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Why Do People Buy NFTs? 5 Reasons Why

rare cryptopunks worth millions

Why do people spend hundreds of thousands of dollars on monkey JPEGs? What gives them so much value and why is Gen-Z so hooked on them?

Even though I’ve been involved in crypto for over six years, even I struggled with these questions and failed to grasp why people liked NFTs so much. Like many, I had all the same questions around where their value came from and why NFTs were important at all.

As I’ve been diving into the NFT rabbit hole to try and understand it better, I’ve come around on a lot of my pre-conceived notions I had about them. I’ll try to articulate my learnings here, explaining why NFTs are valuable and why people like and buy NFTs.

1. NFTs Create Mimetic Desire

We desire what others desire. That is the crux of Rene Girard’s mimetic theory. Most of us don’t really know what we want, so we simply imitate others and want what they want or have.

This theory applies to nearly everything in life. Once you apply it to NFTs and the art world, a lot of it starts to make sense.

If I showed you this picture below with no context, would you care at all?

Now, what if I told you that NBA player Steph Curry recently bought it for $180,000 and changed his Twitter profile picture to that pic?

Some of you still may not care. But many others will. Those that like Steph or follow the NBA will probably care more. Regardless how you personally feel, there absolutely will be people out there that take notice.

All of a sudden, that ape isn’t just any picture of an ape. It’s a Bored Ape Yacht Club ape that Steph Curry paid nearly $200k to own. Now the picture has meaning and value behind it.

Steph Curry becomes a model of desire for us. He thinks a BAYC ape is valuable, therefore we think so too. This is mimetic desire at work, and is one reason why certain NFTs will have lasting value.

2. NFTs Act As Digital Status Goods

People buy luxury goods because they’re a symbol of wealth. They elevate your status to your peers.

Can you tell what brand she’s wearing?

People don’t go around wearing designer goods to blend in and go unnoticed. They wear them to stand out – to “flex” on others by signaling their wealth and imply they’re better than you in some way.

These luxury goods do the trick in the physical world. But what about in the digital realm, where we spend more and more time?

In the digital metaverse, it’s harder to show off your physical goods without looking like you’re trying too hard. Instead, you are your online profile picture. Changing your Twitter profile picture to a Bored Ape or Cryptopunk is the digital version of flexing your Rolex in person. Except now it’ll be seen by thousands or millions of people, not just those around you.

In the future, the options to customize your digital avatar will be endless. You’ll own digital land, upon which digital property exists. Just like how what we own in the physical world will define us, what we own in the online universe will too.

The need to impress others with status goods will never go away. It’ll simply get digitized, which is why value will accrue to luxury NFT goods.

3. NFTs Turn Everything Into Collectibles

As long as humans have been around, so too have collectables. In fact, the urge to collect unusual objects can be found in many other animals as well, like bowerbirds and pack rats.

We naturally covet things that are scarce and of limited quantity. This is why marketing campaigns still to this day tempt us with exclusive offers available for a “limited time only.”

We know it’s all a marketing ploy, yet it still works. Such is the power of scarcity, and NFTs are the perfect vehicle for manufactured scarcity. NFTs on the blockchain are verifiably scarce. Most collections are either 1/1 unique pieces or have a limit like 10,000.

This manufactured scarcity allows NFTs to usher in a world of digital collectables. If you don’t think there will be a market for these, just think of how many random physical items some people collect.

Physical collectables span everything from spoons to sports cards to action figures to cars to sneakers…you name it. It is not inconceivable to believe the digital world will mirror this.

In fact, it’s already happening. In March 2021, RTKFT Studios released a digital sneaker NFT collection that sold out for $3.1 million. They’ve replicated that feat since with other collections, some of which have sold out in minutes.

Would you buy a digital sneaker NFT?

NFTs are ushering in digital collectables, with arguably even more possibilities. The only limit is creativity.

Will most of these digital collectables be worth anything of significance? Probably not. But just like in the physical world, those that do survive and catch on will capture most of the value.

4. NFTs Provide Access To Gated Communities

With every passing year, we spend more and more time online. That trend was accelerated even more with COVID-19.

At the same time, we spend less and less time socializing in places we used to in the physical world: churches, country clubs, community centers, meetups, and so on.

The means of socializing may have changed, but the desire for human connection and wanting to be a part of something has not disappeared. In fact, as the world gets more and more fragmented, we yearn to find groups with likeminded individuals that represent our values.

Enter NFTs. By owning an NFT of a certain collection, you become a part of that collective. You’re not just you, you’re also one of one of only ten thousand Bored Apes.

The NFT provides exclusive membership into the club, where you can hangout with fellow apes on Discord, receive special perks, first access to events, and other benefits. Just like how a country club or other gated community distills a sense of pride and elitism, so too do these gated NFT communities.

The BAYC community makes it enticing to be a member

As NFTs expand more and more beyond just digital art and collectables into music and gaming, this community aspect becomes even more interesting. By holding an NFT from your favorite singer, fans all of a sudden can have an ownership stake in that singer’s future. Likewise, owning early NFT cards of an emerging game like Parallel incentivizes players to help the game succeed.

NFTs flip the traditional producer-consumer relationships by turning everyone into an owner, strengthening community ties. If people feel there is enough value in being a part of a certain community, they will happily pay for it.

5. NFTs Can Be An Inflation Hedge

Finally, when considering why NFTs are valuable, there is a thesis that some NFTs may stand as an inflation hedge. It’s still much too early to tell if this will be proven true, but some investors may be adopting this viewpoint.

High-end, traditional art has long been appreciated as a hedge against inflation. One example of this is from 1977 to 1982, a highly inflationary period where prices rose 80% but the Art 100 Index outperformed by 130%.

Recently, contemporary art has actually substantially outperformed the S&P500.

In an era of unprecedented quantitative easing and easy money from the Fed, asset prices across the board have been driven up. Additionally, bonds and savings accounts return negative yields, pushing investors farther out along the risk curve to seek returns.

High-end art is already to the far right of the risk curve, and NFTs push that even further. Assuming the NFTs as an inflation hedge thesis is right, then investors are dropping millions of dollars on Punks and Ether Rocks because they figure the easy money will eventually make its way all the way to the right of the risk curve, where their high-end NFTs sit.

If this still doesn’t make sense, keep in mind the ultra rich live in a different world from the rest of us. Spending $2 million on a picture of a rock to a person with a net worth of $100 million is equivalent to someone with $100k net worth spending $2,000 on a piece of art.

Conclusion

Even if you understand the concept behind NFTs, it’s hard to wrap your head around the sums of money being exchanged in the NFT market. In this article, we explored five fundamental reasons why people buy NFTs.

These touch on deep-rooted parts of the human psyche – imitating our idols (mimetic desire), wanting to be noticed (status goods, community entry) – as well as financial reasons, such as buying collectables or using NFTs as an inflation hedge.

If you’re new to the NFT space, I’d recommend you put aside your initial pre-conceptions and cynicism, and instead explore with an open mind. I have no doubt they will touch on every part of our lives at some point in the future. It’s in all of our best interests to learn and participate in the ecosystem now so we don’t get left behind.

If you’re already in the NFT game, you likely already know just how early you are. Keep yourself in the game through the highs and lows, protect yourself from the common NFT scams, and you’ll likely do very well for yourself.

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