What’s driving the ‘value’ of NFTs?
With popularity and awareness of NFTs growing across the cryptosphere and beyond, there are now millions of pounds in NFT transactions happening every single day. This ranges from the average price of an NFT at just over $100 (although trending upwards from just $60 at the beginning of the month and at a 7 day average price of over $1,000) to the headline mega-sales such as Beeple’s digital artwork ‘Everydays’ selling for $69m, a 24bit pixel collectable alien selling for $7.57m and an NFT version of the Nyan Cat gif fetching $600k.
Understandably so, there are those who are sceptical about the high price tags these NFTs are generating, and the popular criticisms which are levied against cryptocurrencies generally are being cast out — that they don’t have any intrinsic value or useful purpose.
In this piece I’m going to explore some of the value drivers for NFTs to help explain why we’re seeing such high valuations. If you need a refresher on the basics of non-fungible tokens, you can learn more in my recent piece: What even is an NFT?
“They don’t have intrinsic value”
A rebuttal to this argument against NFTs (and cryptocurrencies more broadly) could fill a blog post in and of itself. However I shall provide a condensed response.
Something does not need to have an intrinsic value to have worth — it simply requires that someone else is willing to exchange another item of value for it.
In the case of gold and precious metals, which are often the poster child of intrinsic value, they have clear utilitarian value; however I would argue that this is not the primary driver of their value but instead it is simply that someone else is willing to exchange other value for them, possibly to take advantage of this utility but not necessarily. Examining fiat currencies, specifically the USD, since this was decoupled from the gold standard in 1971, arguable its held no intrinsic value since then but is still the primary medium of value for many countries across the world. As such, the lack of intrinsic value of NFTs shouldn’t be seen as a necessary disqualification for their ability to have value.
However this is often only half of the argument. An NFT critic would also likely reinforce their position by stating that NFTs have no actual purpose…
“What are they even FOR?!”
Whilst this challenge can easily hold against NFT projects such as Taco Bell’s 5 collectable tacos, and Charmin’s digital toilet roll artwork which serve little purpose other than a marketing ploy to jump on the NFT bandwagon (although at least Charim are donating the sale profits to charity), when we explore some of the notable NFT sales there’s a little more depth to the projects which can be seen as driving their value.
Beeple’s Everydays: The first 5,000 days — Each day for 13 years Michael Winkelmann, the artist known as “Beeple”, has created a piece of digital artwork — with his skill level notably improving throughout. These often reflect controversial socio-political musings which are certainly not to everyone’s taste but represents a vast collection of digital artwork. As such the end result is 13 years of artist labour and craft development which could be argued to have value in and of itself — regardless of the content or medium upon which it’s created. Whether this deserves the $69m price tag is debatable but the NFT itself can therefore be seen more than ‘just’ a digital artwork but the duration of a person’s lifetime devoted to its creation.
CryptoPunk #7804 — On a different thread, the pixelated alien ‘CryptoPunk #7804’ which was sold for a staggering $7.57m doesn’t represent craftsmanship (as it’s created through an algorithm) but instead proves that digital scarcity holds value in much the same way that we seen in the physical world.
It is one of 10,000 24bit images created back in 2017 and whilst initially distributed for free, these NFTs now fetch significant values on the secondary markets.
CryptoPunks have various traits with some more rare than others and CryptoPunk #7804 is one of just 9 alien versions. As such by virtue of the limited nature of the collection at large and the rare attributes it’s sold for the highest price tag across punks (so far!). Whilst the value of these simplistic artworks may seem even less tangible than pieces such as Beeple’s, it’s important to note that physical collectibles can also demand extremely high values and not necessarily because of any intrinsic value of the object. Pokemon cards and rare Barbies have sold for tens of thousands, a beanie baby could set you back over half a million, and an untrimmed baseball card can fetch over $3m! What do these physical collectibles and their NFT counterparts have in common? Scarcity.
So as long as humans continue to value being one of a limited number of owners for an item — whether physical or digital — then collectible NFTs will be ascribed value.
Nyan Cat Meme — The easily recognisable meme; featuring an 8-bit cat with the body of a pop-tart flying through space, was turned into an NFT by original creator Chris Torres to celebrate 10 years since its inception.
There have been countless versions of the meme created and shared so it’s clear that scarcity is not the driving force behind the value in the NFT. Likewise whilst it’s certainly a creative meme it’s not quite a magnum opus. Instead the value behind this NFT comes from the authenticity of being created by the original Nyan Cat illustrator and the ‘bragging rights’ which come attached to that. This may seem a trivial reason to pay such a hefty fee for it however the notable autograph market proves that this value exists outside of the digital realm too.
Some other recent examples where the valuation of the NFT was due to this driver are: the New York Times column which sold for over half a million dollars, Jack Dorsey’s first tweet which was snapped up by crypto celebrity Justin Sun for $2.5m, the ‘Cash Me Outside’ star Bhad Bhabie’s NFT collection and various artists who are looking to release NFT versions of their songs.
Another notable example, which many see to be the crowning example of the baseless nature of NFTs, is the token representing a burnt Banksy print. You read that correctly. A group filmed themselves burning their copy (1 of 90 in total) of Banksy’s “Morons” artwork and then created an NFT to represent this destroyed piece of artwork. Owning this NFT therefore gives you nothing more than bragging rights to a token representing the absurdity of art and crypto!
Therefore whilst ownership of an NFT representing; an iconic meme, a limited edition digital collectible or a creative masterpiece, may not entice you grab your credit card, there are those who see real value in this and who are willing to pay vast sums of money (or more specifically cryptocurrency) for them. Whether these values can be sustained either short or long term is open to debate and likely only time can tell.
(All views expressed are the authors own and do not necessarily reflect that of their employer or any associated organisations.)