WHY ARE NFTS SO EXPENSIVE: ANALYZING THE RARITY, SCARCITY, AND UTILITY OF NON-FUNGIBLE TOKENS

The market report by cryptoslam.io, $256.69 million worth of NFT sales were recorded in a single week in January 2023. There were 1355376 NFT sales in the stipulated time frame. Further, the report indicates that Ethereum-based NFTs constitute a large part of sales, which is, $206.06 million. 

Most importantly, the report also points out the most expensive NFT sales of the month. The top three most expensive NFTs sold in January 2023 are from BAYC and CryptoPunks NFT collections. 

• BAYC #4025 is sold for $613000 
• Cryptopunk #7674 bags $451,000 
• Cryptopunk #7641 is sold for $418,000 

What’s so special about NFTs that makes people pay millions? Are NFTs worth it? 

While some experts believe that market bubbles support the high prices of NFTs, there are other factors at play. On in-depth analysis of NFTs, we find that people are investing their money into it for a reason.  

Let’s discuss the factors that drive the price of NFTs. 

Read on to find out if NFTs are really worth spending millions on. 

Why Do NFTs Have Value? 

NFTs or non-fungible tokens are digital tokens on the blockchain network. They are used to tokenize physical and digital assets. Being powered by blockchain the data stored on the NFT are immutable and secure.  

Today NFTs are used in asset lifecycle management, software licensing, document digitalisation and identity verification. Due to their innovative features, NFTs streamline and boost the efficiency of supply chain management, logistics, real estate and healthcare sectors. 

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However, the most common use of NFTs is digital art and collectibles. The second most popular use of NFTs is in the trade of virtual lands on the metaverse. 

The weekly news magazine, The Economist auctioned an NFT of one of its cover pages. The cover page was from the issue about Decentralized Finance and the magazine cover portrayed cryptocurrencies along with images from "Alice in Wonderland."  

To everyone’s surprise, it was sold for $422000. 

Now, most people would think, why spend millions for a cover photo when you can download it for free?  

The buyers have a set of reasons to buy the exclusive rights of a data file that anyone can view. 

Here are some of the reasons why NFTs are so valuable. 

• Firstly, NFTs are non-fungible meaning that you cannot exchange one NFT for the other. Every NFT is unique as it represents unique assets. Moreover, every NFT has a different value. To sum up, The Economist NFT is a one-of-a-kind NFT that cannot be traded with any other NFT. 
• Secondly, NFTs give the buyers exclusive ownership rights of the asset it represents. It is one thing to download and print the Mona Lisa painting and another thing to actually own it. The downloaded art is always fake and cannot match the real art. The patrons of art know the true value of creativity and art. Therefore, they are ready to pay a higher price for it. 
• Lastly, NFTs give verifiable proof of ownership of the asset to the buyer. Therefore, the buyer knows that he has the authentic item. 

Vignesh Sundaresan says, "The buyer knows how many will be made and has blockchain proof of ownership,". It means that the NFT buyer is a knowledgeable customer who knows that it’s a rare asset. Further, he understands the true value of NFTs and undisputable blockchain proof of ownership. 

What Makes An NFT Valuable? 

NFTs get their value from several factors such as: 

• Rarity  
• Scarcity 
• Social Recognition 
• Market Bubbles 
• Utility 

Let's discuss each factor one by one. 

Rarity 

The rarity of an NFT refers to the rare attributes of the asset that makes it unique from others in the collection.  

For example, BAYC #8817 is the 17th-rarest NFT in the collection. Its rarity comes from sports gold fur against an orange background, with a comical spinner hat on its head and a blue and white party horn hanging out of its mouth. 

The golden rule in the NFT industry is – “The rarer an NFT is, the more valuable it will be.” 

The BAYC #8817 was sold for $3.4 billion which makes it the most expensive BAYC NFT ever sold. 

Scarcity 

Scarcity is one of the fundamental aspects of economics that also plays a major role in the NFT industry. Scarcity and rarity combined make an NFT valuable.  

