NFTs have been making headlines frequently due to the large prices some have been selling for at auction. For many outsiders, and a few insiders, it’s hard to imagine exactly what’s driving the price up.
Some NFTs are selling at a cost that hardly seems to match the asset being sold. Check out Gucci Ghost for a very quick example.
To begin to understand why an NFT is so expensive, you first have to understand what an NFT is. An NFT, or non-fungible token, is a unique item.
It’s a digital asset that is hosted online and sold to the public via auction. Many NFTs are forms of digital artworks, and they’re traded for cryptocurrency.
NFTs actually act similar to cryptocurrency, in that they’re given authenticity and recorded via blockchain. The difference is the non-fungible quality of an NFT. Where other tokens of cryptocurrency are interchangeable, an NFT is wholly unique.
This gives it a rarity, and everyone knows that rarity can be a shorthand for ‘expensive’. By purchasing an NFT, you take ownership of an asset that no one else has. This is an important distinction - buying an NFT is buying ownership of an asset, rather than a physical item.
The rarity is the basic explanation for why NFTs are so expensive. However, numerous items are rare and that still doesn’t make them costly. Scarcity doesn’t always breed profit.
Instead, it’s a task of finding that meeting point of scarcity and desirability. The most expensive NFTs have both of these in spades. At least, they do to some people.
So, NFTs are unique and scarce items, the ownership of which is traded online for currency. Put like this, you can hopefully begin to see where the price tag comes from.
However, once you add the items themselves back into the equation, the question may arise again. Expensive NFTs aren’t always high quality, and they’re mostly still accessible to the public.
To answer the question ‘why are NFTs expensive?’ there’s one very important consideration to remember: many of them aren’t.
Not all NFTs are that expensive, it’s just that the pricey ones tend to make the news. Many of the assets undoubtedly languish unsold on auction sites until the listing is removed.
Many of them sell for small amounts that won’t offset the initial gas fees and minting costs (the price paid to host an NFT online for sale).
Some of them will sell at a price for the creator to make a profit, without attracting the attention of news organizations. The ones selling for thousands are only a fraction of the total number of NFTs.
Still, those that are being sold for a lot are being sold for a lot. If price is determined by scarcity and desirability, then it’s difficult to see what makes them so desirable.
At this point we have to turn to a fairly basic concept: bragging rights. A huge reason that many of the NFTs are being sold for high prices are bragging rights.
Let’s face it, there is some degree of cool to turning up at a party and saying you own the first ever tweet.
There may not be much you can do with it, but you still own it. That’s something that no one else in the world can say, about an asset that most people are on some level aware of.
So some NFTs gain value because people want to be seen to own them. Don’t forget, many NFTs are sold via auction. As we see someone else bidding on it, we view the item as desirable, so we want it for ourselves.
At the moment, NFTs are a fairly new system. So alongside bragging rights, prices are being inflated because of the sudden boom in purchasing NFTs. Now, those original, less expensive, NFTs are selling for larger amounts, because they’ve taken on some level of historical value.
A CryptoPunk alien in a headband may not have been worth so much initially, but it’s now an example of the very first NFTs. So, its value has increased.
When considering these two factors, NFTs require investors to look forward. The purchases might seem strange now, but who knows what the world of NFTs will look like in the future.
If they’re able to expand, and continue to move towards legitimacy and integration, then these early purchases will only grow in historical value and bragging rights. The copyrights that people purchase now may eventually yield big returns. We’ve already seen it happening.
These factors of desirability are driving up the prices, but this is also where prices are most likely to fall. It could be that NFTs end up being a fad, and the bubble will burst.
Undoubtedly, some expensive purchases being made now will prove to be a foolish investment regardless of NFT growth - this is true of any new assets.
It’s impossible to know at the moment what the growth of NFTs will be. It may be that they become the sole method of purchasing a digital asset, or the high prices will work against them by creating unaffordable, bloated sales.
This current, intense, interest is undoubtedly driving prices higher. How sustainable a marketplace it is will only be revealed by time. (Especially as one of the major problems is how environmentally unsustainable NFTs and other forms of cryptocurrencies are.)
These are changeable, uncertain factors that initially drive up the price of NFTs. However, it would be wrong to dismiss them as a fad of the incredibly rich.
NFTs have undoubtedly gained ground because they fit a gaping hole in the market. Digital ownership and copyright has moved slower than the creation of digital assets.
Current internet copyright laws are struggling to keep up with the expanding changes of the online world. Claiming ownership of a digital artwork is a tricky thing, due to the ephemeral nature of the internet.
