Crypto

Why are NFTs considered valuable? | The value of NFT explained

How does NFT earn value_

The NFT market has become a billion dollar industry over the past two years. As the project gain popularity and more NFTs are minted, it increases transactions and therefore the market value of NFTs.  Data shows that the entire NFT market was worth less than 100 million dollars in early 2020; now, it is estimated to be worth over $30 billion dollars as more NFTs are introduced to the market.

NFT increase value

Number of sales NFT sales vs USD value over one year. Via [NonFungible]

As the NFT industry is only a couple of years old, some people might still not fully understand it and may think of NFTs as “glorified JPEGs”. If it’s true that the NFT marketplace earns value as more NFTs are minted, Shouldn’t it decrease in value, instead of increasing, just like with fiat currency? 

In order to answer this question, we will first look at what an NFT is, how it is created and what it represents. Then, we will explain how an NFT can earn value over time. 

Keep Reading: NFTs – Four Years On and Two Cents on the Space.

What is an NFT?

What are Cryptopunks and why are they so expensive?

Cryptopunks by Larvalabs

Before explaining what an NFT is, let’s recap what gives a blockchain value. A blockchain is an accurate ledger of transactions. The 2008 economic crash impacted many, and a sense surged of mistrust for fiat currency and the constant money printing. 

Fiat currency is centralized, and it is tough to keep a record of every transaction ever made. We trust the central entity that our money is real, that it is actually worth something. With cryptocurrency, the trust over the ledger of transactions becomes decentralized and trustless; in theory, cryptocurrency gets governed by math and computer processing versus fiat currency which is centralized. 

Cryptocurrencies are considered fungible: you can trade one dollar for another dollar, and it is still worth a dollar. You can trade one Bitcoin for another Bitcoin, and it is still worth a Bitcoin. However, an NFT is a nonfungible token. Like art, every NFT is different and stands out in its own way. Two NFTs in the same NFT collection can be worth different prices, as each NFT is unique and cannot be replicated.

Like cryptocurrencies, NFTs are stored in a ledger of transactions with blockchain technology. Therefore, if a blockchain is public (like Ethereum or Solana), then people know at any given time which wallet owns which NFT, which wallet created the NFT, when the NFT was created, and the metadata that the NFT stores. 

Don’t miss: Layer 1 blockchain projects to keep an eye on in 2022.

To sum it up, an NFT is a trustless digital asset that can be stored in only one place at a time. This digital asset can be instantly verified at any given time, and depending on demand, its value can fluctuate in both directions.

Why are NFTs valuable?

NFTs: Four Years On and Two Cents on the Space

The Bored Apes Yacht Club Collection

We could compare why NFTs are valuable with how Pokemon cards are priced. Pokemon cards are also a finite asset; only so many pokemon cards have ever been printed and will ever exist. The rarest Pokemon cards that are kept in good condition can reach high prices over time.

Pokemon cards earn value over time because as time goes on, fewer Pokemon cards are kept in good condition. This is happening while, at the same time, more avid Pokemon card collectors exist out there. This could create a condition for Pokemon cards to earn value: more dollars are chasing a supply that is slowly depleting. Since there is more demand for the cards than supply, the value of the Pokemon cards goes up. The same principle remains true for NFTs.

Since an NFT is a limited digital asset that can only be stored in one wallet at a time, if many people are interested in the same NFT, this may cause a shock between supply and demand, causing the NFT to rise in value and therefore be worth more. And that is how an NFT could increase value!

Have you ever wondered what are Cryptopunks and why are they so expensive? Find out! 

As the NFT industry is new, be sure to watch out for clear NFT scams that exist out there. Many scams and techniques exist to lure people into buying a certain NFT, even though the creators know that the NFT is worth nothing. Anyone can make an NFT collection, and anyone can buy NFTs. A common problem is the “wash sale” technique, where someone creates an NFT collection and buys the NFTs from himself, faking the value of the NFT collection. The blockchain will say that the NFT was sold for a certain price, giving it a specific value. This may lure people into thinking that the collection is expensive and therefore be willing to pay more than the NFT is worth thinking that they got a good deal. 

Now, these people may have trouble selling their NFT for more value.

Bottom Line

Overall, an NFT can only earn value if more people gain interest in it. Honestly, any NFT’s value is entirely subjective when we genuinely think about it. Like art, each NFT is worth the amount the buyer is willing to pay. Some people may think that an NFT is worth three times less, but as long as some buyer is willing to pay more for the NFT, then that is the true current value of the NFT. 

Overall, just like art, most NFTs cannot earn value and may not even be able to retain their current value. Many scam NFT projects exist out there, so be careful. Realistically, only NFT projects with great amounts of backing and support might earn value. These NFT projects are generally well-known, already trading at high prices (like Cryptopunks and the Bored Apes), and so far have earned value. Nobody knows if these NFTs will retain their value over time or continue to earn more value over time. 

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