Scarcity refers to the disparity between supply and demand. If the resources are little and the demand is high, the prices will subsequently increase.  

NFTs are unique and non-fungible. Therefore, each NFT is special and only one of them is available. There is no second piece of the same NFT. Therefore the demand for one such unique NFT is high which increases its value. 

For instance, CryptoPunks is a collection of 10,000 computer-generated pixel art. Each Punk NFT in the collection is unique and multiple pieces of the same punk aren't available. Therefore, this makes the CryptoPunk NFT collection highly scarce.  Further, the probability of owning a rarer CryptoPunk NFT is low and its demand is high. Thus, the scarcity of CryptoPunk NFTs pushes its valuation by millions. 

NFT collector who goes by the name “Punk 4156” sold CryptoPunk #4156 in 2021 for $10.26 million. 

Social Recognition 

When you engage in a transaction involving an NFT, the blockchain permanently records your wallet address and the purchase price. It creates immutable proof of your participation in the transaction.  

Most people are drawn to buy a particular NFT collection just to be the first owner of the NFT. Moreover, people also buy renowned NFTs for social prestige and to brag about their ownership on social media. It is similar to buying or owning limited edition Gucci or Louis Vuitton accessories. 

Market Bubbles 

In economics, a market bubble refers to a situation where the price of an asset is significantly higher than its intrinsic value.  

Moreover, market bubbles tend to emerge when new technologies are launched. Investors are drawn in by the seemingly high value of the new technology, often due to media attention or celebrity endorsements.  

In such a scenario, people purchase assets without fully understanding their value. They are only interested in the potential profit from reselling them.  

In the case of NFTs, when multiple investors buy and resell them, it can lead to a market bubble and drive up the prices of NFTs. 

It is sometimes also known as “Snipping.” The phenomenon of "snipping" NFTs involves purchasing them for a lower price than their actual value, often because the seller is unaware of their rarity or worth. 

Utility 

One of the factors that make NFTs valuable is utility. A digital asset that provides functionality has the potential to increase its value. 

Nowadays premium NFT collections offer exclusive utility to their buyers. These utilities may include: 

• Access to events 
• Free concert tickets 
• Membership in exclusive celebrity clubs 
• Gifts in form of branded items like sneakers & hoodies 
• Discounts on physical items 
• Early access to new releases and collections 
• Opportunity to meet celebrities 

That’s not all! NFTs are also used to raise funds.   

For example, in 2022, AssangeDAO orchestrated the multi-million dollar purchase of Pak's Clock NFT. It currently stands as the second-most expensive NFT sale of all time. 

The NFT was sold for 16,593 ETH, which is approximately $52.7 million at the time of sale. The proceeds from the sale were to fund the legal defence of WikiLeaks founder Julian Assange. In this case, the NFT's value and high price were due to the purpose it was serving. The Clock NFT was used to support a charitable cause, and its sale attracted many buyers who were willing to pay for its multifaceted functionality. 

Conclusion 

To sum up, the price of an NFT depends on its rarity, scarcity, social recognition and utility. Out of all the 4 factors, scarcity and utility are the primary factors that make an NFT valuable.  

There are thousands of NFT collections on marketplaces. However, not all of them are worth millions. Some NFT collections do not fetch more than a few hundred dollars.  

But if there is an NFT collection for which people are spending millions or even thousands then it must be worth it. 

According to market data, there are over 50,000 NFT sales in a week. Further, on average $10 million to $20 million in NFTs transactions are recorded on the blockchain. 

Moreover, the market report shows that collectibles constitute 43.4% of the total NFT industry. Utility NFTs is the second most popular category with 38.6% contribution. Apart from this, the new emerging metaverse constitutes 4.2% of the NFT industry. 

Observing the exponential growth of the NFT market, entrepreneurs are actively building NFT solutions to capitalize on this opportunity. If you are also looking to tap into the NFT industry, then get professional NFT development services from experts. 

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