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How do NFTs get their Value – Revealed in Plain Simple English!

Jan 5, 2022 | Investing

Right now, the world has gone NFT crazy. Extremely high NFT prices, for what appears to be nothing more than a digital image or digital piece of art.

Here at Money Boost, we simply had to investigate this craze and find out whether they were worth investing in.

We had to learn and understand why an NFT (Non Fungible Token) can sell for millions of pounds or millions of dollars, why there is such a demand and how NFTs get their value.

On the whole, an NFT gets its value from scarcity, demand, status, and popularity. Being part of a brand, group, club or feeling connected to the artist or their cause is often the reason an NFT can sell for $92,000, $920,000 or even up to $92million which is the current highest selling NFT.

When an item is scarce and in demand it will increase in value whether the item is physical or digital.

But let’s look into the world of NFTs in a little more detail. I will explain in simple English where the value in an NFT is, whether it is worth investing in NFTs or not, how risky they are and what the future holds for NFTs.

 

 

What is an NFT

An NFT (or a Non Fungible Token) is a digital item such as a photo, audio, video etc… that is bought and then stored in something known as the ‘blockchain’ and is owned by one individual.

The ownership of the NFT can be validated and verified in this blockchain, meaning proof of ownership is very easy. In fact, it’s easy to see the full history of an NFT.

Only one person can own an NFT. It’s unique.

Think of an NFT as a piece of art. Instead of the piece of art hanging on your wall, it is held digitally in a digital wallet where all your other digital items (assets and investments) are stored.

NFTs can be bought are sold quite easily through online marketplaces such as OpenSea. A user simply connects their wallet to OpenSea and selects which NFT they wish to sell.

NFTs are bought and sold by way of cryptocurrency, such as Ethereum, rather than directly with money.

This article isn’t about what an NFT is, so I am keeping this section brief, before we move on to the value of NFTs.

 

 

How do NFTs get their Value?

There are four primary foundations and reasons why an NFT will get its value:

  • Rarity
  • Desirability
  • Status Symbol
  • Exclusiveness

 

A recent article from The Guardian argued these NFTs are not art, there are to do with ego and status symbol. It isn’t a surprising fact considering many of the worlds most popular platforms are driven on such statuses.

The best way to look at the value of NFTs, and the craze of them right now, is to look at this through a real life example.

 

Most Expensive Bored Ape Yacht Club NFT

Let’s look at the Bored Ape Yacht Club.

The most expensive Bored Ape Yacht Club NFT #2087 sold for 75 Ethereum in October 2021, which was equal to $2.3m (£1.7m) at the time.

Yes over $2million for a cartoon JPEG image!

The first thing I want to tell you about the Bored Ape Yacht Club NFTs is that Eminem recently purchased one for around $450,000 (£333,000).

Yes, that is almost half a million dollars to own a digital cartoon drawing of an ape – one of 10,000 I might add.

Right now, the very cheapest Bored Ape Yacht Club NFT you can buy will set you back 71.3 Ethereum. It may not sound a lot, but right now the price of 1 Ethereum is around $3,740 (£2,800) – so this means 71.3 Ethereum has a price tag of $266,662 (£197,000).

This is the cheapest!

You could also think that this is a crazy price tag, and no one could possibly be buying them. Well wrong again. I randomly looked at the sales history just now, and 8 of these NFTs have been sold in the past 5 hours alone at prices on average of $300,000.

Bored Ape Yacht Club NFTs

$2,452,000 has been spent on Bored Ape Yacht Club NFTs in the past 5 hours alone.

Highest Value Bored Ape Yacht Club NFT

So how does a digital cartoon drawing of an ape command such a huge price?

Well, Bored Ape Yacht Club has become a club that everyone wants to be part of now. Investors, entrepreneurs, influencers, and celebrities.

