Why Are NFTs Worth So Much?

Or maybe the better question is “Why are some NFTs worth so much”?

Key Points

• The worth of NFTs, like a physical piece of art, rely on certain factors such as its connections to an artist, its cultural significance, and its history.
  
  
• NFTs solve the issue of an oversaturated digital world by allowing for verified ownership.
  
  
• An NFT's worth is enhanced through its authenticity, scarcity, transferability, immutability, utility, and community.  

Earlier this year, a digital-only artwork sold at Christie's auction house for an impressive $69m. However, the highest bidder didn’t receive a physical painting or even a print of the artwork they bought, no -  they received an NFT.

Confused? You’re not alone. In this article, we’ll be discussing different theories as to why NFTs can be worth so much. 

First of all though, let’s delve into the basics: what is an NFT?

What is an NFT?

NFT stands for "non-fungible token".

But that’s not very helpful.  

So let’s first look at the term “fungible”

The term "fungible" refers to an asset with units that are mutually interchangeable.

You can swap a $20 dollar bill for another $20 dollar bill - maybe you want a crisper one for a gift envelope - and your crisper $20 dollar bill is still worth -- exactly $20.

Or you can swap a $20 for two $10 dollar bills  - and, still, the two $10 bills are worth -- exactly $20.

Dollars are interchangeable - they are fungible.

On the other hand, something that is non-fungible cannot be interchanged in that way. Non-fungible assets have unique properties or attributes that make an exact interchange with another asset impossible. 

The Mona Lisa hanging in the Louvre in France is non-fungible. 

Sure, prints can be made;  photos can be taken; artistic copies can be produced  - but there will only ever be one, original Mona Lisa painting. 

And how do we know that the one at the Louvre is the original  - well, experts in France tell us so.

NFTs are similar to this: they’re unique assets.

The NFT isn’t the asset or piece of artwork itself, but rather a piece of code on a digital ledger - a blockchain - that maps out the metadata of the asset, such as its owner, where the asset is, and such. 

One of the simplest ways to think of NFTs is as certificates of ownership for assets.  

And rather than people in France telling us which is the original, the work can be tracked and traced on the blockchain. 

Blockchain you say?

With a cryptocurrency such as Bitcoin, a ledger known as a ‘blockchain’ maintains and shares a record of who owns what, and the same goes for NFTs.

Typically (although not exclusively) NFTs live on the Ethereum blockchain - basically the Ethereum ledger.

This ledger lives on thousands of computers around the world and remains in sync, and therefore the records, past and present, cannot be forged or manipulated. 

Why Are NFTs Valuable?

First, not all NFTs are valuable.  Most are worth next to nothing.

Yet some, apparently, are with millions.

Mona, Brighten Up that Smile Please

To help understand value, let’s take another look at our good friend, Mona Lisa.

According to Wikipedia, the Mona Lisa was assessed for insurance purposes in 1962 for an amount of $100 million.  Adjusted for inflation, that figure would be somewhere in the ballpark of $860 million.

But why so much?

I mean, I don’t quite like those drab colors.  And what’s up with the odd smirk on her face?  If it weren’t worth so much, I’m not so sure I would want that hanging on my wall.

Surely I could find an artist to improve it.

But that’s not that point, is it?

Many theories abound about why the Mona Lisa is such a cultural icon , but there is no denying that the Mona Lisa has an incredible history.  It was painted by Leonardo da Vinci; it hung on Napoleon’s bedroom wall; it’s been displayed in a world-famous museum for a very long time.

And it is these sorts of links and connections that can drive the price of an original, unique piece of artwork.

But can those same sorts of properties be translated to something digital?

The Problem with Digital Files

In the digital world, it is very difficult to get real connections with a piece of artwork.

Which is the original digital file?  Which was actually made by the hand of the digital artist?

When we upload a song, image, or piece of art to the internet, there’s almost an implicit understanding that we’re putting our work out there for people to look at, share, and download, usually for free. 

It’s just way too easy to duplicate the work, even for something that took hours and hours to make in the first place.  In economics, we say that the marginal cost of reproducing a digital file is essentially zero. 

But maybe a more important point is that with each reproduction, we lose that special connection to the artist and its history.  

If I have a JPEG of some piece of digital art that has been downloaded or sent around Twitter a millions times, I just have another copy of that work - nothing special or unique about it.

That’s been the nature of the Internet.

Do NFTs Solve the Problem with Digital Files?  

In a nutshell, yes.

While previously digital files were treated as ubiquitous commodities in the online world, NFTs are a way of allowing artwork to exist with an added value that can't be copied or interchanged - and that can drive up the price.

With an NFT, I can prove that I have the original and I can prove that I own it.

NFTs bring that special connection to digital art work that didn’t exist before.

And this also applies to the NFT’s provenance.

The Mona Lisa was, for a time, owned by Napoleon. That adds value to the Mona Lisa.

In a similar way, if my NFT was owned by, let’s say, a famous celebrity, that adds value to my NFT in a way that a simple copy of a digital file could not.

