What makes an NFT valuable?

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What makes an NFT valuable?

These days we seem to hear the term “NFT” everywhere: from Late Night Shows to luxury clothing brands.

These digital assets are all the rage in the tech world, so much so that an NFT can be sold for up to $91.8 million.

But the question is: How is it that a non-fungible token has so much value in the market?

What is an NFT?

An NFT stands for Non-Fungible Token and is a unique identifier that can cryptographically prove and assign ownership of digital goods. With its technology, it allows digital content (such as an audio, a video, a photo, etc.) to be registered and authenticated in cryptocurrency blockchains, mainly in Ethereum , although others also support them such as Solana .

Once content is recorded on the blockchain , all transactions from transfers to sales are recorded on-chain, creating an easily accessible price history. NFTs can be considered modern collectibles as they are bought and sold online and represent the digital rights to the aforementioned assets.

How is an NFT created and who can create one?

An NFT is minted from digital objects that represent tangible and intangible items including art, GIFs, videos, collectibles, virtual avatars, designer sneakers, music, memes, trading cards, domain names, etc. Anyone who has a digital wallet, makes a small purchase of Ethereum or other crypto, and has a connection to an NFT marketplace where they can upload and convert the content into an NFT or crypto art can create an NFT.

where does its value come from

As we saw before, an NFT is a non-fungible token, this means that the ownership of the item rests solely with the person who buys it. For example, if a person invests in a work of art by Picasso, although there may be many copies of his art, there is only one original piece, and that is what makes it so valuable and irreplaceable.

NFTs are different from cryptocurrencies in that while an NFT is built on the same technology as cryptocurrencies (such as Bitcoin or Ethereum ) we are referring to two different concepts. Cryptocurrencies can be exchanged with each other and have the same value, that is, we can exchange one BTC for another BTC and its value will remain the same, regardless of its price fluctuations with respect to other similar currencies. But this is not the case with NFTs : only one person has a digital signature that is created through a type of encryption, and this guarantees its uniqueness.

On the other hand, there are other factors that make an NFT a worthwhile investment:

Its utility

Utility is one of the most discussed topics within the context of NFTs. Do these assets do anything beyond their expected future value? From enhancing a video game by adding value and maximizing profits within it, to creating unique digital art in the form of NFTs, the usefulness of an NFT plays a big role in its value.

The value of the utility depends on how the NFT can be used. Two main categories that have high utility value within NFTs are in-game assets and tickets. Another dimension of an NFT's utility is the ability to use an NFT that you purchased for X app, in a different app. Imagine if you could use the same weapon you bought for X video game in a different game, the value of this would clearly be even higher.

For example: Decentraland , a virtual reality game, allows you to buy NFTs that represent virtual parcels of land that you can use as you see fit. The inhabitants of Decentraland buy, sell and trade ERC-721 tokens called LAND and use an ERC-20 token called MANA to buy other items within the universe.

History of your property

The value of an NFT depends on both the identity of the initial issuer and the previous owners of the NFT. Those with a high historical ownership value are often created by famous artists, world-renowned celebrities, or luxury brands.

Examples of this are digital artist Beeple, who has three of the top 10 NFT sales worldwide, or Sir Tim Berners-Lee, who recently turned the original code for his invention, the World Wide Web, into an NFT. through a series of works of art , selling them for more than 5 million dollars.

its rarity

Rarity is a unique characteristic of NFTs as they are, by definition, unique. What is becoming clear, however, is that some are more unique than others, and that's what we mean when we say "rarity."

Let's say a collection has 10,000 totally unique characters like CryptoPunks. Some have different traits or characteristics that make them rarer than the others in the same set. It is these rarities that generate increases in its value.

Liquidity

The possibility of liquidity is the main justification for why tokens created in ETH, for example, have a higher value than tokens created off-chain . The higher the liquidity, the higher the value of the NFT.

Standard NFTs on the Ethereum network can be easily traded on secondary markets by anyone holding ETH. That said, if the market isn't bought for your specific NFT, or collection of NFTs, you may have liquidity issues. If no one wants to buy your digital asset, you can't sell it. Or at least not for the price you want.

On the other hand, investors prefer to invest in NFT assets that have a high trading volume, because liquidity reduces the risk of holding an NFT that you no longer want to own.

Why are some NFTs valuable and others not?

Generally, things are valuable when they are scarce. For example, there is only one Mona Lisa, so people are going to pay a significant amount to be the only person in the world to own her.

But the truth is that users are minting millions and millions of NFTs into the market and sparking a speculative buying spree. This shows that the NFT markets are not quite mature: they are speculative and driven by momentum and sentiment rather than price study. However, at some point these markets are likely to stabilize and prices will begin to reflect more realistic demand.

That said, it's worth noting that NFTs are proving to be the gateway to owning digital assets within digital environments, such as the metaverse or within video games. Also, it helps to know that non-fungible tokens are a new way for people to own items on the internet that can not be duplicated.