What Gives NFT Value?
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Answering this question requires understanding what value means especially with regards to financial assets like NFTs.
The Concept of Value
A myriad of factors determines the value of a financial asset. They include current interest rates, the asset's potential to generate cash flows in the future, and even market dynamics.
Generally, the value of a financial asset like an NFT is measured by its market value—the price at which it is traded in a market. In addition to the aforementioned factors, the market value of an asset can be influenced by its supply and demand, investors' sentiments, social trends, and political factors. For instance, the Russia-Ukraine war drove down the price of many assets in the stock and crypto markets, while the bragging rights associated with owning an NFT kick-started a trend that heightened the value of the NFT market.
Investors across markets use different methods to determine an asset's present and future value. Chief among these methods are fundamental analysis and technical analysis. These analyses give investors insight into an asset's performance and guide them toward making informed investment decisions.
But in their analyses, many investors, especially those in blockchain markets, often ignore one aspect of value known as intrinsic value. This is the inherent value of an asset rooted in its qualities or future potential. It is for this reason stocks are more robust and less volatile than digital assets. The intrinsic value of a stock is usually tied to the company's performance and other fundamental factors. On the other hand, digital assets such as cryptocurrencies and NFTs derive their value from speculation and investor bias.
But whether intrinsic or speculative value, one recurring variable persists in the subject of value: scarcity.
The Relationship Between Scarcity and Value
Basic economics states that there is a close relationship between scarcity and value. A scarce asset is one with limited availability; it is an asset whose demand is greater than its supply.
People are willing to pay for a scarce asset because they know it's difficult to get. As a result, its value automatically increases. Case in point are precious metals like diamond, gold, and platinum. These are some of the rarest metals on earth, and their rarity makes them very expensive. For context: an ounce of gold costs over $1,800, while a pound of copper costs about $4.
Scarcity and the NFT Space
If an asset is abundant and easy to obtain, there's a likelihood for its value to drop since it becomes commonplace and less desirable. This is why Satoshi Nakomoto created Bitcoin's halving mechanism which reduces how much Bitcoin is injected into circulation every four years. This is why many NFT collections have a fixed supply, usually between 5,000 - 10,000 tokens.
For NFTs, one can assert that their very foundation of being unique and resistant to duplication already makes them scarce. Unlike cryptocurrencies that are fungible—that is, each unit of a cryptocurrency is identical—one NFT is not identical in shape, size, or value to another NFT. As a result, NFT creators usually grade the tokens in their collection, making some rarer and more expensive than others.
This has created an opportunity for creators to profit directly from their work. These days, artists create NFTs to represent ownership of their work and sell them to collectors or fans who are willing to pay for them. For example, to commemorate The Merge, Ethereum's move to Proof of Stake consensus, a digital artist, PAK created an artwork that sold for $91.8 million.
Aside from its rarity, another reason the NFT was sold for that amount was because it was birthed by a significant event in the crypto/blockchain industry. This shows in addition to rarity, there are other factors that give NFTs their value.
What Determines the Value of NFTs
Major factors that determine the value of NFTs include their: rarity and uniqueness, popularity and demand, authenticity and ownership, creator, and use case.
- Rarity and uniqueness: As stated earlier, scarcity is a key determinant of an NFT's value. The “Everydays,” “CryptoPunks” and “Bored Apes” of the NFT world are all rare and unique. This is why they are valued at millions of dollars.
But it is important to note that an NFT can be rare, yet have little to no value—because there's no sufficient demand for it.
- Popularity and demand: Scarcity only becomes important when there's demand. If there's no demand for a scarce resource, it would attract no value. Therefore, the popularity and demand for an NFT greatly influence its value.
When Jack Dorsey decided to sell his first tweet as an NFT, it sold for $2.9 million. However, when the buyer decided to resell it a year later, it couldn't go for $300. This is because the popularity and demand for the NFT dropped. And this drop could be attributed to the third factor that affects the value of NFTs.
- Authenticity and ownership: NFTs are valuable because they represent ownership of a unique digital item or experience. The more authentic an NFT is, the more valuable it is likely to be.
“Jack Dorsey's First Tweet NFT” could sell for $2.9 million because it was owned by Jack Dorsey and represented his experience. But as soon as ownership changed hands, it lost its Jack's touch. It lost its popularity. It lost its demand.
This shows how the profile of an NFT’s creator or owner can influence its value.
- Creator: A creator’s reputation and popularity can impact its value. For instance, an artwork from Beeple will always have more value than one from a random digital artist. As a matter of fact, Beeple had already stamped his reputation as a digital artist before he auctioned “Everydays: The First 5000 Days” for $69.3 million.
- Use case: An NFT may be unpopular or not have a reputable creator, however, if it has a solid use case, it may accrue great value to itself. For instance, the blockchain-based game, Axie Infinity allows players to purchase and groom NFTs called Axies. This grew the demand for these NFTs and even their native token, AXS.
What are the Most Valuable NFTs?
Some NFTs have attracted so much value as they meet most of the criteria that determine value. These NFTs include:
- Everydays: The First 5000 Days: This is a digital collage of 5,000 unique images created by artist Mike Winkelmann a.k.a. Beeple. It was sold for $69.3 million.
- CryptoPunks: This is a collection of 10,000 unique characters created by Larva Labs.
- Axie Infinity: Axie Infinity is a blockchain-based game where players collect, groom, and battle creatures called Axies. Some rare Axies have sold for tens of thousands of dollars.
- Bored Ape NFTs: Bored Ape NFTs are unique digital assets that represent a one-of-a-kind digital image of an ape character with different attributes such as clothing and accessories.
- NBA Top Shot: NBA Top Shot allows fans to collect and trade officially licensed NBA highlights. Some of the most valuable NBA Top Shot moments have sold for over $200,000.
A Table of the Ten Most Valuable NFTs (Data Culled From Metav.Rs)
|S/No.||NFT||Value (in million dollars)|
|2.||Everydays: The First 5000 Days||69.3|
|10.||Right-click and Save As guy||7.09|
NFTs represent the ownership of unique digital items or experiences. They derive their value from their rarity, uniqueness, popularity, authenticity, and utility. Also, the creator’s reputation and popularity can influence its value. While a complex interplay of supply and demand governs the value of NFTs, their value is still largely speculative. Therefore, many expect the market to evolve to the level where NFTs would derive their value from their utilities and functionalities.
Frequently Asked Questions
What is the value of an NFT Art?
An NFT's value is subjective and determined by several factors such as rarity, uniqueness, popularity, authenticity, and utility.
How is the value of an NFT determined?
The value of an NFT is determined by an interplay of supply and demand. When there is high demand for a particular NFT with a limited supply, the value of that NFT can increase significantly. Also, the perceived value of the underlying asset or the NFT’s utility can also affect its value. But generally, the value of NFTs, like many other blockchain assets, is largely based on speculation.
Why do people pay so much money for NFTs?
People pay high prices for NFTs because they represent ownership of unique digital items or experiences. They also pay because of the utility some NFTs offer.