A recent explosion of interest in NFTs by blockchain early adopters begs the question, why? So, what’s an NFT token, why does it have value, and why are some digital NFT art pieces selling for thousands, if not millions? Read on to find the answers to these and more questions.
What is an NFT? How Do They Work?
NFT stands for Non-Fungible Token. In economics speak, a fungible asset has units that are easy to interchange – such as crypto tokens. You can, for example, exchange Bitcoin for USD, which makes them fungible.
Unlike a standard token in the Ethereum or Bitcoin blockchain, an NFT is unique, and you can’t change it like-for-like – hence “non-fungible.” The uniqueness of NFTs is verifiable on the blockchain, so you can’t replace the original NFT with a replica. Every NFT has a “digital certificate” verifying that it’s authentic and original work.
The certificate contains extra information, elevating it above pure currency and bringing it into the realm of just about anything. NFTs are variable but can take the form of a piece of digital art, a music file, or anything unique and can be stored in digital format while holding value.
Think of NFT art like other items you would find with a physical collector. But instead of receiving an oil painting for hanging, you get a JPG file instead, for example.
But it’s easy to duplicate digital files. NFT artwork is “tokenized” with a digital certificate that contains a record of who owns it. People cannot forge these records since thousands of computers worldwide maintain the blockchain technology ledger.
Why Do People Pay For NFT Digital Art?
You’re probably wondering why anyone would pay for an NFT. Of course, you can take a screenshot of the NFT, download it, or even sell the digital file. But it’s not the original artwork.
Plus, you won’t make millionaire status from the downloaded file. This is because it doesn’t hold the information that makes it part of the Ethereum blockchain. People purchase non-fungible tokens for various reasons.
Scarcity Creates Value
The best way to explain scarcity is to consider what makes diamonds more valuable compared to potatoes, for example. You can easily live by eating potatoes, but you cannot consume diamonds. So, if potatoes are so important to your life, shouldn’t they be more valuable?
The answer is scarcity creates value. Diamonds have a higher value than potatoes because they are scarce.
Going back to NFT art, there is only one original piece that the digital artist signs in the digital art world. Copying and redistributing the artwork does not mean that other people have the verified original.
There’s only one original NFT artwork, and scarcity becomes one factor that contributes to its value. Plus, many people may want that specific NFT and the owner is not selling, or it’s not available in any NFT marketplace.
That’s how the price of an NFT rises at an auction house. The result of a simple demand versus supply economics, where many people are vying for the same artwork, creates excitement around the scarcity of the artwork.
Digital artist Mike Winkelmann, who goes by the name Beeple, sold his piece “Everydays: The First 5000 Days,” for over $69 million on Christie’s. Since there is only one original and more than two bidders, the demand outdoes supply.
The Original Digital Artist Adds Value
What makes any type of art valuable? One factor that makes the Mona Lisa so famous and expensive is that it’s a good painting. Second, a renowned painter, Leonardo da Vinci, created the artwork in the 16th century.
Principles that apply to physical art also apply to digital pieces. Any NFT done by a famed painter or designer automatically gains value. People are always looking to purchase the only original, making its value skyrocket.
However, the seller doesn’t have to be an artist or designer. Jack Dorsey of Twitter has sold his first tweet as NFT for over $2.9 million. Elon Musk also considered selling one of his tweets as NFT and turned down a $1.1 million offer.
People Like Collectibles
For decades, people have been collecting baseball cards, old coins, and other things. Many will pay a lot of money to have a specific collection of an item.
Scarcity also has a hand in collecting. Some people collect old coins that are no longer in circulation, and there are very few of them.
Your regular digital token is not collectible considering there are so many of them, and they’re interchangeable. But, like trading cards, there is only one of each NFT.
The NFT Craze
The current NFT craze adds hype and drives up the value of NFTs. Industry top shots will pay a lot of money for an NFT because of the craze, and they have the cash. Doing this drips up the price of the NFT and also in the entire NFT market.
People are hearing more about NFTs on the news and visiting NFT marketplaces such as Rarible, SuperRare, and OpenSea. The increased interest drives the prices of NFTs higher.
Cryptocurrency’s Price is High
Some NFTs may sell for a set amount of Ethereum. The price of an NFT may go up as the price of Ethereum cryptocurrency rises.
The Art is a Famous Meme
A creator can base an NFT artwork on a famous meme. For instance, the viral YouTube video of Nyan Cat was turned into a GIF and sold as NFT for about $560,000. The seller, Chris Torres, was the original meme creator.
Hopefully, you now understand what makes an NFT valuable. Keep in mind that not everything has value because of its intrinsic worth.
External factors, such as hype, demand, artist’s fame, and scarcity, add value. The value of NFTs is constantly fluctuating, but as long as people are crazy about them and willing to purchase them, crypto art remains valuable.