Only 10,000 people can be part of this ‘club’ and say they own a Bored Ape Yacht Club NFT. Only 10,000 were released but with NBA stars, Jimmie Fallon, Eminem and many more wanting to be part of this exclusive club it naturally means the price of each NFT will rise as demand does.

It’s a status symbol to own a Bored Ape Yacht Club NFT, just like wearing a Rolex, driving a Porsche or Tesla and owning the latest Apple iPhone.

Of course, the Bored Ape Yacht Club is not the only NFT community out there. There are other highly desirable and valuable NFT clubs such as Crypto Punks for example.

Unfortunately, though with many gold rushes you will see a lot of copycats, and other investors who can’t afford a Bored Ape Yacht Club or Crypto Punk that will hope a new NFT community will fly to the moon as well (as common term of launching and becoming highly valuable).

Some of these other NFT communities will do well, but many will leave nothing but investors out of pocket.

 

 

Why Do NFTs Go Up in Value?

NFTs are like any other asset or investment. The value of an NFT increases as demand for it increases.

An NFTs is unique. It’s their nature.

They are often part of a similar collection, but each NFT usually has its own traits making it individual.

Rarity is usually the biggest driver of an NFTs value.

You may be asking how can an NFT be rare if there is only one?

Let’s say 10,000 NFTs were created by the brand, artist, or company and each had an ape character. The ape may have glasses, or red lasers coming from its eyes, or maybe a gold necklace and a fancy background.

Maybe 2,000 of the ape NFTs have glasses out of the 10,000. This means 20% of all the collection have glasses, so it’s not a very rare feature.

What if only 500 had red lasers coming from its eyes. This means only 5% of the collection has this trait, making these rarer.

But what if there is just one NFT in the 10,000 collection that had a gold necklace and a fancy background. Just one. This means 0.0001% of the NFTs in this collection have this trait – making it ultra-rare and will often mean it’s the most valuable.

In a really popular NFT collection this 1 in 10,000 chance could mean the original 0.08 ETH cost (about $350 plus fees) could now be worth 10-20 ETH or more straight away after the reveal, which means $40,000-$80,000!

If that NFT collection grew and grew in popularity and desire, and a wave of investors came through the doors, this #1 rarity NFT could be worth $400,000-$4million.

Yes, all these numbers are hypothetical, and yes, the odds are heavily stacked against you.

That said the demand could be low and diminishes quickly, and the NFT become worthless.

 

 

The Future Value of NFTs

People are investing in NFTs now but in projects, brands and communities they believe in.

Yes, some are making a quick flip, but these are difficult and often need expensive tools to find the valuable gold nugget in the pan filling with mud and water.

There isn’t much doubt that NFTs are going to be a way of the future.

NFTs may also be the new way to crowdfund startups, musicians and artists who can launch NFTs for their early fans and those NFT holders, especially those with the rarer NFTs, may be entitled to royalties, meet and greets, exclusive content, video calls etc…

The opportunities for such a technology are endless, and we haven’t even talked about the metaverse!

But maybe that’s a topic for another time.

 

 

Are NFTs Risky – Can their Value Decrease?

100% Absolutely!

NFTs are incredibly risky. You could lose everything you invest, and your shiny new NFT could be worthless in a few weeks.

NFTs are still very new. It feels like the days of the first start-ups on the internet back in the early 2000s.

Opportunities are there for investment and making a nice return, but there are many NFT groups launching every day trying to cash in on the exploding trend.

An NFT should be something you want to own because of the story behind it.

For example, I recently invested into the Kindergarten Baby Apes NFT community as their mission is to use the investments from the NFTs sold to build a school in developing countries and communities and give children the chance of education that may not have had the opportunity. In fact, they’ve recently announced the launch was so successful they are now going to build two schools!

This to me is how something such as a drawing of a kindergarten ape can make be incredibly worthwhile.

Where will the NFT craze go, no one knows for sure.

But Money Boost will definitely be keeping an eye on this in the coming months!

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