It’s mind-boggling to think how much money we hear people purchase Non Fungible Tokens (NFTs) for. The reason for the value of NFTs has been the subject of much debate and bewilderment.
There’s so much to understand about NFTs before trying to understand why they sell for so much. NFTs have sold for millions of dollars; some even sold for higher prices than physical properties. There are a few factors that might come to determine the price and worth of an NFT. For example, its potential value and the buyer’s perception of the NFT.
Note that not every NFT is ridiculously expensive, as you may assume. However, it’s those million-dollar sales that make the news that make us wonder why exactly they cost that much. We’ve done the research and will answer the questions – what are NFTs, and why do people spend so much money on them?
What Are NFTs?
NFT stands for non-fungible token. These are digital assets such as art or pictures on the blockchain. Essentially, they are like a digital form of collector’s items. The concept of NFTs is quite hard to grasp but still understandable in lay terms.
Their non-fungibility means you cannot exchange them for items of the same value. According to experts, there will be upcoming NFT games that you can play and earn money. Herein lies the difference between NFTs and cryptocurrency. Unlike NFTs, equivalent cryptocurrency values can be exchanged, thus making them suitable for commercial transactions. Fiat money is also fungible as the value of each bill is equivalent to another same bill.
Several real-world valuable assets are valuable due to their non-fungible nature. Some examples include the Monalisa or any other similar valuable piece of art by a famous artist. These pieces have a set value without a true equivalent, as that particular painting can only exist once.
An NFT asset is unique and cannot be exchanged for anything, including other variants of the same asset. When a person purchases a non-fungible digital asset, the person does not get to receive a physical asset. Instead, they get a digital certificate proving that they own the original asset, unlike just right-clicking on a picture online.
Due to the decentralized nature of the blockchain, people can buy and sell NFTs without requiring an intermediary. NFTs are non-transferable and somewhat like digital passports in terms of their uniqueness.
Real-world tangible assets like real estate and artwork can also be tokenized and traded more efficiently on a blockchain. In some ways, this might minimize the likelihood of fraud and allow for more efficient trade. The most common types of NFTs sold are digital works like pictures, videos, and pieces of virtual property.
Why Are NFTs So Expensive?
We’ve seen NFTs selling for thousands and even millions of dollars. There are a few essential factors that might cause an NFT to have its value. Much of the value of NFTs lies in factors separate from the asset itself.
Some of the factors that contribute to the overall value of an NFT include:
- Its underlying value
- Its potential value
- Buyer’s perception
- Relationship in price to other similar works of the same digital creator
Also, you can divide fungible tokens into smaller units. For example, Bitcoin and ethereum can be further split into smaller units called Satoshis and Wei, respectively. In contrast, NFTs cannot be broken into smaller units. Even though copies of an NFT can be reproduced and sold, your ownership of the digital certificate makes you the asset’s original owner.
Thus, just like a painting, an NFT will hold the same value regardless of the number of reproduced copies that exist, as long as you can prove its authenticity. Essentially, these are some of the factors that might be responsible for expensive NFTs.
Collectability And Perception Of Scarcity
Thus, their collectability and perceived scarcity are among the reasons they are expensive. Since NFTs began to increase in popularity, millions of assets have differed greatly in cost. However, just like any other collectible industry and traditional art, only expensive sales make the news.
One famous collection called Bored Ape Yacht Club (BAYC) is a valuable NFT collection with over 10,000 different NFTs. Its original collection contains collectible items with an air of exclusivity. No additional content can be added to the original collection, thus giving it a sense of being scarce.
Also, physical art sells for low figures every day. But these do not make the news as they are the norm. NFTs are similar in terms of sales. However, due to the coverage of the NFT industry right now, it appears that all NFTs are ludicrously expensive. This is not the case, as most NFTs sell for much less.
The NFT Bubble
Some economists think that the NFT marketplace is currently in a tulip-style bubble. This phenomenon describes a situation where prices of items are inflated due to speculation or for some other unclear reason. Much like the Dutch tulip bulb market bubble from which the term was derived, many believe that the rich buy NFTs at extreme prices simply because they are expensive and not because they hold any inherent or sentimental value.
There are debates that greed and a need to make quick profits by selling the acquired NFT for an even higher price fuel these purchases. This in no way means that all NFTs have no value. Instead, it is a pointer to the fact that many people buy them simply for the prospects of reselling them at a higher price. If the bubble ‘pops,’ the asset loses a large portion of its value.
For example, The NFT of the first tweet ever made lost over 99% of its original sale value during its second sale. This phenomenon is all too common in emerging technology. For now, many are still getting huge returns on trading NFTs, but this bubble will likely pop sometime in the future.
