If you’ve ever wondered why a particular NFT is worth, say, $20,000 when it looks to you like an ugly cartoon, you are not alone.
In almost every “NFT Fundamentals” class, people are wondering why NFTs have value, especially the astounding amounts some collections are obtaining. The most typical response scanning through OpenSea is “I’m in the wrong business,” and clearly the valuations are hard to justify, and we are not going to.
The best way to describe most of the $360 million in transactions on Opensea in 2022 is that it is raw supply and demand, plus some “pumping up” by project founders and lots of marketing. In this essay, we are not going to look at what investors look for, and how price is driven,
Some of the valuations are clearly hype, FOMA, and real or perceived scarcity. When the price goes up, then other people will want to buy it to have the same financially successful experience.
So typically NFT creators seed some buys to get FOMA started. Beeple s $69 million sale was in fact to an investment group that seemed primarily interested in making the market – which they did, influencing the entire ecosystem and kicking off an NFT craze along with their investment business.
So while not exactly a scam – which would be posing as a Bored Ape, when it’s only a copy – a famous NFT may not be worth anything like their peak valuation months later. JackDorsey’s NFT of his first Tweet sold $2.9 million in 2021, struggled to sell at $21,000 in 2022, less than a year later. The value did not evaporate to zero, just settled at a more reasonable level, the media equivalent of a signed football from a famous SuperBowl quarterback or the dress Marilyn Monroe wore when she sang Happy Birthday Mr. President.
On the other hand, NFTs can also have utility by creating a record of ownership for items that are easy to copy and where the origin can be difficult to track, such as music and digital art; or even high-end handbags on resale during a boom of knock-offs. If you have the NFT from the original purchase, it’s more convincing than asking for $4000 on eBay and hoping that your 4star rating will convince the buyer.
Even noting that NFT trading volume on OpenSea fell in 2022 from $1 billion + to a measly $360 million this year, it’s worth looking at all the things that may give NFTs value, and which may remain after the market “shakes out” one more time. Here are the types of value that collections have:
1.Value as a collectible. Like baseball cards and beanie babies, people like to scarce things that have a theme. Collectibles have been around forever, and the same concept applies, just that these collectibles are mostly digital, and the transaction is recorded on the Blockchain.
2.Unique association with a celebrity. Top Shots gets its value because the unique images are famous moments from famous NBA stars. Celebrity items, especially if endorsed by the celebrity, have a kind of built-in scarcity. People have always liked to buy things that famous people owned.
3.Access. Some NFTs come with access to VIP events, training sessions, o working spaces, etc. Investors who buy these are looking for this intrinsic value, and potential the ability to sell it later to someone else.
4. The ability to be resold to a broader, international market. NFTs give some items liquidity they otherwise would not have by creating a built-in international marketplace. Unlike Craigslist or Ebay, digital NFTs created in the United States can reach Singapore and China. This new liquidity is, in fact, part of its value.
5. Value as art. Whether for digital art, music or video some investors buy an NFT because they like its artistic merit. Because NFT primarily represents digital art, there is overlap between fine art/graphic art/ and collectibles so it is hard for the truly masterful fine art to stand out, and “what is good” in this emerging genre is under discussion as we speak. But the market does exist. Fine artists often include a physical work with the NFT, or a way to display it.
6. Physical objects included. As mentioned the possibilities here are endless. Will you get a $2000 large screen to display your new NFT with a $10,000 purchase? Will your NFT be featured in an NFT art museum this fall? Will you get a real shoe with the NFT of a shoe you just bought? We know creators who have tried all of these things.
7. Entertainment. Buying land in the Metaverse, a building, and a fashionable item to wear in the Metaverse, also promises to let people express themselves in unique ways, in an alternate reality, where they can’t be judged by factors that humans so often apply. So there is an element of entertainment value and even social freedom in participating in virtual and alternative cities, games, and planets. It’s new, cool, creative and fun.
8. Community. The communities around some NFTs, such as the Board Ape Yaught club, or the Discord group of a popular gaming community associated with some NFT items, provide a social outlet. Conversely, the strength of the community also gives NFTs value. The community element can add meaning and value, such as a non-profit cause, or the ability to vote on governance. One investor felt that the main value of the NFT they purchased was to fund a new start-up with a “save the world” mission, and perhaps even be including an initial investment round. But the real reason he bought, he told me, was to advance a worthy cause.
9. Status. The use of a high-priced or rare avatar also yields status to investors within the community of insiders.
10. Copyright usage. While an NFT is not a copyright, Solana and a few music platforms allow creators to add value by adding specified licensees’ rights to the buyer. A license can allow them to sell an image on T-shirts, or use a music clip in a commercial for their business.
11. Utility. To the extent that NFTs make it easier to time stamp records, such as deeds of houses in a country that does not have great government record-keeping, there may be all kinds of new uses evolving, whose value is the record-keeping function and is not based on scarcity of the NFT itself. NFT have also been used for membership, one that the user can resell. In fact, utility is an area that we expect to take off in the next few years as entrepreneurs and businesses explore ways to use them to earn more revenue.
12. Advertising. The Budverse sold out its “limited edition” digital beer cans, which also came with a case of private-label beer. An increasing number of brands feel they need some kind of NFT strategy that taps into a younger, affluent, and more international generation.
13. Cutting out the middle man. A theme for NFTs is often their ability to simply cut out the middle man. Audius, for example, allows musicians to sell directly to their fans, and avoid Spotify, which takes a huge percentage of the listeners’ fees.
In conclusion, as NFTs mature, we expect they will begin to settle into parts of other business strategies, rather than primarily a market for digital art, which is 80% of the market today. That can change very rapidly, and combine with DAOs, tokenization models, and a variety of licensing forms.