NFTs have caught the eye of the high-brow art, major corporations and tech investors alike. Artists and musicians have been leading the charge with highly priced virtual creations of their own. But what exactly are NFTs and what makes them so valuable?
Non-fungible tokens, popularly known as NFTs or Nifties are tokens that have unique properties and cannot be exchanged or substituted for similar commodities. Fiat currencies (such as the US dollar) or cryptocurrencies (such as Bitcoin) are fungible in that they can be exchanged for similar items. However, non-fungible tokens are blockchain-powered assets that can never be equal. For instance, a movie ticket is designed for a particular movie at a particular time. The same movie ticket cannot be used anytime for any movie. Similarly, NFTs offer convenience and security, but for a particular asset that has a particular value. In this article, you will find out why some NFTs have enormously huge prices.
What Influences the Value of NFTs?
Recently, there have been NFTs that been auctioned for jaw-dropping prices. Some of the remarkable ones include:
- Everydays: The First 5000 Days by Beeple – $69 million
- Grimes album – $6 million
- A Nyan cat’s animated gif – $500,000
Theoretically, anyone can tokenise their digital work and sell them as an NFT, but high interest has been catalysed by the recent headlines of NFT sales of millions of dollars. NFTs are valued based on various components such as utility, future value, ownership history, liquidity premium, and several others.
a) Ownership history
The value of a specific NFT is also determined by the previous owners as well as the issuer of that NFT. Mostly, NFTs that have a great ownership history value are developed or issued by firms with a strong brand, or famous artists. There are two methods of increasing an NFT’s ownership history value.
First, you can resell NFTs that were formerly owned by influential people. There are several marketplaces such as OpenSea that provide their consumers with a convenient tracking interface to enable the consumers get access to the valuable on-chain information. Second, you can partner with individuals or firms that have a strong brand to offer NFT tokens. This will naturally bring users and traffic to the ecosystem.
b) Scarcity and future value
There are many NFTs that are limited or one-of-a kind. For example, Top Shot Moments feature different players and games, and there is only one of Lebron James. That means that its price was destined to escalate given the scarcity of the card. An NFTs future value is determined both by future cash flow and valuation changes. Valuation of an NFT is derived from speculation, and this could sometimes be the key driver for price appreciation. A good example is in December 2017, when CryptoKitty #18 went from 9ETH to 250ETH in a span of just three days.
Speculation is not only important when it comes to NFTs, but forms a crucial part the current financial system as well. If an NFT developer makes the right balance, they can attract new users and enhance the value of the NFT. Valuation of an NFT is majorly driven by speculation and scarcity of supply. Speculation can be fuelled by highlighting specific NFTs that increase in value, or by indicating the price performance charts of NFT commodities. A platform such as StockX, a sneaker marketplace, achieves its high valuations by encouraging speculation on sneakers’ price: thus, creating a rare market.
Future cashflow is the earned royalties or interest by the original NFT owner. For instance, SuperRare is a marketplace that offers NFT creators a 3% royalty each time their artworks are subsequently sold on the secondary market.
c) Liquidity premium
High liquidity of an NFT means a higher value of that NFT. The primary reason why the tokens that are created on-chain have a higher value than assets that are off-chain is liquidity premium. NFTs with ERC standards can be bought and sold easily and conveniently on marketplaces by anyone who has Ethereum currency. This increases the number of prospective purchasers. Most investors like to invest in NFTs which have a trading volume that is high. This is because liquidity decreases the risk involved when holding NFTs.
In the worst-case scenario where a particular NFT has lost its utility value because its connected platform has been closed, an NFT that is highly liquid still retains its value provided there are people that willing to buy and sell. However, NFTs standards which are not powered by Ethereum face the challenge of lack of liquidity. Thus, the value that is created on those marketplaces are regularly discounted.
That said, firms need to develop token economics that encourages people to trade so as to increase NFT liquidity and engagement. An example is where games can introduce a method of forcing users to swap their assets so as to remain competitive during the course of the game, and depreciate the assets if they stay idle for long.
d) Utility and Transferability
An NFTs utility value depends on how the NFT itself can be used. Tickets and game assets are major categories which have a high utility value. There are NFTs that can generate revenue, serve functional roles, or even be exchanged for physical items. An NFTs value increases when it can be resold to almost anyone in the world. This means that it has a wider pool of potential buyers as compared to an NFT that can only be used in a particular platform such as a game.
If you also can use an NFT that you acquired elsewhere to serve a particular purpose, then definitely its value will go even higher. A way of increase the utility value of an NFT is to partner with other businesses to offer given benefits such as discounts to individuals that hold your NFT.
e) Trading Platform
Selling an NFT on a major platform, such as Christie’s auction house or OpenSea, is a guaranteed way of drastically increasing the price of an NFT. A trading platform influences the price of an NFT because more trusted platforms have more registered users, which in turn generates more sales. The First 5000 Days by Beeple was auctioned off at Christie’s for such an amount mostly because of the auctioning firm’s high popularity and credibility among investors.
f) Artist popularity
Just like in the physical world, the value of a commodity increases if it is being sold a popular individual or company. In this case, NFTs from popular artists such as Linkin Park, Kings of Leon, Shawn Mendes or Grimes could fetch a great amount of money as compared with an NFT from a lesser-known person. More popular artists have more fans that are willing and, in a position to bid up enormous amounts of money for a specific NFT. A great example of how an artist’s popularity can influence the price of an NFT is the selfie by Lindsey Lohan that was sold for $59,000, or the LeBron James that was sold for a whopping $208,000.