Something interesting is underway.

Over the past month, NBA Top Shot, a digital collectable similar to a basketball card has exploded in interest and in price. My friend Michael Batnick just wrote a great post about diving into the mania head first. With Top Shot, instead of a physical card you get a digital one, or a moment - a video clip that is unique. In turn it has ushered in excited about the cryptoasset powering Top Shot,  Non-Fungible Tokens (NFT's).

NFT's are are unique items that live on the blockchain. They can be intangible or tangible. They can embed smart contracts and different other forms of licensing and business logic as well. I call it the "internet of cool shit", but others have called it the "internet of value", "internet of art", or the "internet of collectibles". I personally think this is the killer app for crypto. This post is not a tutorial in NFT's however, but you can find a great one here.

The Format is Shifting

Instead, this post is about NBA Top Shot. Its success is what has turned on the lightbulbs in people's heads.  It's the first true mainstream validated application. I know some will yell at me about a Bitcoin ATM, the Venezuelan economy, Coinbase, Cryptokitties, or the slew of other applications that feel mainstream. NBA Top Shot is different. It's the first time I've seen a true format replacement underway.

NBA Top Shot since October

Top Shot has been so successful that it is starting to affect the price of cardboard.

This person (and others) think it will reverse, and at some point it will reach an equilibrium, and they're right. But it's not just a simple bubble, it's something else. In fact, if you know anything about the card market, you know people are sitting on tons of unopened "wax" which is the equivalent of an oil well or a gold mine. They sit on the wax for years, mine out the top players and rare inserts over time and then sell them to high end collectors. This might imply that we may be seeing something of a short squeeze happening - where those in the business of collecting are short a new format and will have to sell the old format and buy the new one, which then feeds on itself.

Formats are Fungible

This format trade is what is interesting about Collectibles are all about scarcity and what everyone else as sees as valuable. The biggest maker of basketball cards, Panini, has implicitly released sets of cards under different sub-sets tied to price and scarcity - Obsidian, Immaculate, Prizm, Hoops. If given two 1/1 cards of the same player on both subsets, the more "premium" subset card is will certainly be worth more than the more "retail" one. Both are just a single, scarce, 1/1 card for one player and both are just cardboard. The difference in price is that people believe that they are more than just cardboard, a player, and the only card in existence. If they didn't then they would be fungible in the first place. What is fungible is the paper they are printed on. Formats are fungible. Unprinted cardboard can be replaced by unprinted cardboard. Ethereum can be replaced by Ethereum. Someone could come out with the hottest and better newer Top Shot tomorrow and steal some of the thunder, or completely take it away.

Format Replacement Cycles are Reflexive Feedback Loops

Unlike arguments whether a player is good or a card is truly scarce, formats replacement cycles are technology installation cycles and are feedback loops.

Anyone who's collected music over the years understands this phenomenon when a new format would come out. You have a bunch of cassette tapes and the CD player comes out. A few people buy them at high prices, and start buying CD's. The price of the player comes down and people buy more players and more CD's. They start coming standard in cars,  your record shop stops carrying as much selection, so people buy more CD's, and the player cost comes down further. Then they replace the Walkman with the Discman, and bands stop releasing on cassette and you eventually people have replaced their tape collection entirely with CD's, and then some.  In this case every technological advancement installs a player, which then moves the CD market forward, which then installs more players in more places, and so forth.

If a new format starts to become the preferred way to collect something that is scarce, a special self-referential feedback loop emerges called reflexivity. Reflexivity is the process by which price begins to change fundamentals. The higher the price, the more the fundamentals become appealing, which increases the price and so on and vice versa. With cards - the more the digital format becomes preferred to the cardboard format, the the price of digital cards goes up and the price of cardboard goes down. The rising and falling prices make each one more and less desirable, affecting the price and demand further.

Right now the industry is starting to wake up to the fact that they need to start replacing their collection. It doesn't mean cardboard is going to be worthless, and Top Shot is going to the moon. Collectors will collect, both will have value, but Top Shots gains will come partly from Cardboards fall. This may be even exaggerated by the fact that people in the cardboard business may now need to get into the digital cardboard business and have to sell cardboard to buy digital. We're witnessing a new format for a relatively mainstream application begin to get installed and it's fascinating to watch.