Links To The Metaverse
Another possible reason NFTs are hotcakes right now is their potential value in the metaverse. The metaverse is an augmented reality universe where people can interact socially, create and consume virtual items, and even own digital space. In this augmented reality, avatars represent different people.
They would have the opportunity to own digital properties like the digital land sold in the Otherside virtual world and other digital objects. Also, the same company owns Otherland and the Bored Ape Yacht Club. Thus, there appear to be likely ties between the Otherworld Metaverse and NFTs.
There are many speculations about the metaverse, especially due to the sheer amount of resources going into the development of web3.0. Several people think NFTs will hold some value in the metaverse and enable property transactions. Thus, many are holding on to NFTs while fully aware that the market might be in a bubble.
2021 saw a boom in the popularity of the NFT market, and since then, the market has surpassed $25 billion in trading volume. There have been record-breaking sales of NFTs of millions of dollars. For example, a digital artist called Mike “Beeple” Winkelmann sold the most expensive NFT ever in 2021 called EVERYDAYS: THE FIRST 500 DAYS. This piece sold for 69.3 million dollars.
The first tweet ever sent also sold as an NFT at the price of $3 million. Buying NFTs is sometimes a matter of the patron’s appreciation for the digital good, much like art. Also, it could be a matter of status or “bragging rights.” After all, not everyone can claim to own these digital assets, and only one person can boast of owning some digital assets. Dozens of other NFTs have sold for millions and hundreds of thousands of dollars. Besides these, some of the most expensive NFTs ever sold include:
1. Clock ($52.7 million)
This NFT is dynamic and reflects the number of days Julian Assange was in prison. The NFT, set up in 2021, aimed to raise funds for Wiki Leaks’ founder’s legal defense. The piece was up for auction and finally sold for $52.7 million, an equivalent of 16,593 ETH. The piece was by the artist Pak, known for his ingenious NFT projects.
2. HUMAN ONE ($28.9 million)
Beeple created this hybrid physical/digital creation in late 2021. Anyone familiar with the NFT world would be familiar with Beeple, as he has created and sold other high-price NFTs. This NFT features a sculpture depicting a person wearing a spacesuit and walking, and it features digital screens on all its sides.
3. Cryptopunk #7804
This NFT is the fifth most expensive NFT of all time. It sold in March 2021 for about $7.5 million (4,200 ETH) by Figma CEO Dylan Field. This piece is just one of the nine CryptoPunks and features a pixelated side portrait of a person wearing a forward cap and smoking from a pipe.
There are several other NFTs that have sold for astronomical sums. CROSSROAD, Right-Click, Save As Guy, and All-Time High in the City are some other popular NFTs that made the news selling for millions of dollars.
How Are NFTs Created?
Just about anyone can create and sell NFTs. Brands, artists, musicians, and other digital producers have the chance to create an NFT and put it up for sale. First, they must make a digital work and convert it into an NFT on the blockchain. Minting is the process of converting any work to NFTs. This process is similar to the creation of metal coins and how they go into circulation.
After minting, the creator can put the work on their preferred NFT platform and attach a royalty to it. With this royalty, the creator receives a payment known as a commission/loyalty whenever anyone purchases the non-fungible asset. The fees you pay for every transaction on the blockchain can be pretty high, and this is because of the gas fees associated with the ethereum blockchain.
The most common platforms to create and sell NFTs are Ethereum, Rarible, and SuperRare. Most independent NFT creators are, however, on the Ethereum blockchain. To create and sell an NFT, you’d need to get on these platforms. With these platforms, your creation is safe, as no one can recreate them. Also, your ownership of an NFT, such as a digital painting, is secure and cannot be altered or undone by anybody. The first step to selling NFTs is choosing your content.
Choose Content And Format
Basically, creators would first need to generate a multimedia creation such as a digital painting, audio file, digital land, etc. There are hundreds of different creative products that could also be NFT. Also, you can sell real-world assets like real estate and precious stones as NFTs.
Creators can make the assets available in any format of their choosing. However, most files are stored in their popular formats. For example, audio and video clips are typically available in MP3 and MP4 format, while PNG and GIF files are also common.
There are almost no laws to limit your creativity when it comes to creating NFTs. A high-resolution artistic representation of the first person to sequence their own DNA sold for millions of dollars.
Several other forms of digital goods have also done some record sales on the blockchain. Thus, there are no limits to your creativity, and there are no best selling niches you have to be a part of to guarantee NFT success.
Create And Mint NFTs
Note that after you create your NFTs and upload them, you can no longer modify them. Minting is the process it takes to create a non fungible token. It is essentially making a digital object into an asset on the blockchain. Once you create a digital item, the next step is to mint it.
You can also make several identical copies of an NFT if you are putting it up as a collectible. After fixing the number of items in your collection, your NFT collection locks with no possibility of modifying it.
