What Drives The Value Of An NFT? NFT Economics & Innovation

NFTs or non-fungible tokens are unique one-of-one digital assets that allow for verifiable ownership; to become an NFT expert, click here

NFTexplained.info is a team of long term crypto investors who are well versed in the crypto space; we have the goal of providing the best information possible. 

NFTexplained.info would recommend reading through the entire article as we breakdown the economics behind NFTs, why NFTs are valuable, the possibility that NFTs create the next big movie or show, and far more. 

NFTs operate through the principles of supply and demand economics – high demand for a scarce item increases the price. The main rationale for purchasing NFTs is because they allow for verifiable ownership – via the blockchain – and can be bought and sold on third-party marketplaces. 

The relationship between the supply and the demand for an NFT is what influences the price. 

NFTs can be a one-off effort like Beeple’s famous digital art piece. But even large NFT collections are typically capped at 10,000 or 20,000 items – the supply is the developer’s choice.

When NFT projects, like CryptoPunks (“Punks”), have a limited supply of 10,000 with stupendous awareness and buying incentive, the price increases enormously. 

This is due to a multitude of factors including the ability to flex. Numerous celebrities have their profile pic set as their Punk like the famous musician/producer, Jay-Z

This drives awareness to the project, creating a buying incentive; however, there are only 10,000 Punks and the supply can not be altered. This high demand with low supply drives price appreciation.

NFTexplained.info briefly touched on the flex that some NFTs have. In the next section of our article we will explain additional reasons as to why people purchase NFTs.

The lowest or cheapest price to buy one of the Punks is nearly half a million US dollars; this is known as floor price. 

Floor price is set by the person who is most eager to sell. NFTexplained.info has a full article covering floor price which can be found here

Another reason people buy NFTs is because large NFT marketplaces like OpenSea exist. This helps make NFTs more liquid, or improves the ability in which a digital asset can be turned into another cryptocurrency or even fiat (cash).

Why Do NFTs Have Value? Why Would Someone Purchase An NFT?

NFTs are incredibly innovative and allow for a range of new possibilities that were previously not possible. Later in the article, NFTexplained.info will cover the innovations that NFTs enable. 

As a general statement, NFTs have value because people are willing to pay high prices to own them. People want ownership for a myraid of different reasons including: the flex, owning the actual work, access to private group chats, access to real events, access to airdrops, and much more. 

Since there is perceived value in owning certain pieces of artwork, the price is high. That same logic is also applied to NFTs. 

In actuality, the Mona Lisa is valuable because people perceive it to be so. At the end of the day, it’s just a canvas covered in different colors of paint. 

Many would consider owning the Mona Lisa to be an enormous flex; the same applies to certain NFTs, but even more so, as this ownership can be verified worldwide, in real time.

A reason people purchase things is because they find the item visually appealing; this rule still applies even though NFTs are digital. Owning the actual file of the NFT also means that the item can be sold on the secondary market.  

Owning NFTs from a collection often grant membership to an abundance of utility (or different features) like private group chats, real world events (Bored Ape Yacht Club threw a yacht party where only Bored Ape holders were allowed in), access to airdrops (being gifted something by the developers of the project), and physical items (e.g. if Tom Brady released an NFT collection, holders could receive a signed tee from him).  

Are NFTs Worth It? Should I Invest In NFTs?

When it comes to NFTs, most people have just begun to dabble in the space and questions such as: should I purchase an NFT, often come to light. 

As a general statement, only invest what you can afford to lose when investing in NFTs. The NFT space moves incredibly fast; this means some investments result in extraordinary gains while others fall to zero. Many NFTs are worth high prices only if people are willing to pay them. 

There are many factors to consider before investing in NFTs; we would recommend reading our top ten tips for picking good NFT projects if you are considering investing in NFTs.

NFTexplained.info would only recommend investing in NFTs if you have extra cash on the sideline and you have completed your due diligence – researching a project. 

One notion sellers of NFTs may rely on is the highly variable notion of the visual aesthetics to incent future purchase. 

NFTexplained.info will now cover the possibilities that NFTs bring when compared to normal collectibles. 

How Are NFTs Innovative? 

NFTs are innovative as they allow for digital ownership which can be authenticated via the blockchain. NFTs also allow the creator to receive royalties when their work is traded in the secondary market. Lastly, NFTs allow purchasers to invest in ideas like shows, people, and much more. 

Creators are able to set royalties for trades in the secondary market. If a 3% royalty fee is set for secondary trades and an NFT is resold for $1,000 then the creator would receive $300.

The NFT line Bored Ape Yacht Club has made millions in royalties from secondary sales. 

Now NFTexplained.info will cover how NFTs can be used as investments for different ideas. 

A line of NFTs could birth the next big cartoon show or even a movie. 

When people purchase NFTs used for the creation of a television show or a movie, it can be thought of as investing in that form of entertainment.

For example, imagine a future in which the main character in a television show is an NFT that you own; this NFT could result in a commission each time someone watches the show in which your NFT is present.  

As a further example, a developing team plans to release 10,000 characters for a cartoon show. Each of the 10,000 NFTs could be minted for US $800 resulting in the developing team receiving US $8,000,000. 

That $8,000,000 could be used to hire a graphic design team and copywriters to create a story line and so on and so forth. A real television show could be created. 

NFT purchasers could receive a 5% commission each time their NFT comes up in the story or show. The commission would come from revenue created by people viewing the show or movie. 

NFTs can also be used as a way to invest in people like athletes. 

Using smart contracts, NFTs can also be updated in real time. This means purchasing an NFT from a famous athlete could be thought of as investing in that athlete. 

LaMelo Ball released an NFT line that updates his stats in real time. NFTexplained.info has a full article covering these innovative NFTs and the idea; that article is linked here.

If LaMelo continues to have successful seasons and the stat-based NFTs continue to go up, it is reasonable to assume people will pay a higher price to own these stat-based collectibles.

We hope you are just as excited as we are about NFTs and continue to stay informed at NFTexplained.info. To get the latest news in this rapidly evolving space, follow our team on Instagram & Twitter!

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