Why Are NFTs Valuable?

Why Are NFTs Valuable?

NFTs are non-fungible tokens that can verify the authenticity of a digital asset. This simple fact makes NFTs valuable and also convinces some to pay millions of dollars in exchange for an NFT.

Moreover, NFTs are somehow comparable to the digital version of the art market. As some paintings by famous artists sell for millions, it shouldn’t come as a surprise that some NFTs fetch millions in bids. 

However, it’s not that simple. There are also digital collectibles like NBA Top Shot and PFP NFT projects like CryptoPunks and Bored Ape Yacht Club that are worth millions of dollars even now during the market downturn. 

None of the above can be accurately characterized as art alone. So, why are NFTs valuable, and what exactly makes an NFT valuable?

Understanding the value of NFTs

There are two types of tokens in the crypto environment: fungible and non-fungible. Fungible tokens are similar to money. Regardless of the serial number on the dollar bill, one can use any dollar bill to replace a dollar bill.

Non-fungible tokens (NFTs), on the other hand, are unique digital signatures and cannot be substituted for any other token. The attractiveness of NFT is due to the validation of its uniqueness and property, as well as its interoperability, which ensures its usability in different applications. These attributes are opening the doors to new business models and application cases.

Understanding the value of NFTs
Understanding the value of NFTs

In that sense, NFTs are valuable because they are scarce. The scarcity principle states that the less available something is, the more likely we are to want it and pay a higher price for it. That is, in the end, why NFTs are so valuable. People will spend a lot on an NFT if they find something desirable, and there can only be one original.

The Scarcity Question

Whether it’s art or a digital collectible, one thing will definitely drive up the price of an NFT: scarcity. What does the NFT shortage have to do with mono JPEGs? To answer this question, let’s do a quick round of Economics 101. 

One of the central problems that the field of economics hopes to break down and understand is how to efficiently deal with the virtually unlimited needs and wants of humans in a world with finite resources. In simple terms, balance the forces of supply and demand. 

Broadly speaking, with a strong emphasis on “generally,” how these forces interact influences a metric ultimately felt by the consumer: price. If demand is high in a certain market for a specific good in abundant supply, that will result in that good being priced relatively low in that particular market. 

However, the opposite is also true. When the demand for a specific good far exceeds its supply, it becomes a scarce good, which tends to fetch much higher prices in its respective market. For a real-world illustration of this concept, let’s look at why fruits are considered a luxury in Japan. 

The mountainous topography of the island nation leaves little room for large-scale agricultural operations. As such, most of the fruit farms there are “family-run or small-business operated,” as Paku mentions in a Wa-Shoku report. 

However, what the Japanese fruit industry may lack in scale, it makes up for in quality. Often, the perfect strawberries, grapes, and watermelons that you would see in the typical Japanese supermarket aisle are given away “to family, business associates, and customers, to thank those who took care of you,” Paku said. 

Okay. So what makes NFTs so valuable?

NFT Are Scarce

NFTs can be very expensive (or valuable, depending on who you ask) because they have somehow managed to do the impossible: introduce scarcity into the global digital marketplace. An NFT is not just an overpriced way to buy an image, it’s a way to own it.

When you buy an NFT, you’re not just buying the image itself. You are buying a permanent token etched into a blockchain that points to that specific image or digital asset. Anything goes, really. In addition to NFT art, NFT music, game assets, virtual land, and all sorts of other digital goods are commonly bought and sold on NFT marketplaces.

So how can turning something into an NFT potentially influence its price? Every time you mint a digital good like NFT, it effectively allows you to limit its supply, thereby “inflating” its price. Although this may sound like an easy way to artificially inflate the price of a digital good, it is not what NFTs are all about.

So what other things about NFTs make them valuable?

NFTs are Digital Art

In the world of fine art, the works of master artists have fetched millions of dollars on the open market. The sheer value of fine art is also equally difficult for the average Joe or Jane to comprehend. 

Take the many works by Mark Rothko that have sold for tens of millions of dollars on the art market. At first glance, it can be a little hard to process why an orange, red, and yellow painted canvas is worth nearly $87 million.

In simple terms, the price is high because it is the only painting of its kind in existence and because one of the most brilliant artists of the 20th century created it.

This is why the vast majority of the most expensive NFT sales we’ve seen so far are one-offs. Like Rothko’s orange, red, and yellow, these particular NFTs are the only ones of their kind. 

NFTs are Digital Art
NFTs are Digital Art

In the case of Beeple’s Everydays, which sold for almost $70 million in 2021, these works are truly one of a kind. Everydays featured Beeple’s 5,000 unique works, created over 14 years, in which the digital artist strove to create a new piece every day.

NFTs Have Utility

Sometimes NFTs command high prices due to causes much broader than art or membership in a collection. NFTs have also been widely used as a means of raising funds, thanks to the built-in security found in blockchain-based transactions.

This can be seen in one of the most expensive NFT sales we have seen so far. In early 2022, AssangeDAO successfully arranged the multi-million dollar purchase of Clock NFTs from Pak, which stands (at the time of writing) as the second most expensive NFT sale of all time.

The NFT was sold for 16,953 ETH to be exact, which was valued at approximately $52.7 million at the time. Proceeds from the sale were expected to fund the legal defense of WikiLeaks founder Julian Assange. In this particular case, the usefulness of the NFT, for what it was being used for, is what made it so valuable and expensive.

Why are Some NFTs Valuable and Others Not?

Although each NFT is unique and creates scarcity, the very concept breaks down when millions of NFTs are minted daily. When there are too many options to choose from, there is not enough attention to make each NFT very popular and valuable.

NFT markets are flooded with new assets every hour, causing a frenzy of speculative buying. Thousands of people talk about what they plan to buy in forums and chat rooms, hoping to inflate the price and then sell when they think they’ve made enough money, a practice called “pump and dump.”

Therefore, assets that do not go through a pump-and-dump movement, that are not produced by famous artists or celebrities, or that do not undergo a strategic marketing campaign are less likely to achieve high monetary success.

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