Qwick Takes: NTFs — how do they work and why are they worth so much?
This week, Talking Biz News Deputy Editor Erica Thompson reached out to Qwoted’s community of experts to inquire about how NFTs work and what makes them worth thousands or millions. Is now the time to invest in the blockchain art market?
Check out some of the top commentary:
Stephen Young, CEO and Founder at NFTfi
There is no generic answer as to where the value of NFTs comes from. NFTs are simply unique digital objects, each with its own set of properties and drivers of price. For art NFTs, the value comes from the same place as for traditional art: the quality of the work, the reputation of the artist and the historical significance of the work. For gaming NFTs, the value comes from the demand and utility inside the game economy and the rarity of the item. For collectibles, it’s the size of the market plus rarity, traits and appearance of the NFT. For financial NFTs, it’s the discounted cash flow of future yields.
NFTs are just a new medium for art. In the same way you have painting, sculpture, line cuts and prints – you now have NFTs. NFTs are a new art medium that has opened up the ability for artists to become a new class of people: Digital artists. This is a huge untapped market and is a genuine new art movement that will have a historically significant place in modern art.
The future of NFTs will involve people realising that NFTs are not just art. I think art NFTs are important and will be here to stay but new verticals like gaming, music, IP rights, financial NFTs, real world objects represented as NFTs, NFTs as loyalty mechanisms, etc. are all growing industries to watch.
Think of NFTs as digital collectibles, almost like the digital version of your baseball cards you traded with friends when you were younger. The value of these collectibles isn’t the picture, video, song, or whatever else they represent – that’s an added bonus for you and whoever you sell it to one day. The real value is generated on a public ledger called blockchain that is owned by everyone who’s mining on it and not by a company like Google today. The miner stores and records your ownership of this NFT on the blockchain for everyone to see and it can’t be modified or deleted ever again. You own this NFT forever for everyone to see. That’s the technical part.
The value attribution part works a bit like today’s art world. It is worth whatever someone else thinks it’s worth. The rarity of your NFT, a famous designer or influencer behind the project, or sometimes just visual or cultural appeal to buyers all determine the value of your NFT today.
The appeal of NFTs today is multifaceted. On the one hand, it is primarily driven by a “tech bro” culture of wealthy individuals who work primarily in the tech industry. These folks love showing off their NFTs as Twitter profile pics and discussing how pure the generative art algorithm behind the project is. These aren’t typical art collectors who enjoy sipping champagne at an art gallery event but love these NFTs because of the community they create. When you buy traditional art, you buy it primarily for yourself – you don’t become part of a close-knit community. But that’s exactly what NFTs do for today’s buyers. Especially the 10K avatar collectibles open up a digital door to a virtual community that is caring, non-judgemental, and wants to build a better (Web3) world together. NFTs also offer high potential multiples in case a project takes off like the Bored Ape Yacht Club. Initial buyers paid $300 for their avatars and six months later they’re worth a minimum of $200,000. NFTs offer different benefits for different audiences but given the early stage and high volatility they come with, you should only invest in them if you’re willing to lose all the money you put in.
NFTs are narrative-driven, which isn’t that different from stocks or other assets, such as art and even classic cars. The story shapes the value. And then that value is confirmed by the price that someone is willing to pay. NFTs are also status symbols and vehicles of social values and prevailing trends (e.g. Curry changing his Twitter profile pic to a BAYC). Collectibles have always been a big market. It’s a virtuous cycle, with the story driving the perceived value higher, which in turn increases the actual price.
The other aspect at play is simply that NFTs are a growth market. As more people enter the space, there’s the classic interplay between supply and demand. With demand increasing faster than the number of blue-chip, high-value NFT projects, there’s outsized pricing pressure.
NFTs are a new asset class worth considering. But sadly, the reality is that many of the most valuable projects, such as Fidenzas, Cyberpunks, and BAYC, have become out of reach. Aspiring NFT investors have to hunt for projects that are early in their lifetimes, with plenty of potential, and thus potentially underpriced.
The other pathway is fractionalization, or buying a portion of a high-value NFT. With this tool, which will be increasingly popular in 2022, investors will have access to projects they couldn’t otherwise afford. Just like Masterworks does for traditional art, NFT fractionalization will allow everyday investors to participate in the incredible price appreciation seen across both traditional and alternative art markets.
NFTs represent a rare opportunity to be part of an early fundamental shift, as they are a foundational technology for the next phase of the digital economy. Similar to in the late 80s and early 90s with the internet, the potential is there and the shift is happening – it’s difficult to grasp the concepts and the breadth of use cases in these early stages until the overall infrastructure and usage and apps are developed. It’s an incredibly exciting time right now because we are at an inflection point, and soon NFTs will be part of the way we live with many use cases coming from the technology.
The NFT market is most certainly here to stay. While exploding to generate more than $10.67 billion in trading volume in Q3, usage is still in the nascent stages. NFTs are incredibly important as we broaden out use cases and the potential behind blockchain overall. The most obvious use cases at the moment are art and collectibles, but NFTs will play a large role in future sectors, such as the arts and entertainment, gaming, retail, social media, and commerce.
NFTs are often simplified and understated as “digital art,” but in reality, they have a much higher potential: Anything unique that you may process, including IDs, passport, plane/concert tickets, invoices, car/home/land ownership titles etc can be a verified NFT tied to your identity via your verified personal wallet. What makes NFTs unique is their ability to verify the authenticity of ANY unique item on a decentralized, completely trusted digital network that anyone can access anywhere in the world. The NFT art market is a mere starting point of the adoption of NFTs. Still, it has immense investment potential as the space evolves into an entire metaverse(s). People will need to own and transact digital fine art, land, clothes, events, and even businesses.