Understanding the Value of NFTs: Why are some Non-Fungible Tokens so Valuable?

The field of cryptocurrency is constantly evolving.  From the early beginnings of Bitcoin, when we first started hearing about crypto and blockchain, things have evolved into what we today call web3, – a space that incorporates decentralised applications, smart contracts, NFTs and multiple metaverses.

An important step in the journey came in May 2014 with the creation of the first Non-Fungible Token (NFT) on a little-known blockchain called Namecoin. Even before this, it is widely believed that Ethereum creator, Vitalik Buterin, conceived of Ethereum and NFTs in 2013 due to a World of Warcraft patch! 

Ethereum went on to be the largest blockchain for NFTs, helping to make them and crypto much more accessible to the mainstream thanks to games such as Crypto Kitties and collectibles like Crypto Punks.

So what is an NFT anyway? 

In the simplest terms, If fungible means it can be broken down into component parts( like how a Bitcoin is made up of 100 million satoshis or a dollar is made of 100 cent), non-fungible means that the token has a 1:1 allocation. 

If you tokenized your Lamborghini as an NFT, it would represent ownership of the entire Lamborghini. The same applies for a piece of art or the deeds to a house.

Whilst fractional ownership and fractionalisation of NFTs is possible, that is not a topic we will be discussing in this article, and we’ll assume that the ownership of an NFT denotes ownership of the entire thing. 

Fungible tokens like Bitcoin or Ethereum can be exchanged for one another without any change in value. 

Non-fungible tokens, on the other hand, are unique and cannot be replaced, even if they look the same ( no, screenshots don’t count). It is the digital record of ownership locked into a smart contract that counts as the NFT. 

They are often used to represent digital assets of value, such as collectibles, gaming items, and art. Non-fungible tokens are becoming increasingly popular as they offer a way to own and trade unique digital assets. They are also being used to create new applications, such as decentralised gaming and art marketplaces.

There are even many gamers that would love to sell some of their Counter Strike or League of Legends skins – with NFTs, this is a possibility! 

Different smart contract standards on different blockchains account for the differences between fungible and non-fungible tokens. For example, ERC-20 is the typical standard for a fungible token on Ethereum such as Ether ($ETH), whilst the ERC-721 standard includes additional metadata that denotes more information.

All blockchains that feature smart contract functionality are capable of hosting NFTs, and more recent innovations for older blockchains such as Bitcoin and Litecoin have seen them develop to the point they can too! 

Bitcoin NFTs and similar items called “inscriptions” and “ordinals” have recently become valuable very quickly and have also increased in popularity thanks to the novelty of being on the Bitcoin blockchain.

Community backlash 

Due to a number of reasonable concerns held by gamers and other sceptical groups, some NFT projects and the potential implementation of NFT collections have been met with considerable backlash that ultimately derailed the projects. 

These concerns amount to fears over the environmental impact of mining proof of stake cryptocurrencies, and the possibility of financial scams. More education is needed around these topics to increase trust in web3, which is in some instances environmentally-friendly, and more safe than traditional finance. 

Rarity

If backlashes negatively impact NFT values, rarity scores are the flip side of the coin. Typically, even though each NFT is unique, some feature attributes in their designs, stats or otherwise that are rarer. The rarer an NFT, the more its perceived – and therefore possible – value is. 

Supply and demand
As such with anything available for buying, selling or exchanging, NFTs are subject to fluctuations in supply and demand. Azuki NFTs, at one point extremely valuable, are no longer experiencing such heavy demand. Popular YouTuber Logan Paul purchased an Azuki NFT at the height of their popularity for over $600k. Today it is worth under 50k. 

Utility 

For a long time, memes about NFTs being simple JPEGs persisted (there are even guides about how to explain this not being the case) because the utility of ownership and wider utility benefits were not widely understood yet. 

Once the benefits of owning an NFT that bestows utility to the owners is understood, both perceived (indirectly impacting supply and demand) and actual (the price) value increases. As an example of utility, there is an NFT that ownership of unlocks the use of a clubhouse in the popular Soho district of London for use as a meeting place and networking venue. 

 One of the most famous NFT collections in the world consists of 10,000 animated apes with varying levels of rarity. The average value of one of these apes right now is over 85,000 dollars, with one selling in May for nearly $1m. Ownership of one of these NFTs involves being part of an exclusive members-only club that bestows multiple benefits

The second collection from Yuga Labs, Mutant Ape Yacht Club doubled the previous collection size to 20,000 mutated apes on the Ethereum blockchain. These are worth slightly less and give slightly less advantage than BAYC NFTs but are still very valuable, and continue to reward holders. 

 Also from Yuga Labs, who have now expanded into a cryptocurrency called “Apecoin” – which they airdropped to NFT holders – and a metaverse-based online game called Otherside. Otherdeed is their “landsale-via-NFT” collection, allowing holders to own land in the Otherside metaverse. The first public sale of these NFTs saw over 50,000 sold in three hours. 

Acquired by Yuga Labs in 2022, Crypto Punks is another hugely popular NFT collection of pixelated punks that often sell for tens of millions. 

As a result of some of the aforementioned backlash, some organisations choose to not call NFTs NFTs, and who can blame them if the alternative is hectoring and social media boycotts.

The most prominent example of this is Reddit, which released “Digital Collectibles” – which in essence are NFTs and a “Vault”, a wallet.

It seems likely many NFTs in future may not be referred to as NFTs at all. 

There are three possible futures for NFTs, two of which are extreme:

• NFTs are made illegal and no longer used at all
• NFTs are made mandatory and all digital interactions will take place on the blockchain

The third and most likely future is somewhere in the middle, whereby use of sanctioned and endorsed blockchains will be officially recognised as ownership, whilst truly decentralised technologies are likely to fall under continued scrutiny and possible regulatory oversight.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not digital asset or cryptocurrency trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.