence. As the entire community grew in value, the servants were repaid in proportion to the investment returned. The one servant who hid his share of talents was punished when the owner returned. He chose not to invest.

The third servant grew poorer, relative to the two others, as a byproduct of inaction. This inaction is also a symptom of many in the American middle class who’ve been unable to invest. Today’s investment culture has diffused a class of Americans that were historically passed over for such opportunities. There are countless stories of normal workers choosing to invest in digital assets after re-investing meager gains into cryptocurrency art projects. One tweet from May 2021 stands out:

Paid off my parents mortgage for Mother’s Day. Paid off my student loans. Five years in crypto and it’s starting to come together – all thanks to ETH. [2]

The average wealth per adult is $79,952. Weighed down by student debt, lower wages, and a rising CPI, millennials under 35 have been too straddled to pursue the investment strategies that older generations have benefitted from. For some, the NFT trade has been their personal parable. These two tweets were less than a month apart.

Sean Williams 🌍 on Twitter: “Within one year I’m paying this off in full. With art money. Mark this tweet. pic.twitter.com/bYLAtH8I0I / Twitter”

Within one year I’m paying this off in full. With art money. Mark this tweet. pic.twitter.com/bYLAtH8I0I

Sean Williams 🌍 on Twitter: “I JUST PAID OFF MY STUDENT LOANS IN FULL WITH ART MONEY pic.twitter.com/k07P2c8xhY / Twitter”

I JUST PAID OFF MY STUDENT LOANS IN FULL WITH ART MONEY pic.twitter.com/k07P2c8xhY

This isn’t the rich getting richer and certainly not the poor getting poorer. This is consumer bifurcation in action; the middle is rising faster than ever. The 1% has spilled over; becoming a millionaire is table stakes.

According to a recent Credit Suisse Wealth Report, 56.1 million millionaires exist worldwide with the total wealth growing 7.4% over the previous year. As of 2020, 39.1% of those millionaires live in America. When the same data publishes for 2021, this number will surely climb. To enter the top 1%, you now must have a net worth exceeding $1 million. Between 2019 and today, the United States gained three times the millionaires that the next country added (Germany). One new source for that wealth? The NFT trade. For a primer, read the next paragraph from February’s Art, Science, and Economics Meet:

A non-fungible token is a class of crypto assets that are unique, indivisible, and scarce. The NFT originated on Ethereum, a blockchain first introduced in 2013 by then-19-year old Vitalik Buterin. Ethereum pioneered expanding the idea of blockchain to include more than the financial transactions that Bitcoin – a fungible blockchain, as it can be exchanged for a central value – is known for. No two NFTs are alike. A person or a store of value owns the entire token – it is unique to them. Buterin’s ideas included use cases like digital collectibles, artwork, and in-game assets. [2PM]

To understand the impact of this class of digital assets, look at the daily transactional volume of its top marketplace.

OpenSea has become the platform synonymous with the growth of the NFT trade. It recorded a transaction volume of $8 million for all of January of 2021. According to Forbes, a lot can happen in six months’ time:

OpenSea, the world’s biggest NFT marketplace, expects to see $1 billion in transaction volume this month, up from $300 million in July and $8 million in January, said Devin Finzer, co-founder of the platform. [1]

In Gilded Age 2.0, I explained consumer bifurcation in the context of 1920s-era wealth: “There is a polarization of American wealth and it’s progressing at a dizzying pace.” An understatement, in hindsight. We’ve never experienced a time like now. There are more millionaires minted each day than ever before. The age of the “digital flex” is upon us, but what begins as digital rarely remains so. In the coming months, the digital flex will take on additional meaning. The Twitter AVIs and the many digital representations of newfound wealth are a product of a moment in time influenced by heightened community online and away from pandemic restriction. But this pattern is following the same cycle of adoption found in other eCommerce categories. DraftKings Inc. announced that it will be launching an NFT marketplace. Shopify now allows for the sale of NFTs, Rakuten has a marketplace in the plans, and Alibaba Group has launched a competing marketplace.

But if we have seen anything in the digital industries it is that the greatest impact can be physical. Amazon is contracting more retail real estate than any retailer on record. Malls are being transformed by the eCommerce industry, from returns processing to the youth of brands that line its aging corridors. FedEx and UPS have been revitalized by the sector. And grocery stores have adopted online retail as a channel at such a pace that stores themselves are beginning to change in an effort to accomodate logistics needs. There is skepticism to consider. Aaron Brown, a crypto investor and Bloomberg Opinion writer, recently noted:

These were people too slow to capitalize the first time around. Since all of them seem driven by cynical calculation for money rather than any vision of NFTs, I suspect things will soon collapse.

That does not appear to be the case, at least not any time soon. With rampant inflation, wage stagnation, rising student debts, and NIMBYism preventing the wealth-generating benefits of home ownership for many, digital goods have become the new gold rush. The duration of the NFT craze matters less than its impact.

By air and by sea, thousands of would-be gold miners traveled to California in pursuit of wealth. They’d come to be known as 49ers. In March of 1848, 800 non-natives made the trip to California. By the end of 1848, that number ballooned to 20,000. And by 1849, that number reached 100,000. The gold rush was one of America’s earliest examples of the frontier thesis. Historian Frederick Jackson Turner penned an essay in 1893 that explained that the economic strength and vitality of America was tied to moving towards the frontier.

With a crippled supply chain, impaired logistics nodes, and the unpredictability of physical retail restrictions, Frederick Turner’s essay rings true once again. We actually need these mechanisms to continue over the next few years. The viability of the consumer economy will rely upon this new wave of wealth creation, even if it is shorter-lived than hoped. But when the physical retail ecosystem returns to capacity, the flex will no longer be digital for the newly rich. Fortune noted, “Rolexes and Lamborghinis are so yesterday; NFTs are the new digital flex.”

The status of online community will maintain the movement, but just as Bored Ape Yacht Club meetups have solidified digital communities by fostering IRL interaction, the new wealth gained by this class of beneficiaries will soon enough impact luxury goods markets. The Visa acquisition of Cryptopunk 7610 made international news. The Hundreds’ Bored Ape Yacht Club collaboration was sold out in minutes. Imagine what opportunities could come of these powerful online communities and the digital goods that represent them.

For over a decade, millennials have been facing an affordability crisis marked by astronomical student-loan debt, soaring living costs, and the battered job market and stagnant wages left behind by the Great Recession. [2]

What began as often inconsequential bets on cryptocurrencies paved the way for $500, $1,000, and $5,000 bitcoin or ETH purchases became .55 ETH NFT art buys that have yielded enormous returns on investments. The volume of trade suggest that while the window of purchase optionality is closed for many, hundreds if not thousands of new millionaires were minted. The least wealthy generation in modern history may have found its solution to the wealth creation gap. Soon this newfound wealth will reflect in physical goods and assets.

The new rich may even be able to buy that dream home with their talents.

By Web Smith | Editor: Hilary Milnes | Art: Alex Remy