The NFTs craze has been through the roof in the past few years. The trend picked up in 2020 when the NFT market first gained mainstream attention and recorded a total sale value of $250 million. The following year was much bigger for this newly emerged technology, and all the statistics skyrocketed.
According to some reports, about $41 billion worth of cryptocurrencies were spent on NFT trading. Moreover, the current market capitalization of the NFT industry is expected to increase by 680% by the end of 2027.
Looking at these numbers, any sane person would instinctively wonder what makes these virtual assets so valuable. Why do people pay hundreds of thousands of dollars for simple JPEG images of cartoon-like monkey characters? What’s the actual value of a digital token?
This article will dive deep into these questions and discuss many elements that determine the value of an NFT.
What is an NFT?
To start things off, we first need to discuss the basics.
Non-fungible tokens, or simply NFTs, are pieces of digital data that are tokenized and stored on blockchain ledgers. Every token has its unique identification address and metadata, which makes it different from the others.
As a result, no two NFTs are the same and cannot be exchanged for each other. Compare it with fungible assets, such as Bitcoin. Each Bitcoin token can easily be replaced with another. It is because no matter which Bitcoin token you own, it will have exactly the same value as the rest of them all. However, this is not the case with NFTs. No single NFTs can be exchanged at equivalency.
Moreover, once an NFT has been created, it can neither be destroyed nor manipulated. These two things, along with the fact that ownership claims of NFTs are provable using the data stored on the blockchain, make it almost effortless to verify the authenticity of the digital token.
Think of it like any other real-world artwork. For example, there may be thousands of prints of the Mona Lisa by Leonardo da Vinci, but only one real painting exists by him. In the same way, no matter how many people take a screenshot of a certain NFT and save it on their devices, there is always going to be only one real NFT.
As far as types of NFTs go, any sort of digital data, including images, videos, audio files, documents, codes, web addresses, and more, can be converted into an NFT.
What is the Value of an NFT?
Before figuring out the right value for an NFT art, you first need to understand the concept of value itself.
Value can be defined in two ways. The price or amount of money an individual (or a group) is willing to pay for something is called its value. This type of value is known as market value. The most important factors affecting the market value of an item are its supply and demand in the market.
The second type is economic value. It is the measure of benefit the item can provide to an individual. Hence, the economic value of a good can be higher or lower than its market value. For example, brands like Apple and Samsung have high economic value due to their massive brand identity.
Factors that Make an NFT Art Valuable
The value of digital token assets is dependent on the following six factors. You can use these metrics to estimate the value of any NFTs in the world.
1. Rarity and Scarcity
Rarity and scarcity are inversely proportional to market demand. If the demand for an item is more than its supply, it is considered a scarce commodity. In other words, if a good is hard to acquire and the available amount is not enough to fulfill the consumers’ needs, it becomes more valuable, and the price increases.
All valuable assets in nature are scarce. And whenever the supply for an item dips, i.e., the product becomes scarce, its price shoots up. For example, during the 70s, the amount of gold being mined declined significantly. As a result, the incoming supply was insufficient to meet the market demand. It caused gold’s price to skyrocket and increase by almost 1,800% during this period.
NFT artists create this effect by capping the supply of tokens, which means creating only a fixed number of NFTs. All successful NFT collections have a fixed number of tokens, including Bored Ape Yacht Club (BAYC), The MeeBits, and Mature Ape Yacht Club. This factor makes these projects deflationary, driving their price up.
The rarity of an NFT art is also a key aspect in determining its value. If a certain NFT has some unique features that are uncommon in the rest of the NFT collections, it automatically becomes more desirable, consequently boosting its value.
Take the example of NFT #5822 from one of the earliest and the most popular NFT projects, CryptoPunks. The project is a collection of 10,000 avatars that are all different from each other. There are 6,039 Males, 3,840 Females, 88 Zombies, and 24 Ape Punks. However, only 8 of these avatars, including Punk #5822, are Aliens, making it the most unique category. Thanks to this rare feature, the Punk was sold for a whopping 8,000 ETH, equal to $23.7 million at the time of the sale.
Utility means practical use cases for NFTs. Although the majority of NFTs minted on different blockchains are rarely more than mere collectibles, there are, in fact, innumerable ways the NFT technology can be used. From supply chain networking to healthcare, NFTs are implementable in almost every field and industry today.
Although the buzz and market trends are probably the determining factors for the early price of any NFT, the utility of a project is what carries its value over the long run. Interestingly, more than 90% of the current NFT projects will be worthless in the coming few years. Why? Well, there are no real use cases for most of these items. Their value is driven only by the hype created in the initial period of launch. In the next 2-5 years, when this hype fades away, the price bubble will pop, causing all these NFT projects to come crashing down.