NFTs: Putting the Value Pieces Together

At this point, we see that NFTs are not just simple JPEGs, they have the potential to add real value by bringing in those same sort of special connections into the digital world that we see with physical art. 

But to see why NFT might have that extra buzz over physical art, let’s look more closely at a few specific factors:

Authenticity

Physical collectibles are protected and verified by various authentication mechanisms, however, none are particularly reliable in today’s world when even acclaimed art collectors and appraisers have been fooled by forgeries. 

NFTs are far more reliable in this sense, as their originality is cemented in the blockchain. 

Being able to prove authenticity adds to the worth of an NFT.

Scarcity

In the same way that the Mona Lisa is one-of-a-kind, many NFTs are also one-of-a-kind or limited. 

Therefore, the rarity of an NFT can add to its worth.

Transferability

NFTs are easily transferable. They can be resold to practically anyone around the world, meaning there’s a massive pool of potential buyers.

Easily being able to flip an NFT adds to its worth.

Immutability

NFTs are permanent - their code and metadata can’t be altered or changed, and they’re secured for all the world to verify on the blockchain.

Knowing that your NFT (digital certificate of ownership) is secure on the blockchain, adds to its worth. 

Utility

NFTs can be enhanced by utility.  

For example, you can offer owners of an NFT a backstage pass in the real world; you can associate physical goods along with the NFT; you can allow for fractional ownership. 

The list goes on.  

And this type of utility can add significant value to an NFT.

Community

An NFT might not only be a way to demonstrate your taste in art or pop culture, but it can also demonstrate your membership in a community.

We see this in particular with NFT collections such as CryptoPunks, Bored Apes, and many others.

By owning an NFT in one of these collections, you essentially become a member of that community.

And some of these communities are quite active.  Combined with utility, these NFTs could be a powerful economic force.  

And yes, that does add significantly to their worth.

But Aren't NFTs in a Speculative Bubble?

Very likely, yes, NFTs have been in a speculative bubble in 2021. 

There has been a lot of investor speculation in this space and there is no denying that this speculation has been driving up prices.

But how did we get here? 

In 2017, CryptoKitties, a game in which users breed and trade digital cats, brought attention to NFTs.

CryptoKitties, however, was still a rather niche project at that time, known primarily by people who followed the crypto space.

But by 2020/2021, NFTs really started to capture the attention of the general public.  And with that attention, we saw a huge explosion of participation, and, of course, prices.

There are a few reasons that can be attributed to the increased value of NFTs in the past year.

The Hustle outlines the following:

Although we may be in a speculative bubble now, NFTs are here to stay and, in the long-term, we will see this space continue to grow and innovate.

An Example: My Very Own "Mona" NFT

Yes, your dear NFT Ska writer bought an NFT as an example for this article.

I bought a Mona from the Monas NFT collection on OpenSea.

Monas are a collection of 5,000 NFTs.  Attributes of a Mona are randomly combined to make a unique Mona.  Each attribute of a Mona has a rarity.  The rarer the attributes of your Mona, the more it is potentially worth.

• Related: What are PFP NFTs?

My particular Mona is Monas #864.

As for utility and community, there are several points mentioned on the Monas website, including “Access to the gang's inner circles” and “Be part of a unique project and meet many amazing friends”.

That sounds pretty cool… I think.

These Monas are not particularly expensive (maybe they will be someday - who knows!).  I bought mine for .04 ETH, about $75 at the time of writing (although some of the earlier minted Monas have sold for $400+).  

And this highlights a key point -

While NFTs can bring value to the digital world, it does not mean that just because something is an NFT, it is automatically worth millions of dollars.

If we go back to the real Mona Lisa, we wouldn’t say that it is worth a lot of money because it is such a beautiful painting (in my opinion, it is not 🙂

It is those other connections - its rich history, its connection to a famous artist, its status as a cultural icon - that gives the Mona Lisa extraordinary value. 

And, in that sense, it is no different with NFTs.

What NFTs can do, however, is bring those special connections into the digital world.

And with my Mona NFT - maybe it is not so special - yet!

Final Say

NFTs can be a tricky notion to get your head around, but there’s no denying that NFTs are booming right now. 

The "value" of NFTs, like a physical piece of art, rely on certain factors such as its connections to an artist, its cultural significance, its history, and the like.

NFTs also offer an opportunity for ownership in an oversaturated digital world whereby art is frequently duplicated, reproduced, and copied. 

This ownership can bring with it certain other characteristics that can give NFTs that extra buzz, such as the utility that can be provided with an NFT or even the participation in a community.

The current increase in attention paid to NFTs can be explained by the big brands who are getting involved, the current pandemic which is pushing more of us into online spaces, and the boom in the cryptocurrency space overall. 

And this of course has led to investor speculation, further driving up prices.

But regardless of how a boom/bust cycle might play out, this is certainly an exciting new frontier that is pushing the boundaries of how we think about value in the digital world.