Why are NFTs so Expensive?

by | Sep 5, 2022 | Blog, NFT

An NFT can be any type of digital good whose value and proof of ownership are corroborated in a blockchain’s ledger. Because blockchains are decentralized and automated digital ledgers, NFTs open a world of possibilities for decentralized property rights.

The most common use that the concept of NFTs has received thus far is defining the property of digital artwork and collectibles, leading to the creation of some extremely popular digital art illustration collections such as Bored Ape Yacht Club and Cryptopunks. 

Each of the pieces in these collections can be worth anywhere from tens of thousands of dollars to hundreds of thousands or even millions, leaving many newcomers into the space baffled as to why anyone would be willing to pay these prices. Thus, people have naturally asked themselves: why are NFTs so expensive?

Here, we will explain to you why NFTs are so expensive and why there are people willing to pay these high prices. Before we do that, however, we should ask ourselves what it means for an NFT to be expensive and if that’s truly the case.

Just How Expensive Are NFTs?

The general notion that NFTs are expensive comes from the fact that the most popular NFTs tend to have a high cost, and naturally, their high cost comes precisely from their popularity.

The most expensive NFT ever sold was a digital art piece called The Merge by an artist known as Pak, for a total cost of 91.8 million dollars. The reason why it achieved such a price was largely due to the artist’s popularity.

In truth, NFTs come in a wide range of prices. If you look at any of the major marketplaces at any time and sort the NFTs by order, you’ll be sure to find many cool NFTs for just nickels, or in many cases, even for free.

As with any other product, NFTs are sold in a market and their prices are determined by supply and demand. Thus, the question we should be asking is why some NFTs are so expensive, which is to say, why is their demand so high and supply so low?

Why NFTs Become Expensive

There are multiple factors that determine the value of an NFT, which can range from its concept to its utility. 

However, when NFTs become exceptionally expensive, going into the ranges of six, seven, or even eight figures in their total price, simple market value explanations might not cut it. 

The three main elements that can make an NFT highly expensive can be summarized as scarcity, novelty, and speculation. Here, we will explain how each of these variables drives NFT prices up, resulting in some of them becoming incredibly expensive.

Scarcity

The main factor that drives up the price of any item that people tend to desire in a market is scarcity. However, up until recently, the matter of scarcity or the lack thereof had been a problem for suppliers in the market of digital goods.

Because digital goods can be reproduced virtually infinitely, suppliers for different forms of digital products, from entertainment to software tools and knowledge have had to develop different ways to limit their access.

This has been done through different means, from platforms with periodic payments to keys for digital downloads. NFTs provide a way to corroborate the ownership of a digital asset without a centralized entity verifying it.

While an NFT image, video, or audio piece can, just like any other digital thing, be almost indefinitely copied, the blockchain corroborates exactly who is the owner of that thing without leaving a place for doubt. 

Nonetheless, although blockchain technologies could potentially be used for the purposes of piracy prevention, this is not the exact reason why they make digital products scarce and therefore utterly expensive.

As it is often jokingly pointed out by NFT critics, images from highly expensive collections can be screenshotted, copied, and pasted easily. However, screenshotting an NFT does not mean you own it. 

Only the person or persons who are corroborated as the owners of an NFT by the blockchain can truly claim they own it and many people are willing to pay large sums of money for that privilege because it entails a sense of social status and aptitude for new technologies and artistic concepts.

This social status isn’t too different from the one that people who possess expensive physical art are given. Almost anyone can have a copy of a Monet painting in their house, but having the original is a rare privilege that comes with social status as a wealthy person who appreciates art.

Likewise, anyone can have a Bored Ape Yacht Club image as their social media profile picture, but actually owning a BAYC NFT comes with a tremendous social status, as someone who appreciates new concepts and technologies.

Novelty

Blockchain technologies are still fairly new and have incredible potential to evolve. Likewise, NFTs have been around for a relatively short time, and being new is something that makes them attractive in and of itself.

The sheer novelty of something like an art piece being registered in a blockchain can make it more attractive for people, as they wonder what being an NFT entails for the piece. This can occur with NFTs made for the sole purpose of being investment assets.

Another aspect that can add to the novelty of an NFT is its utility, or the actual uses of the token built into its smart contract, which provides added value to its end holder.

Examples of NFT utility include those of tokens like the Coachella NFT which grants its holder a lifetime pass into any instances of the festival. Likewise, Bored Ape Yacht Club NFTs give their holders access to exclusive parties and events.

Utility in and of itself does not necessarily drive the price of an NFT to astronomic levels, even if it does provide added value to the end holder. However, when utility, even in its most simple terms is added to the novelty factor and the uniqueness of an NFT, it can result in incredibly high-value NFTs.

Speculation

While the high prices of the most popular NFTs are largely a result of the natural forces of the market, it is undeniable that many of them are artificially driven to a certain extent by simple speculation, in some cases in a deliberate manner.

In short, there are many cases in which the prices of NFTs aren’t driven by people who actually want to own the NFT, but by investors who think the NFT’s price might go up later, so they demand it and make the price increase as a result, in a sort of self-fulfilling prophecy.

In some instances, NFT creators go as far as to buy their own NFTs themselves to artificially drive up demand. These types of moves were tracked in a report developed by Chainanalysis at the beginning of this year. 

According to the report, many new NFTs owe their high price to the practice known as wash trading, which consists of buying and selling an asset within a single group of investors with the purpose of driving up its price.

In NFTs, this is done by setting up multiple crypto wallets and using them to buy a single NFT belonging to the same person or group. Once the NFT is artificially inflated to a high enough price, it’s sold to an unsuspecting user.

NFT wash trading is an increasingly common practice, which is often carried out using hundreds of different NFT wallets through AI bots. However, this does not mean that every NFT that is sold at a high price is a wash trade.

Interestingly enough, however, wash trading isn’t profitable in the majority of cases due to the high costs that come with paying multiple gas fees. 

There is nothing inherently wrong with monetary speculation other than potentially being a risky way to invest one’s money. Speculation is a natural and inevitable part of all markets, particularly so in markets like collectibles and NFTs.

However, although the NFT market isn’t regulated in most jurisdictions, the practice of wash trading, regardless of the asset with which it’s done, is illegal in the US according to the Commodity Exchange Act (CEA), of 1936.

On top of wash trading, the report by Chainanalysis also found that some NFTs are being used as instruments for money laundering. Although this practice is nowhere near as common as wash trading, it’s arguably one of the factors that tend to carry NFT prices up.

The Future of the NFT Market: Will it Stabilize?

The fact that NFTs are such a new technology and that their uses are still being figured out to this day contribute to the current market being highly volatile, which is a sign that the prices of some NFTs might not reflect their true value.

High prices in NFTs come along with their high volatility. However, since NFTs are made to be permanent assets whose ownership can change over time but the NFT itself does not disappear, it is likely that the prices of NFTs will go down in the future, and eventually stabilize at a point in which they reflect their real value.

For this to happen, however, cryptocurrencies, which are the base over which NFTs are traded and their prices are set, should reach a more stable price themselves.

This is going to happen as cryptocurrencies and blockchain technologies increasingly become a part of the mainstream, and the internet develops into its next phase, Web 3.0, where decentralization will be the name of the game and blockchain technologies will play a key role.

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