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7 Reasons Why NFTs Are Valuable

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Why are some NFTs more valuable than others? How can some fetch millions in the market while others can’t find a buyer for even a few dollars?

This article will shed some light on why NFTs are so valuable and what fundamental factors contribute to an NFT’s value. Whether you’re an NFT collector or flipper, keep these in mind as you evaluate which NFTs to add to your collection.

1. Community

As I’ve mentioned before, one of the reasons why some NFTs are so desirable is because they provide entry into gated communities. The more exclusive or desirable the community is to join, the higher an NFT’s value should be.

The strength of an NFT’s community is one of the most important factors in an NFT’s value. NFT holders are essentially all mini-owners of a project. Just like in traditional investing, the stronger the owners of a company are the better off it’ll be.

If your community is full of get-rich-quick, short-term flippers who don’t have any ties to the project, that will be reflected in the NFT’s value. These kinds of NFT holders will dump at the first sign of profit, and will also sell for a loss when the project doesn’t immediately work out.

The best NFT projects have community members with deep pockets and diamond hands. Think CryptoPunks and Bored Apes, both of which are held by crypto whales with millions/billions, celebrities, and even institutions like Visa and hedge funds.

Buyers with deep pockets can sit comfortably on paper losses and are not stretched for liquidity all the time. Diamond hands allows you to hold through the volatility of NFTs and reduces supply to market, which raises price along the demand curve.

Equally important is community consensus which helps set the floor price for NFT projects. The stronger that consensus is the more established the floor “support” level is.

If every holder of a collection agreed they would never sell for under 1 ETH, that floor price becomes 1 ETH. But the moment someone breaks that pact, that opens the flood gates for others to do the same. It’s essentially the prisoner’s dilemma in real time.

Community consensus is usually not a verbal or written pact, but rather an implicit agreement. Visa buying a Punk for $150,000 implicitly set the floor value of Punks to $150K for all participants.

You can get a sense of how strong a community will be by joining the project’s Discord and seeing the interactions that take place. The projects that go nowhere are usually full of what look to be younger kids, don’t have much money to spare, and have wild visions of 1000x’ing their money overnight. You’ll know it when you see it.

2. History

Humans love the concept of firsts or origins. Knowing the history of something helps us make sense of the world. Everyone remembers the names of Adam and Eve, or who landed on the moon first; barely anyone knows the names of those after them.

Thus the earlier a collectable or NFT is, the more valuable it is. There’s something appealing about owning the first of anything, whatever it may be. You’re essentially owning a cultural asset that’s a part of Internet history, and in doing so you become tied to that history.

Physical collectables like Pokemon cards are routinely valued based on their print date. The earlier the better. First edition symbols are also an indicator the cards are from the first print run of the set, which further increases their value.

Image titled Value Your Pokémon Cards Step 2

One of the reasons CryptoPunks are so valuable is because of their origin as one of the first NFTs built on Ethereum. They were also the first NFTs used as profile pics, which has become a subcategory of NFTs all of its own now.

SBF’s (Sam Bankman-Fried)’s first ever NFT is a recent example of the “history” concept in action. A recent example of the “first” concept in action is FTX founder SBF’s (Sam Bankman-Fried) first ever NFT. A crudely drawn “test” in MS Paint fetched $270,000 because because people wanted to own a piece of history.

3. Story

Why did Beeple’s NFT Everydays: The First 5,000 Days sell for $69 million? Why is the Mona Lisa so revered even today? It’s not just that the artists were incredible or that the art was just that much more beautiful than other pieces.

It’s also because of the stories surrounding the artwork. Stories are central to human existence, and bring meaning to the mundane.

Beeple (aka Mike Winkelmann) started the Everydays project way back on May 1, 2007. He created a piece of art every single day for five thousand days in a row, even on days like his wedding or his children’s births.

Alongside the “first” factor, Everydays represents a turning point in the story where digital art and NFTs hit the mainstream. It flips the traditional art world model upside down, where a handful of experts judge your worth and are gatekeepers into their world.

To many struggling digital artists and graphic designers, Beeple’s story represents a way to get around the establishment gatekeepers.

