Why Are NFTs Valuable?
This is not a post complaining about NFTs, it is a post trying to understand why some NFTs are valuable and others are not. So where do we begin?
We all know that collectibles gain value based on scarcity and demand. For example, the Mona Lisa is a one-of-a-kind work of art. If someone wants it, they’ll need to pay more than anyone else to own it.
By definition, there are only 59 NBA Top Shots (NFT Collectibles) featuring LeBron James dunks. One of which sold for $387,000. But is NFT value really that simple? Continue reading to find out.
For more NFT posts check out the following:
- 5 Best NFT Marketplaces For Beginners
- Everything You Need To Know About Non-Fungible Tokens (NFTs)
- The NFT Environmental Impact
The NFT Gold Rush
Despite some NFTs finding success, people are minting millions of NFTs. These are flooding the market and causing a speculative purchasing frenzy:
Sadly, there are forums and chat rooms where thousands of people discuss what they’re going to buy to artificially inflate the price and then sell when they believe they’ve made a sufficient profit.
These are referred to as pump and dump schemes, and they are unlawful for stocks. However, many cryptocurrency markets are unregulated, and investors, creators, and marketplaces face high numbers of speculative buyers and sellers.
This demonstrates that the NFT market is not mature. They are speculative and driven by sentiment and momentum rather than price discovery.
It’s similar to a gold rush, with people paying thousands of dollars for pans and shovels and then millions for each rock discovered, regardless of whether it contains gold.
These markets will likely stabilize, and prices will begin to represent realistic demand, just as presented in the primary and secondary art markets.
NFTs In The Future?
It’s worth mentioning that NFTs are paving the way for the ownership of digital assets in digital settings such as the metaverse or video games.
However, for the time being, it’s helpful to know that non-fungible tokens are demonstrating a new approach for individuals to create unique things on the web.
How Do NFTs Work?
An NFT is a non-fungible token, a one-of-a-kind digital asset – like a person’s signature.
Whether it’s a song, an image, or a clip of a film, this unique digital signature acts as a fingerprint for the asset, containing information such as who developed it, when it was made, and any restrictions on its future sale:
For example, whether or not the creator gets a percentage of when it is on-sold.
A blockchain is used to store these signatures. A blockchain is a massive, publicly accessible database that tracks and records the movement of all of the assets and signatures.
If one of those assets is agreed to be sold, all participating nodes check and agree that the item has been sold and the digital signature has been transferred to another party.
That is why, when bitcoin hit popularity it created such a stir. This was the first time something could not be copied and pasted from the internet:
If you attempted to copy or paste a digital asset onto the blockchain, two digital signatures would be made. All machines verifying and validating the changing database would reject the second one due to the inability to verify its provenance.
Confirming and agreeing on historical ownership of a digital asset is critical to the operation of blockchains.
Additionally, because the blockchain is public, you can tell whose wallet possessed the digital asset earlier. And before that, the proprietor. Each digital asset can be traced back to the miner and the mining date.
After the Colonial Pipeline, an American oil pipeline infrastructure, was hacked and hackers demanded $5 million dollars in bitcoin as ransom, the US authorities turned to the public blockchain.
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However, because each bitcoin has its digital signature and the blockchain documents how each signature flows via transactions, the U.S. authorities could track down the bitcoin’s final destination and reclaim approximately S2.3 million of that money.
However, Bitcoin is connected with digital currency, whereas NFTs are associated with digital objects.