It might come off as baffling for many people that a digital image can be sold for millions of dollars. To understand why this is possible, it’s important to first have a clear idea of what a Non-Fungible Token (NFT) is and where its value comes from.
Although many NFTs indeed take the form of digital images, there are many more things they can be—from collectibles to items in a metaverse or even songs or books that are digitally stored.
What defines an NFT is being unique and having its property and authenticity verified by a blockchain platform such as Ethereum or Solana. However, just because something is registered in a blockchain doesn’t automatically make it worth a million bucks. Here are the five main factors that define the value of an NFT.
Supply and Demand
Despite their disruptive nature and the fact that they belong primarily in the digital world, NFTs are not exempt from the basic rules of the market. This might seem obvious, but recently, the digital world has traditionally operated under slightly different economic rules. Before blockchain platforms and NFTs were a thing, digital assets could be infinitely replicated without very reliable methods to prove one’s ownership, generating problems such as piracy.
The biggest Web 2.0 platforms have circumvented these problems by coming up with alternative methods of monetization based on data, advertisement, and attention. This, however, created a new set of issues that pertain to user privacy. When a digital asset is minted into an NFT, there is a reliable way to prove its authenticity and ownership, which takes it back to being under the classic laws of supply and demand. However, NFTs have their own particular ways of determining how much supply and demand there is for them.
Whether they come in the form of a digital image, a 3D metaverse collectible, a set of information, or even a digital book or a song, NFTs can have multiple uses. Most of them are bound to digital smart contracts that define certain conditions and agreements for the parts involved in a transaction for the NFT.
These agreements may include things such as access to unique social spaces, experiences with celebrities, copyright ownership, stakeholding, or anything the parties agree on in the contract. The flexibility of smart contracts coupled with the accountability of blockchain ledgers gives NFTs infinite possibilities for utility, which is an essential element of their value.
Of course, the other side of demand is supply, and as we all know, when supply is low, prices go high. The possibility of making a digital item truly scarce paves the way for a whole economy of collectibles. But scarcity alone isn’t what makes an item rare. We appreciate things such as the first issue of a well-known comic book, an instrument that was played by a famous musician, a unique work of art by a renowned painter because there is a story and significance behind them.
Since NFTs allow us to track the history of a digital item, the same principle applies to establishing their value. Thus, some NFTs can be extremely rare, with communities surrounding them and meanings behind them, making them highly valuable.
Although it’s hard to think of the tangibility of an asset that is, by definition, digital, one of the coolest aspects about NFTs is the possibilities they have to transcend the barrier between tangibility and intangibility. Many NFTs are bound to the ownership of physical items. For instance, the clothing company GAP is launching a line of NFT hoodies that are bound to the ownership of their physical versions, all with different rarity levels and price points.
NFTs bound to tangible items open a world of possibilities for new ways of commencing and interacting within digital platforms. Thus, this is a factor that can immensely increase how much interest there is in a particular NFT project and, by extension, the value of the NFTs that come out of it.
Liquidity is always an important factor when it comes to financial assets. Although, as we’ve stated, NFTs can have many uses, a lot of their value comes from their potential as investment assets. Liquidity is a significant factor of this potential because it makes them easy to buy and sell. Most investment assets on the liquid side, such as stocks, cryptocurrencies, and fiat currencies, are fungible, and their liquidity comes precisely from that fact. Fungible assets like diamonds, land, and baseball cards are illiquid because they’re not as easy and fast to buy and sell.
NFTs, however, despite being non-fungible, are highly liquid because they’re traded within blockchain platforms. If an NFT is minted in the Ethereum blockchain, anyone who has enough ETH to buy it can do it instantly, from any part of the world and without any intermediaries. This is one of the reasons why they’re so attractive as investment assets, though it also makes them particularly risky.
Whether you’re planning to invest in NFTs or are simply interested in them for their current and potential uses, it’s always useful to know the factors that define the value of an NFT. As with any other asset, it’s all about supply and demand, but how NFTs position themselves in the markets is largely owed to utility, rarity, tangibility, and liquidity, varying drastically from one token to another.
If you wish to learn more about the value of NFTs, as well as their potential uses, and experience the latest innovations in the NFT world, stay tuned for the largest upcoming event on NFTs and mass blockchain adoption, Expoverse.