If you’re just coming across NFTs for the first time, and you’re like most people, one of the first questions that comes to mind is why are these, often highly pixelated, digital images so valuable.
After all, if you were to spend millions of dollars to buy a piece of work done by Picasso, you could hang it in a gallery and charge quite a bit of money for tickets to simply look at it. But NFTs are different. They’re digital files that can essentially be copy and pasted by anyone.
In fact, if you wanted to, you could simply print a copy of the most expensive NFT ever sold and hang it on your wall, and if the owner of the intellectual property behind the token did the same, you couldn’t tell the difference.
So, what is it that makes these digital assets so valuable?
NFTs Are Unique
First and foremost, it’s important that you understand what the acronym NFT stands for, which is non-fungible token. The non-fungible part of the name points to the uniqueness of the digital asset. These pieces of art simply can’t be replaced.
To understand the difference between a fungible asset and a non-fungible asset, all you need to do is look at Bitcoin, Ethereum, or a wide range of other cryptocurrencies, which are all indeed fungible. After all, there’s nothing unique about a single bitcoin other than its ownership. One could be replaced with another and the owner wouldn’t mind because the value is the same no matter which coin he owns.
On the other hand, your dog is a non-fungible asset, albeit one that’s likely a very valuable member of your family. After all, I couldn’t walk in with another dog that looks pretty much the same, take yours and leave mine, without you being upset about it.
Your dog is unique. You know his personality, he knows yours, he gets along with your kids, friends, and family. Shucks, he’s part of the family. There’s no way to replace him.
Not that NFTs are living, breathing, animals that become part of the family, but they are just as unique and irreplaceable as your beloved family pet; hence, making them non-fungible.
Ultimately, uniqueness adds value. After all, value is a concept that’s built on supply and demand. When the supply is high and demand is low, value is hard to come by, but with NFTs, the supply count for each unique token is one! As a result, if someone wants to buy it, they’re not going to be able to unless they pony up the amount of money that the owner of the NFT is willing to accept for it since there’s no competitors to lean on when you don’t want to pay the price asked.
NFTs Point to the Utility of the Blockchain
Although the technology that makes up the blockchain was invented in 1991 and has been being perfected for decades, it wasn’t until very recently that a mass of developers saw the value and decided to start building utility into the equation.
NFTs point to that utility.
You see, NFTs aren’t just digital forms of artwork, they can actually be used. Some of the most common ways they’re used include:
- Games. One of the first games involving NFTs is known as CryptoKitties. In the game, the NFT artworks are digital images of cats with no two looking exactly the same. Those that play the game are able to adopt, breed, and trade CryptoKitties as if they were a mix between a real life pet and a playing card. Today, CryptoKitties are some of the most valuable NFTs on the market.
- Tracking. Several corporations have used NFTs as a way to track and verify the source of basic materials and even end products they sell in their stores. Products are essentially tied to NFTs, and when they trade hands, data is added to the ledger. This is overwhelmingly valuable for companies like jewlers that make promises not to use blood diamonds in their jewelry. After all, if the source and distribution of those diamonds is tracked using the blockchain, every step along the way can be verified, ensuring that money is not making its way into the hands of the terrorists that force slave laborers to mine the diamonds.
- Ownership Verification. Because each NFT is unique and the owner of that NFT can be verified through the blockchain, these tokens are often tied to limited edition products, attaching an owner to each individual product within the run. For example, say Nike was launching a new style of shoe, but only decided to make 100 of them. The first pair off the line would be the most valuable ever made. As such, if an NFT was attached to that pair, the owner could verify that not only is the pair of shoes one of only 100 ever made, he could verify that it was the first of the 100 made.
- Royalties. When developing an NFT, artists are able to add royalties to the blockchain, giving them capabilities they’ve never had before. After all, in the past, if an artist were to sell one of their works, the sale was final and there were no future revenues that could be made off of that piece of artwork. However, with NFTs royalties are made every time a piece of art trades hands. Imagine the implications this concept carries for the artist. If Picasso would have attached NFTs to his paintings, his family would still be collecting royalties to this day.
As you can see, NFTs aren’t just digital images attached to the blockchain. These are pieces of art that can be used in various ways, with each individual use adding value by way of utility.
NFTs Are an Investment In Far More Than Art
OK, for the average joe, you may see some value in the fact that NFTs are unique and that they have quite a bit of utility. Not to mention, more uses for them are being developed each and every day. However, that doesn’t yet point to hundreds of thousands or even millions of dollars in value.
What I find to be the most valuable part of the NFT is that these digital artworks are investments in much more than the artwork itself or even the utility it represents. They’re an investment in the underlying cryptocurrency, known as Ethereum.
Think of it this way:
When you purchase an NFT, you’ll purchase it using the cryptocurrency that lives on the same blockchain as it, with the most popular being the ethereum blockchain, which uses ether cryptocurrency.
So, say you wanted to purchase a Cryptopunk for one ether, which in United States dollars works out to about $3,487 as of September 2021. You like the art and you decide to hold it for a while, but in five years, you decide it’s time to sell and look for other artworks for your portfolio.
Even if you decided to sell the art for exactly what you paid for it, one ether, there’s a strong chance that you’ll make a hefty profit when that ether is converted back into USD. After all, five years ago, ether had a value of about $11.
What Are the Chances of Losing All Your Money?
When investing in art, or anything else for that matter, one of the biggest concerns among investors is the potential to lose money, and NFTs are no different. As with any investment, money can be lost and anyone that tells you it’s impossible to lose is either ignorant or trying to scam you in one way or another.
However, something important to consider when investing is that any asset, whether it’s an NFT, a piece of fine art, or a share of Apple stock, is only worth what someone is willing to buy it from you for.
For example, if the new iPhone hits the market and sales don’t stack up to investor expectations, investors aren’t going to be willing to pay as much money for shares, leading to declines in the price of Apple’s stock. However, regardless of how far it falls, there’s likely always going to be someone willing to buy it at some price. So, chances are, you’re not going to lose your money because Apple is a popular company.
NFTs values work in the same way.
For example, a Cryptopunk is only worth what someone is willing to pay for it, but Cryptopunks are also very popular. As a result, the only way for the price to fall to nothing is if a massive community of followers suddenly decided that they’re no longer interested in the asset. Although I never say never, you’d have a better chance of being struck by lightning and the burn ending up looking like the most attractive tattoo you’d ever seen.
So, yes, you can lose money and you can make money, but the chances of NFT losing all of their value are slim to none.
At first glance, NFTs may not seem to be all that valuable, but once you dive into the industry and what it represents, you’ll quickly see that there’s incredible value in owning these digital artworks.
As with any other investment, it’s always wise to do your research and understand what you’re buying before you dive in, and as with any investment, valuations will go up and down. However, those that take the time to get to know what makes the NFT market tick and thoroughly research the projects they’re interested in diving into will have the best chances of making it big in the space.