In this article, we get to understand, How and Why NFTs get their value. Today’s post has been contributed by the lawyer Andres Munoz (Litigation Parter – Romano Law) who is a New-York based intellectual property and commercial litigator; and by Stefan Ateljevic, who is the founder of BitcoinPlay.
In the last couple of years, interest in NFTs has exploded. Every day multiple NFT projects are being launched, and prospective NFT buyers are hoping theirs is the one to “go to the moon.” There are several factors that can make an NFT valuable, although none of these alone can guarantee that an NFT will become the next Cryptopunk.
Content and Identity of the Artist – NFT value is initially dictated by its quality and look. Like with any piece of art, it’s the first thing people see. A related and important factor is the identity of the artist, which plays a key role in dictating value. NFTs including art created by well-known artists, like Banksy for example, are immediately valued much higher than those of an unknown artist.
Hype and Endorsements – the success and initial value of an NFT project is dictated by the hype generated leading up to the initial NFT sale. Many celebrities are associating themselves and promoting NFT projects, with one of the latest celebrities being Snoop Dogg. These endorsements add appeal, as well as credibility.
Exclusivity/Rarity – NFT creators decide how many NFTs to mint. The law of supply and demand is very applicable here. A one of a kind NFT is generally more valuable than 1,000 editions of the same image or media. Even with projects that create thousands of NFTs with the same theme (e.g. Bored Apes, CryptoKitties), value is dictated by the rarity among the characteristics of each particular NFT. For example, only a small percentage of Bored Apes were minted with gold fur. Thus, those are seen as more exclusive and valuable than those with the more common gray fur.
Community and Brand – NFTs can gain value over time by building a reputable brand and supportive community. The Bored Ape Yacht Club is a prime example. Bored Apes initially sold for less than $200 and now regularly trade for six-figures. In addition to the initial hype surrounding the project (10,000 NFTs sold out in just hours), the Bored Ape community has been able to curate their brand such that they are one of the most well-known NFT projects in the space. Many celebrities, including Eminem, Jimmy Fallon, and Mark Cuban have bought Bored Apes, further adding to the value of the brand.
Early & Original Collections – Over the last year or so, we’ve seen the value of early NFT projects explode. Larva Labs’ Cryptopunks was one of the first NFT projects on Ethereum, and they are some of the most valuable NFTs today. There is something to be said for being a holder of an early NFT work. Just as original and historical artwork has more value in the real world, more “original and historical” NFT collections are seen as more valuable.
Rewards/Access Given – Some NFTs will entitle their holders to special privileges, rewards, or royalties. These NFTs are inherently considered to be valuable because there are direct benefits that holders can benefit from and can even be seen as investment products.
The way NFT’s get their value is due to them being a “piece” of the blockchain that hosts it. So for example, an NFT hosted on the Ethereum blockchain is interpreted by the network as several “blocks” that make up that NFT and who the owner is. However, NFT’s also benefit from their aesthetics and utility in either the real world or in the metaverse. Some NFT’s allow you to play games and earn, such as Axie Infinity or Nest Arcade. Others provide just aesthetic value, similar to collecting a piece of art, except you hold it “virtually”.
What causes a particular NFT to be more valuable than another depends on various factors, some which are intangible like social media hype. Some NFT’s carry their value from hype alone, even when the project is still under development and promises no guarantee on your ROI. So it’s always important to do your own research and understand the fundamentals, white paper and roadmap of any NFT project that you decide to invest on. After, you can dig into their social networks to gain a better perspective on how hyped the project is and if it’s trending.
Interesting Read: Expert Corner: Key areas while drafting an Artist Agreement
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