2021 can be dubbed the golden year for non-fungible tokens (NFTs), with some of the most expensive NFTs ever sold. The sale of digital artist Pak’s ‘The Merge,’ which sold for a mouth-watering $91.8 million, was the cream of the crop. Other valuable NFTs that deserve an honourable mention include Beeple’s Everydays: the First 5000 Days which sold for $69.3 million and his HUMAN ONE piece which sold for $29 million.
Most NFT collections are increasing in value daily, with some selling for hundreds of thousands of dollars. But the question still stands, why are NFTs so expensive?
Why Are NFTs So Expensive?
An NFT collection is valued at a specific price primarily because of the type of NFT it is. For example, the most popular NFT type in today’s market are digital art collectibles, and these items accrue value in similar ways to traditional art.
That said, several NFT collections get their value in other ways that traditional art or other conventional items cannot. The following are factors that determine the value of an NFT today.
The actual value of an item refers to its measurable cost without the actions of any external forces. For example, the actual value of a piece of art would mean the cost of the materials used in its making, as well as the cost of the artist’s time and effort.
Perceived value, on the other hand, refers to the worth that society or people set on an item. It is the amount of money that an investor is willing to part with to claim ownership of an item. The difference between the actual and perceived values of an item can sometimes be extreme.
For instance, Salvator Mundi was last priced at a whopping $475 million. That is only a perceived value of the artwork, as there is no way Leonardo da Vinci spent such an amount creating the painting. But then, someone was willing to pay that amount for the piece.
Like the most expensive paintings, most NFT collections have little actual value. After all, the cost of creating can be as low as $0.1. However, the perceived value of some NFTs is enormous. This is because of the sentiments attached to digital assets by people in the NFT space.
Beeple’s Everydays digital artwork, which was sold for $69.3 million in 2021, is one of the most valuable NFTs in the world today. This NFT didn’t suddenly accrue such perceived value; it did due to other factors further discussed in this article.
Simply recreating a copy of an artwork doesn’t diminish the worth of the original – so long as there is proof of originality. The same holds true for NFTs. Indeed, an NFT is a digital file that can be reproduced in various ways multiple times. However, what makes an NFT special is its originality and rarity.
A significant portion of perceived value depends on how famous an item is. So, the more your NFT gets reproduced, the more people become aware of it. With increased fame, your NFT becomes a desirable asset to several investors, increasing in value.
That said, why can’t any NFT collector save any digital asset they want on their phone? Exclusivity is the reason! Every NFT owner has something of a ‘bill of sale’ that proves their sole ownership of the digital asset.
Everybody wants to be a part of something great. They want to be part of a good story in the NFT space. For instance, some NFT collectors are banking on projects, such as the Bored Ape Yacht Club (BAYC), CryptoPunks, and Autoglyphs, to remain culturally for years to come.
Specifically, BAYC has the potential to become a huge franchise in terms of intellectual property, as the Apes now appear in books, comics, movies, video games, even as restaurant brands, and so on. As long as the NFT collection maintains its cultural relevance, it will be desired by NFT investors, thereby increasing its value in the long run.
Many NFT projects have niche audiences and don’t need mainstream recognition to be valuable. In fact, some NFT collections sell for a good amount just because of how scarce they are.
An example is the NBA Top Shot, which allows NFT collectors to trade 10-second video clips ‘Moments’ from their favourite NBA players. Instead of diluting its NFT pool with constant releases, Top Shot is making its circulating supply more constrained, thereby driving up the value of its NFTs.
Fear Of Missing Out (FOMO) has been known to drive up NFT value in the past. Since this is a relatively new market, we’ve seen investors flock to try and make as much as they can. And when a project drives enough hype, people are bound to follow.
The majority of new collections gain mass followings of tens of thousands before even releasing their NFTs. And when there is a limited number of NFTs to go around, the value can sometimes skew due to the number of people wanting to cash in to make a quick profit. This is not always a good thing and almost always leads to the project reaching a peak in price very early on.
Moonbirds by PROOF Collective is a strong example of FOMO, with the 10,000 pfp collection being priced at an astronomical 2.5 ETH to mint, a price that no project even came close to at the time. Due to the mass amount of hype around the project, they sold out instantly and reached an immediate peak of 34 ETH and have remained below that price ever since.
Utility is a word that gets thrown around in the NFT space quite often as many believe that without utility the inherent value of an NFT is worthless. It’s been known that if an NFT can provide additional features other than just being a picture on the blockchain then its value will rise and more people will want to invest.
NFT utility can be and is not limited to; exclusive entry into events and digital spaces, claimable real-world assets, airdrops, staking (re-occurring awards), whitelists, and in-game features. BAYC is a great example of being more than just an NFT, with previous records of rewarding its investors with other incentives.
Many projects are expected to deliver on utility to help drive up the price and make holders happy. However, it can sometimes act as a double-edged sword when it comes to founders over-promising through future roadmaps and then later under-delivering on expected features.
NFTs accrue so much value for various reasons – some of which are mentioned in this article. And, with the inevitable growth of the cryptocurrency industry, NFTs have a massive potential to become even more valuable in the future.
Investing in NFTs is one of the most worthwhile ventures one can make in the cryptocurrency space today. That said, there are certain things you must look out for when making your NFT pick in order to avoid making a futile investment.