What Gives NFTs Their Value?

What are NFTs? NFTs Explained in Layman's Terms

In crypto, there are two main types of tokens: non-fungible tokens (NFTs) and fungible tokens. Fungible tokens are digital assets like bitcoin (BTC) or ether (ETH). One bitcoin is always equal to one bitcoin — just like how one dollar is always equal to one dollar regardless of the serial number on the bill. Conversely, NFTs can't be directly exchanged for another NFT, and no two NFTs are identical.

NFTs are unique, cannot be copied, and provide exclusive ownership through the blockchain. They are used to represent unique digital assets, such as collectable fine art, digital trading cards (i.e., a Lebron James NBA Top Shot collectible), or even a character from a movie. NFTs can represent a musical track created by an artist or a plot of digital land within a blockchain gaming metaverse.

NFT Trading In Today’s Digital Economy

Let's say a user wanted to send their friend or family member their newest Mario, Bowser, or Luigi NFT. They would need to create an account on a secondary NFT marketplace such as OpenSea or Rarible. Then they would connect their Metamask wallet and purchase the NFT with ETH. Further, the transfer of an NFT from one wallet to another is typically very cheap or free (with the exception of Ethereum-based NFTs, which require a gas fee) and takes only a few simple clicks.

Why Are NFTs Valuable?

Let’s dive deeper into what makes NFTs valuable:

Verifiable, immutable ownership: Through the verifiable cryptography that blockchains provide, NFTs are designed to give a user something that cannot be copied: ownership. Although it is possible to freely copy and distribute digital media (such as images, musical tracks, or videos) associated with an NFT online, each NFT is given a cryptographic signature (a specialized serial number) in the form of a private key that cannot be copied. Similarly, anyone can own a Picasso print, but only one individual can own the original.

Limited in number and scarcity: NFTs that are initially produced with a limited supply often have a higher probability of increasing in value due to their rarity.

Collection and artist reputation: Generally, NFTs are worth significantly more if the artist or company that created them is well-known. Collections such as the Bored Ape Yacht Club (BAYC) and CryptoPunks, or those created by graphic artists like Beeple, have historically been extremely valuable. CryptoPunks regularly sell for hundreds of thousands or even millions of dollars a piece. In February 2021, Beeple’s “Everydays: the First 5000 Days” NFT became the most expensive NFT ever sold, selling for 69 million USD at a Christie’s auction.

Utility in play-to-earn (P2E) gaming economies: Of late, it has become increasingly popular for NFTs to be used in digital metaverses and play-to-earn gaming environments. Most blockchain games that employ their own cryptocurrencies allow users to earn NFTs for their in-game behavior. This means the more the user plays the game, the more they are rewarded.

In addition to the above factors, NFTs accrue value from numerous other attributes:

• Underlying value: the value associated with the artist or company that created the NFT

• Potential value: the value that the NFT could accrue in the future because of up-and-coming artists, creators, and celebrity or company backing

• Buyer’s perception of value: what the buyer considers to be valuable

• Comparable market value: the value of similar pieces with similar rarity from the same collection or artist