Once in a while, the crypto sector introduces a new trend that sets the world ablaze. A few years ago, the crypto sector experienced the DeFi boom, which is still growing today. In less than a year, the world has officially gone crazy for non-fungible tokens (NFTs), and now every single sector in the world is trying to get into the NFT craze.
In March 2021, Beeple's “Every day's – The First 5000 Days” NFT became the most expensive NFT at $69 million. There have been many expensive NFTs so far, making people wonder what makes NFTs so valuable.
What are NFTs, and why are some of them so valuable? This article highlights how NFTs work and what gives them value.
Definition of NFTs and How They Work
Non-fungible tokens are unique digital signatures attached to a digital asset. NFTs are collectible digital assets on blockchain technology that holds value. It could be a song, an image or video, virtual avatars, or anything that counts. Even tweets have been minted as an NFT.
What makes NFTs so attractive is that it gives exclusive ownership rights. Only one person can own a particular NFT at any time. Since its data is stored in a decentralized public system, anyone can easily verify who the real owner of a digital asset is, and this makes NFTs authentic. These qualities make the NFT sector attractive to content creators as they can publish their work on blockchain technology and own exclusive rights to them.
NFTs are unique digital signatures attached to digital assets. They are like a fingerprint that contains information about a person. They contain data about who owns or created the asset and other properties or conditions needed for sale. These signatures are ascribed to a blockchain. All activities are recorded and open to the public on the blockchain network.
People are interested in Bitcoin and blockchain because it is decentralized, and transactions are traceable and transparent. Like Bitcoin is associated with digital money on the blockchain, NFTs are associated with digital assets on the blockchain network.
All transactions are visible to others, and users can know the history of owners behind a digital asset. Since no one can copy and replicate an NFT, this is one factor that makes people value non-fungible tokens.
Factors That Make NFTs Valuable
Since Beeple's masterpiece in March 2021, many more NFTs have been sold for millions. Popular NFT marketplace, OpenSea, recently surpassed the $12 billion mark in trading volume. One might wonder what makes NFTs so valuable that a random user can pay $69 million for a piece of art.
There are a lot of factors that contribute to the value of a non-fungible token. One such factor is utility. The utility of non-fungible tokens is one of the most discussed topics when it comes to non-fungible tokens. What use case a particular non-fungible token has goes a long way to determine the value it will yield.
There are some NFTs that are used in play-to-earn games, and there are some that represent a physical asset that holds value. Some non-fungible tokens are yield-bearing. This means that holding that particular NFT will generate value over time. These NFTs are in huge demand, and simply holding them increases their value over time as people will want to have their hands on this kind of NFTs. So non-fungible tokens are in-game rewards, and simply holding them means that you can sell them for a higher value to other gamers who wish to own such rewards in NFT.
Another factor that determines the value of non-fungible tokens is how rare it is. Everyone loves to own something that no one else does. The fact that it is rare is one reason why people bid so high for paintings. Like the Mona Lisa painting by Leonardo da Vinci, how rare an NFT is, determines how much value it is worth. Non-fungible tokens are unique, but as the market grows, it is becoming evident that there are non-fungible tokens that are more unique than others. For example, the CryptoPunks NFT has a total of 10000 unique characters with different traits, features, and characteristics, making some rarer than others from the same collection. This rarity is what drives a massive increase in value. Some people buy these NFTs at a high price with the hope that they can sell them in the future at an even higher price because of the speculation around it. For example, a crypto user bought CryptoKitty#18 at 9 ETH and later sold it for 253 ETH within 72 hours.
Ownership history is another factor that makes non-fungible tokens valuable. non-fungible tokens owned by famous artists, celebrities, or globally recognized brands tend to have much more value than other non-fungible tokens. For example, the owner of Beeple's “Every day's – The First 5000 Days” NFT is sure to make a ton of money if the user decides to sell the recently owned NFT. Ownership history is one reason why Jack Dorsey's tweet was sold for more than $2.9 million.
One last factor to consider is liquidity. Higher liquidity means a higher value NFT. This is one of the reasons why non-fungible tokens on the Ethereum blockchain have a higher value than off-chain resources. Non-fungible tokens on the Ethereum blockchain can be exchanged easily across secondary markets by anyone holding Ethereum. If there is no market for the non-fungible token, then the NFT is less valuable than those that are sold in a market with high liquidity. This is why investors prefer to invest in NFT assets with a high trading volume. High liquidity lowers the risk of holding an NFT you no longer want in your collection.
non-fungible tokens had moved on from being a trend to becoming an integral part of the crypto sector. NFT cryptocurrencies have increased in value within the last two quarters of 2021. Many big companies, celebrities, and sports personalities are now invested in non-fungible tokens.
Recently, Visa spent 49.5 ETH for an NFT called CryptoPunk #7610. Wikipedia is also planning to auction its first edit as an NFT. With more top organizations joining the sector, one can be sure that the NFT sector will continue to boom.