However, NFTs that are created to fulfill a purpose or used to perform certain functions are not only more than likely to survive this period but increase in value over time. Some common utility digital tokens include metaverse NFTs, crypto domains, and NFTs used to represent a real-world asset. So far, the gaming industry and game developers have contributed the most in exploring the potential of this newly emerged technology.
NFT technology can be used to tokenize in-game items like avatars, skins, weapons, arenas, etc. This gives players more control over their virtual assets. Blockchain games, such as CryptoKitties and Axie Infinity, have fairly active and growing marketplaces where players buy, sell, and trade their in-game NFTs.
Crypto domains are another great example of utility digital tokens. Some crypto domains with high-volume keywords are bought for hundreds of thousands of dollars in secondary markets. A few months back, an investor sold a crypto domain for over $400,000, which he bought for only $15.
Provenance refers to the historical records of the ownership of an artwork or a valuable item. It includes details of its origin, creator, and all the people who held/owned the piece at some point in its history.
Since the earliest of times, provenance has been the go-to method to validate the authenticity of any valuable item. Even in the current-day art market, a piece is not accepted as an original unless a record of its historic ownership is not presented. The more detailed provenance is, the more reliable it is considered.
However, maintaining this record and then proving it legit is itself a challenge. Fortunately, the use of blockchain and NFTs makes this procedure much easier. Since all the events and transactions on a blockchain are automatically recorded on the ledger, the entire journey of any NFT right from its inception is traceable.
On top of documenting the NFT origin, creator, creation date, and address of all wallets that held it at different points in time, this data is easily accessible to anyone, as all popular NFT blockchains are public and open-sourced.
Most of the time, the NFT art itself does not have as much of a significant impact on its price as the name of its creator or artist may have. For instance, an NFT art, which originally was not worth much, may command an incredibly high price after its creator becomes a popular artist in the NFT space.
Similarly, NFTs that were previously owned by an influential crypto personality may resell for a lot more than their inherent value or original price. Sellers can use tools like Etherscan.io to access the information of previous owners and highlight if they find an important wallet address.
Tangibility is another key factor to consider when assessing the value of digital tokens. Tangibility means the association of an NFT with a real-world item or asset. Both technically and literally, anything in the real world can be backed by NFT ownership. However, just the fact that a certain NFT represents a real-world asset will not make it valuable. The object/asset needs to provide good practicality and user satisfaction to its buyers or owners.
A good example of such NFTs is membership tokens. A large number of NFT projects offer access to an exclusive club with several perks. For example, every owner of a BAYC NFT is part of a posh private group that includes globally famous celebrities like Eminem and Snoop Dog.
Another project named Fly Fish NFT gives exclusive membership privileges to a private 10,000+ sq. ft. seafood dining room in New York City. Such NFTs succeed in achieving high value both on an intrinsic and personal level with users.
5. Subjective Quotient
The subjective quotient is arguably the most important factor driving the value for most NFTs today. Unlike the objective value, which remains the same regardless of the change or shift in belief, perception, or preference of consumers/users, subjective value is determined by the person’s behavior and individual desires towards a certain entity.
To understand this difference better, let’s draw a comparison here between the value of a commodity like oil and a luxury item such as a vintage car. The price of oil reflects its objective value. No matter how a general user feels about it, the price won’t be affected by her feelings.
On the other hand, the price of the vintage car reflects its subjective value. It is entirely up to the buyer and the seller how much they want to purchase and sell it for, respectively. The price wouldn’t take factors like the car’s retail price or the worth of its individual parts into consideration.
Similarly, the price of most NFTs is driven by their subjective value. It is up to the investors how much they are willing to spend to acquire a certain NFT art. This is the reason why NFT auctions for high-value digital tokens are so successful. For instance, no macroeconomic or objective factor led to a whopping $69 million valuation of Beeple’s “Everydays: The First 5,000 Days.” It was only the buyer who believed that the artwork was worth that much and was willing to pay the price.
NFTs are a nascent industry. Though the market for this new virtual asset class has grown exponentially over the past few years, it’s still in its early stages of evolution. The technology has already begun creating waves in different business sectors, but we are yet to see its widespread adoption.
Hence, the current NFT market is under the influence of several different factors. It will be interesting to see how this space will expand and put its roots deeper in the corporate world over the next few years.
As of now, NFTs are considered high-risk assets since the prices are subject to fluctuations all the time. Do not make any investment decisions before consulting with a professional financial advisor.