Why are NFTs so expensive?

Non-fungible tokens, or NFTs for short, have suddenly surged in popularity and price. As discussed in our recent blog on Apecoin, the most expensive NFT ever sold went for 23.7 million USD or 8000 Ether. Critics argue NFTs resemble overblown hype, whilst advocates think NFTs will be a mainstay in the future digital asset landscape. Within this blog, we explore what lies behind the explosion in the value of NFTs.

Before we delve into the pricing of NFTs, it’s essential to cover what is meant by NFTs. NFT stands for non-fungible token. First and foremost, the token part means it is stored on the blockchain. Non-fungible, the slightly more complicated part of the acronym, implies something unique. In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable and each of whose parts is indistinguishable from another part.

A good example of something fungible is a dollar bill; it is interchangeable and indistinguishable from another dollar bill; the value is exactly the same. Therefore, non-fungible, which is the opposite of fungible, implies that the token in question is unique and that it is not interchangeable.

To summarise, an NFT is a unique token on the blockchain. NFTs are available for purchase using crypto, as NFTs are held on the Ethereum blockchain, buyers will require the Ether coin.

Click here for a more in-depth explanation of NFTs.

Case study example

One type of NFT which is popular at the moment is sports footage. NBA franchises in the US are creating NFTs of in-game clips, for example, LeBron James scoring a dunk shot, which are being snapped up by fans.

It’s important to note that owners of these clips do not own the rights to these clips, nor do they receive royalties when the clip is used. They simply own a line of text within the blockchain which demonstrates ownership of that clip’s NFT. So, what does ownership mean? It means in short, that the clip has been tokenised, and there is only one version, which is held by an owner on the blockchain. A LeBron dunk shot clip recently sold for a staggering $125,000.

At first glance, the idea of paying such staggering amounts of money to own a piece of text on the blockchain may seem lunacy. However, the concept isn’t quite as alien as it may appear. For example, people regularly pay subscriptions to Amazon for Kindle books, where they hold no ownership. Of course, the amounts differ greatly, but the concept of digital ownership is far from new.

A look into the world of art for comparison

To wrap your head around NFTs, it’s wise to look at the world of fine art to comprehend how and why NFTs are being exchanged for such eye-watering sums. Pieces of art come with certificates of authenticity (COAs) as proof they are genuine. Without the COA, it is difficult for a seller to exchange the artwork, especially for a large sum. Certain buyers will purchase the artwork without the COA; however, this is a risk. A COA is the same as an NFT; the only difference is the NFT is a digital form of ownership as opposed to a physical or hard copy.

What gives NFTs value?

There are two factors from the field of economics which provides NFTs with value. The first is scarcity. NFTs are designed to be rare. The majority of things which are created online or using IT can be instantly duplicated; you simply copy and paste the code. However, NFTs demonstrate originality in the online marketplace. As every single NFT is unique, it is, by virtue, scarce. That doesn’t necessarily mean anyone will want to buy it, but if they do, the fact that there is only one available makes it more valuable.

The blockchain represents the first time that it has been possible to create scarcity within a digital landscape, which owes to why there has been so much interest. The other equally important economic factor is demand. For certain NFTs, for example, an NBA clip, the huge basketball community drives the demand. Fans want to own pieces of NBA history, and NFTs give them a way to do so.

How to value an NFT

NFTs add-ons and utility

If you’re not convinced by the investment case above, you’re not alone. Whilst the NFT community has many advocates, it probably has a much larger group who are unsold on the idea. A further source of value of NFTs is the added utility which is becoming increasingly common with NFT smart contracts.

Athletes and artists are just some of the groups that are capitalising on the NFT wave by offering their own exclusive range. What is particularly interesting about NFTs coming from creatives and sports stars alike is the added benefits.

Let’s use Alpha Tauri Formula 1 driver Pierre Gasly as an example. Gasly was one of the first athletes to sell NFTs to his fanbase. Gasly auctioned NFTs, which allowed fans to claim signed caps and limited-edition T-shirts. Other stars, for example, professional English boxer Jack Catterall is creating NFTs, which act like a membership card. Owners of these NFTs are entitled to pre-release tickets, backstage access and other perks.

For NFT non-believers, the added utility factor which is discussed above generally allows the value to be more recognisable. However, as with anything in life, something is worth whatever someone is willing to pay.

NFTs at this stage may appear overpriced, as was the case with exciting new internet stocks before the dot-com bubble crash. However, once the market irons itself out and prices become more appropriate, it is becoming increasingly hard to imagine a world without NFTs.