NFT tokens have been around for a few years already, but they’re only gaining widespread popularity recently. However, just what is an NFT token, and why does it have value? If it’s just digital art that you can easily replicate and distribute, why would anyone pay for an NFT, and why are some NFTs selling for thousands or even millions of dollars?
What Is an NFT? How Do They Work?
NFTs are non-fungible tokens. Typically, crypto tokens are fungible. That means you can exchange them for money, other digital assets, or the same type of asset. In other words, they are not unique.
For example, you can exchange Bitcoin for USD; both are fungible. Non-fungible tokens, on the other hand, are not exchangeable with each other. NFTs are unique, and while you can sell them and transfer them, there is only one of each, unlike Ethereum or fungible cryptocurrency tokens.
NFTs are more than just digital art. Their uniqueness is verified on the blockchain, which is why you can not replicate the original NFT. Each NFT comes with a “digital certificate” verifying that it is the true, original work.
Since the blockchain ledger is public and maintained on thousands of nodes (or computers), the uniqueness of the original NFT can always be verified.
Why Would Anyone Pay for an NFT? What Gives It Value?
A lot of people wonder why anyone would bother paying for an NFT. Why can’t you just take a screenshot of the NFT and then download or sell that digital file? Sure, it won’t be the original, but you’ll still have crypto art.
Scarcity Creates Value
To answer that question, you first have to think about what makes anything valuable. Why are diamonds valuable but not potatoes? You can eat potatoes, but you can’t eat diamonds. If you had only diamonds, you would surely die. However, if you have only potatoes, you can still live. Therefore, shouldn’t potatoes be more valuable?
The answer lies with a simple principle: Scarcity creates value. People value diamonds because they are scarce; you can’t find them anywhere. Potatoes, on the other hand, are everywhere and easy to maintain. Practically, diamonds are just stones, but they are hard to find.
Now, think about NFT art. There is only one original NFT piece of art signed by the original digital artist. Even if people copy and distribute it, they will never have the verified original. Since there is only one, it becomes scarce, and its scarcity is one of the factors that make it valuable. Many people might want that particular NFT, but if the current owner isn’t selling it, you can’t just buy it on any NFT marketplace.
That is how the price of an NFT can rise when an auction house sells it. When everyone is vying for the same artwork, the price will automatically go up. That is how Beeple sold an NFT on Christie’s for $69 million. It’s simple demand vs. supply economics. If there is only one original, as long as two people want to buy it, there will be more demand than supply.
The Original Digital Artist Creates Value
Another question you can ask yourself is, “Why is any art valuable?” What makes the Mona Lisa so valuable? While many factors make the Mona Lisa so famous and expensive — including the fact that it is a good painting — a lot has to do with the fact that a famous painter created it.
The principles that apply to physical art also apply to digital artwork. If a famed designer or painter creates an NFT, it will automatically have value. People will want to buy the original, and there will only be one original, thus making its value skyrocket.
Sometimes, the seller isn’t even an artist but a famous entrepreneur. For example, Jack Dorsey sold his first tweet as an NFT, and Elon Musk also toyed with selling one of his tweets as an NFT.
People Like Collectibles
Why do people pay so much for baseball cards or old coins? Some people love collectibles and will spend a lot of money to collect a wide range of them. Scarcity does have a hand in this as well. People usually like collecting scarce things, such as old coins that are rare or no longer in circulation.
Regular digital tokens are not collectibles, as there are many of them, and they are interchangeable and replaceable. However, think of NFTs as trading cards — except there is only one of each.
There Is an NFT Craze
There is no denying it — there is an NFT craze currently going on. That helps add hype and drive up the value of NFTs. If an NBA top shot is willing to pay a lot of money for an NFT because they have the money to throw at it, that will drive up prices not only for that NFT in particular but for the entire NFT market.
More people will hear about NFTs on the news and visit some of the best NFT marketplaces like Rarible, SuperRare, and OpenSea. The more interest there is, the more NFTs will cost.
The Price of Cryptocurrency Is High
Sometimes, an NFT might sell for a set amount of Ethereum on the Ethereum blockchain. If the price of Ethereum goes up, the cost of the NFT may go up as well.
The Art Is a Famous Meme
Sometimes, NFT artwork is based on a famous meme. For example, Nyan Cat, a YouTube video that went viral, was turned into a GIF and sold as an NFT for around $580,000. Of course, not anyone can do that — the original meme creator sold it.
Hopefully, you now understand what makes an NFT valuable. Value is not always intrinsic — that is, not everything valuable has value because of its intrinsic worth. Sometimes, external factors, such as hype, demand, the fame of the artist, and scarcity, create value. While the value of NFTs can always fluctuate, as long as people are crazy about them and want to buy them, they will remain valuable.