NFTs are working to change this. The big money sales only help to legitimize the medium, benefitting the smaller sales. Part of the reason NFTs are so expensive is it's the first time that anyone has really been able to purchase universally recognized ownership of a digital asset. Meaning it was a market waiting for sales.
This idea of ‘ownership’ is driving the prices of NFTs. It’s what NFT sales are essentially about - the concept of owning an asset.
We also have to consider the type of people purchasing these expensive NFTs. These are people who are interested in cryptocurrency, and eager to make money. While many NFT purchases will be made out of genuine enthusiasm for the art, the most expensive sales will be made as a form of investment.
Only, rather than investing in a physical asset, you invest in a digital one. In cases of investment, what you’re hoping for is the value of the asset to increase. Then, your money is kept safe in the form of a digital asset, and it is essentially earning interest.
There’s no way to really know for sure if your asset will gain value, but assigning a high price upfront creates an initial desirability. When a group of people purchase expensive NFTs, they’re building a market. To them, it’s worth paying more for an NFT, because it shows NFTs are worth paying for.
Then, eventually, you can make a profit from your purchase. By the time of resale, more investors will be interested in joining the market, and willing to pay.
Another thing to consider is the prices of artworks in general. The art market is a big one, and at the very top artworks can sell for several millions. This doesn’t mean every artwork will.
However, for NFTs to be seen as the premiere way of selling online assets, then they need to make these kinds of high-end sales. When established artists such as Beeple sell works as NFTs, they sell for a high price because the creator is seen to have that value anyway.
Finally, the value of cryptocurrency cannot be ignored. Cryptocurrency, such as Ethereum, is the primary way of buying an NFT. In many ways, NFTs are cryptocurrency, except with the unique, non-fungible, aspects. When cryptocurrencies have a high value, then NFTs will likely maintain that value alongside.
Exactly why NFTs are so expensive is probably a deeper philosophical question than can ever be sufficiently debated. To do so would require examining why anything is expensive, ever. They’re expensive because we value the concept of ownership, at times more than we value the thing being owned itself.
This isn’t that different to how the traditional art world works. A painting like Da Vinci’s debated Salvator Mundi doesn’t sell for 450 million dollars purely based on artistic merit - especially when no one is that sure of its provenance. So what does make it valuable?
The materials it’s made of are only the tiniest fraction of the cost. While it’s certainly highly skilled, the quality of any artwork is a personal matter. However, first it garnered massive amounts of interest across both the art world and the general public before it went on sale.
Second, it’s potentially by an artist with a scarce output. Both factors mean it brought attention to whoever the eventual owner would be, which can then be converted into an even higher profit. Many people purchasing NFTs today will have an eye on the same idea. They garner interest, which leads to a greater return in the future.
How does this reflect on an artwork that doesn’t go on public display? The enjoyment of a painting as it relates to the amount paid for it is hardly a quantifiable thing.
What makes them so expensive isn’t necessarily the skill of the artwork itself. If someone can be moved by a Jackson Pollock splatter painting, someone can be moved by a Gucci Ghost.
Alternatively, both items can be bought solely for the pleasure of claiming ownership. Which brings us back to the philosophical question of indefinable value.
NFTs are expensive because they are at the right intersection of scarcity and desirability. However, both of these factors are liable to change. An asset that is desirable right now may not be desirable in a few years time. Or even a few weeks time. Desirability is formed from many attributes.
In the case of NFTs, it may come from the skill of the asset, the history of the piece, the output of the artist, or simply the notoriety. Or it could be any number of other things. Including the fact that NFTs are currently gaining popularity, and people are eager to own a part.
Scarcity is also a tricky concept, especially as it relates to the internet. The scarcity of an NFT is manufactured. As a digital asset, it technically has an infinite amount of copies. The digital artist Beeple famously sold an NFT for $69 million, and anyone can download the image ad infinitum.
These downloads are all essentially the same image. What you won’t be downloading is the information that conveys ownership. And this is what makes it scarce. Not the asset itself, but the ownership.
But this scarcity of ownership only matters as long as the item is desirable. Which is where the whole thing gets complicated again. Scarcity and desirability aren’t easily definable things, and many of those big ticket NFT sales thrive because of that.
NFTs are expensive because they’ve been determined to have value by the people buying them. In this way, they’re very similar to other types of non-functional assets. The difference is that as a new technology no one can fully predict where the world of NFTs are heading.
They could become a vital part of online trade, or an embarrassing blunder for those who lost money. Some NFTs will gain value, where others will fail to resell.
To put it incredibly simply: NFTs are expensive because, right now, people are willing to pay the price. Which isn’t really that different from anything else.