Depending on the NFT technology, you might continually receive commissions on your product sales even after the product is sold to another buyer. The creator can include a royalty clause when minting their product, stating that they are entitled to a commission upon subsequent sale of their digital asset. Thus, if the artwork increases in value down the line, the creator still gets royalties when it passes down to a new owner.
Choose NFT Platform Or Marketplace
After creating your digital product, you must choose an NFT marketplace to sell it in. Some factors you should consider while picking an NFT marketplace are the blockchain type, the supported file formats, and accessibility.
Besides Ethereum, there are several other marketplaces to sell NFT, like Binance Smart Chain and Cosmos. However, most of them are Ethereum-based. Each service’s operations differ slightly, and each has pros and cons. Some platforms have lower fees than others, and some offer fewer file formats than others.
The most accessible marketplaces are non-curated platforms, as they offer free access. Uploading your NFTs to such sites simply requires you to register on the site and pay a transaction fee. Then click on the “Create/Add new item” and upload the high-quality format of your digital art. Then, give the file a name and description before clicking create.
A popular non-curated marketplace is OpenSea. It has quite a user-friendly interface that allows new users to navigate the site easily. The site also helps creators view data and statistics of their creations. Rarible is another popular marketplace that has interconnections to OpenSea.
However, the number of formats available in Rarible is limited. Nonetheless, Rarible allows minting before selling NFTs, unlike OpenSea, which only mints when you sell a token. Curated platforms like SuperRare have a more stringent and time-consuming selection process.
Set Up A Wallet And Acquire Cryptocurrency
NFT marketplaces require you to have a crypto exchange wallet to access them. It is an essential requirement in any blockchain system. With NFT platforms, you do not need to input or store your account data, making the platform secure.
Several web apps are available, even on mobile, to purchase and store your crypto. One important factor in setting up a crypto wallet is the available cryptocurrency options. You must ensure that it offers the cryptocurrency you intend to use on the NFT marketplace.
Users must pay a gas fee when minting a token on the blockchain. This fee is charged to the user as payment for the computing energy used to transact on the blockchain. These fees fluctuate based on demand. Usually, fees cost between $10 to $100 and are often cheaper on weekends.
Sell And Promote Your NFTs
After uploading your file on the platform, attach a title and a brief description. You should write a description that would attract collectors and increase your chances of selling. After you upload your digital creation, you can choose between minting one token or a collection of tokens. Also, there are two ways to sell NFTs: fixed price or auction.
The creator can either set a price they want to sell the NFT for or leave it up to the auction. The auction can either be an English or Dutch auction. Whichever the case may be, the creator would need to set an initial price and a royalty percentage.
After the platform verifies your NFT, it will be ready for sale. After it goes up for sale, creators can employ several strategies to promote their NFTs. The best free strategy is to create a reputation in the NFT community by sharing information about yourself and your NFT. Otherwise, you can promote your NFTs online with paid ads.
Are NFTs Worth It?
The value of NFTs can be subjective, and thus they may have different appreciation values. If you buy tokens with some underlying value, they might be worth the investment. This value of these digital objects depends on the creator who mints the tokens, and other digital assets attached to the NFT might also influence its underlying value.
Problems With NFTs
The NFT market is relatively new; thus, there are no strict regulations concerning many of its systems. The most common issue with NFTs is their energy consumption and contribution to the earth’s carbon footprint. The millions and possibly billions of GIFs that have been and will be created and traded on different platforms will severely affect the environment. Another issue with NFTs is the security challenges associated with blockchain.
If hackers hack an exchange on which your NFTs are stored, you might risk losing your valuable NFTs. NFTs are also prone to scams and copyright infringements.
The Future Of NFT
NFTs have quite a promising outlook, as the industry reached a market size of over $41 billion in 2021. These figures show how close the value of digital art and traditional art has become. All the paintings sold now have a digital option.
Also, because they provide community and real-world access to cool perks, there seems to be hope for NFTs, especially with young people. Its possible relation with the metaverse also gives NFTs a positive outlook for the future.
Conclusion: Why NFTs Is So Expensive?
As we have seen in this article, the value of an NFT can be subjective, or it can hold some other kind of underlying value. Several NFTs have sold for millions of dollars, making the young industry a multi-billion dollar company in just a short time. However, there are still many uncertainties about NFTs as many suppose that NFTs are in a tulip-style bubble that can pop any time soon.
Its possible links to the metaverse make it valuable to many virtual reality enthusiasts. It is necessary to do thorough research before delving into the world of cryptocurrencies and NFTs. As glamorous as the market seems, it is still susceptible to fraud because it is a relatively new industry. Also, not all tokens are as expensive as you think, as most NFTs sell for a few dollars.