Similarly, the Mona Lisa’s story is what adds to the painting’s revere. The theft of the painting in 1911 and the ensuing capture, media attention, and endless reproductions all work together to create an air of legend around the painting.

NFTs that can enrapture an audience with its story are likely to see their value increase.

4. Rarity

The rarer something is, the more unique and scarce it is, and the more desirable it becomes. Flaunting that you own something rare is a signal that you have greater status than your peers.

The desire for status is a fundamental human motive. We all want to be admired and respected by those around us. Most of us would prefer having status over others even if that meant everyone had lower status on an absolute level.

Rarity of NFTs can be easily evaluated. For any given collection, you know precisely how many collectables there are (ie. 10,000 punks, 10,000 bored apes). Then among the collectables, you can drill down into their properties to see which ones are more rare.

On OpenSea, this can be found under the “Properties” tab. You can see that the tanktop and S&m Hat are rare attributes, as only 2% of the bored apes have them.

The more rare attributes an NFT has, the more valuable it theoretically should be. However, rarity isn’t always directly correlated to price. Sometimes buyers place a premium on more visually obvious but less rare traits, simply because they look cooler.

In the case of Bored Apes, having gold or trippy fur stands out much more than a rare mouth trait, so the former matters more to price. CryptoPunks with hoodies command a higher price than Punks with white hair, even though the latter is rarer.

Keep this in mind when making NFT purchases. Rarity tools like rarity.tools can be helpful, but many NFT buyers place too much emphasis on them.

5. Utility

Contrary to popular belief, NFTs are not all just useless jpegs that have no purpose. Some NFTs are created to be used, like in the case of game items or music passes.

You might think NFTs with more utility should automatically be worth more than those that don’t. After all, what’s the point in owning something that can’t be used, right?

Not necessarily. Just like in the physical world, price is not always correlated with utility. Water has the most utility of all items, but for many of us is abundant and cheap. Do not fall into the trap of believing greater utility equals greater price.

Sometimes an NFT with utility or promised future utility can be less valuable than one with zero utility. When you add utility to the equation, you create a promise for the future. You have to factor in an assumption of that promise failing to deliver, which negatively affects the NFT’s present day value.

For example, NFT weapons created for a future game are dependent on the success of that game. There are a million variables that can make or break the game. If the game gets no traction, the NFT weapons may be entirely worthless.

On the other hand, something like a Punk will always just be a Punk. People didn’t buy them because the success of the project was dependent on anything, they just bought them as collectables. There’s no scenario where a Punk will lose value because of something else.

6. Liquidity

Just like in any other asset class, there is a liquidity premium in NFTs. People are willing to pay a little extra if it means they have an easier time getting in and out of their investments.

For NFTs, we can see this as collections built on Ethereum are generally valued higher than those built on Bitcoin. Ethereum’s ERC standard smart contracts creates a much easier buying and selling process. Likewise, NFTs on Solana have been gaining traction due to the network’s scalability and low fees.

NFT buyers also prefer buying NFTs with more volume traded, as it is another signal of a collection’s liquidity. You can see how there is a flywheel effect here – the more volume traded, the more buyers are interested, and the more volume increases. This is one reason why so much value accrues to the top in NFT land.

7. Aesthetic

The aesthetics of something is arguably the hardest to judge, which is why we placed it last. As the saying goes, one person’s trash is another person’s treasure.

However, there are some obvious indicators of aesthetic. Like many animals, humans are drawn to bright lights and other visually appealing stimuli.

For example, even putting aside the rarity of holographic cards, you can argue that holographic cards are aesthetically more pleasurable to look at than non-holographic cards.

We can apply many of the same physical desirabilities to NFTs. Things people generally find cool in the real world like gold, lasers, rainbows, sparkles, and other extraordinary traits are also desirable in digital art. NFTs that have these aesthetics are generally more valuable.

Conclusion

We’ve discussed why NFTs are valuable as a function of seven components. When you think about how to value a particular NFT collection or item, it’ll help to consider each of these in your fundamental analysis framework.

Community is the most important factor – a community with strong capital ties and social consensus are strong indicators of a project’s success and the NFT’s value.

Then look at the historical significance and the story surrounding the NFT. Once you dive into the collection itself, attributes like rarity, utility, liquidity, and aesthetic all help increase an NFT’s price.

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