With Crypto Punks NFTs selling for a minimum $230,000 and Bored Ape Yacht Club NFTs selling for a minimum of $330,000 you may be wondering, what gives an NFT its value!?
An NFT is after all just a digital asset like an image, graphic or photograph, and yet a cartoon of an ape is trading online for incredible values.
So why are investors, entrepreneurs and even celebrities turning their backs on traditional investments like stocks and shares, and even more speculative assets such as cryptocurrency, in favour for probably the riskiest asset there is to own?
In this article we’ll look at some of these wild price tags, why people are spending so much money on them and ultimately what gives an NFT its value.
Demand versus supply is how an NFT is given its value. The demand for a particular NFT, or NFT project, will set a market price between the lowest price an NFT owner will sell for, and the highest price an NFT collector will buy for. 98% of NFTs will lose in value over the course of the next 2 years.
Like almost all assets, commodities and services, the selling price is often set by the demand and need.
Owning an image of a cartoon ape couldn’t in any way be classed as an essential need, so what is driving the price of certain NFTs so high?
How the Price of an NFT is Determined
We can try and understand the price of an in-high demand NFT with something a little more relatable.
Explanation of High Value NFTs
A pair of exclusive Adidas may fetch upwards of $5,000 or more yet will cost a fraction of this to produce.
A Rolex watch may cost in excess of $100,000 but can tell the time in no other special way than a cheap $10 watch.
These types of goods are known as luxury commodities.
The price rules around luxury commodities are very different to those of other commodities.
Take a look at a commercial for the latest cologne or perfume. Selling a scent through a television commercial must have given the marketers of the 60s the challenge of climbing Everest in a pair of shorts with a tooth-pick.
How do you express a scent visually, without the obvious scenario of an actor smiling gleefully after taking a nostril full of the scent.
Instead, the marketers started veering towards the emotional pull of wearing the scent, rather than the sense of smell itself.
As marketers started creating a mindset of how good it would feel to wear their brand, it resonated with the audience. Who doesn’t want to feel as if they are wearing the best, the most desired and most wanted commodities.
This plays on the status need in people.
By wearing the best and having the best you increase your status in society. This has a very heartfelt emotional trigger in most people and plays on their desire to continue to increase their status by the possession of luxury brands.
You can see just how much people value their status by taking a look at social media posts.
We are not going to look at the emotional dynamics of status in this article, but this example is intended to look at how owning the most sought after and desired commodities can push the price someone is willing to pay for a commodity through the roof.
The Bored Ape Yacht Club community are an example of this.
When BAYC first launched you could purchase one of the NFTs in the collection for around $300. Being one of the first, with quirky graphics and a marketable project, it took the imagination of many investors to take a look and invest with the speculation demand would increase.
They were right.
It took a few months, but a well-known shoe brand decided to dip its toes in to the NFT market, to test the concept and learn how the market reacted to provide themselves valuable research and insight in to this new space to watch, and paid around $150,000 for one.
News of this purchase from a major brand sparked a huge amount of interest, as investors and entrepreneurs alike flooded the market looking to get in on this – which just like stocks and shares – pushed the prices of other NFTs being held through the roof.
As the story became mainstream, celebrities became involved. To date Jimmie Fallon, Eminem and Justin Bieber are just three celebrities who have come forward to say they have purchased a BAYC NFT.
With the price of a BAYC NFT being out of reach to most and being one of the most sought after NFTs to hold in your collection for anyone in the NFT space, it has for sure earned its label as a luxury brand.
Owning a BAYC in your Wallet is now a symbol of status. And to many that feels very good.
Explanation of Low Value NFTs
You will see in media news stories and social media posts examples of very high selling NFTs such as Crypto Punks and Bored Ape Yacht Club all the time – but what about the others?
There are many NFT projects, each with between 4,000 and 10,000 NFTs, launching every single day.
They of course all can’t be gold mines and they can’t all see the value of a $300 minted NFT worth $300,000 in 18 months. There just isn’t enough money or demand to go around.
For every $300,000 NFT there will be 10,000 NFTs or more than are pretty much worthless.
These are the ghost town projects that simply couldn’t build enough demand, interest, desire or long term goal to make investors want to invest.
This is why 98% of all NFT projects will be worthless in less than 2 years.
This is also why NFTs are an incredibly risky investment.
There are though some diamonds in the rough. I invested in to the Kindergarten Baby Ape NFT project (disclaimer: yes, I am a holder of an NFT in this project). I did so because not only are ape led NFT projects quite popular at the moment as people look to cash in on the Ape NFT craze, but also because of their mission statement.
The Kindergarten Baby Ape NFT project is building schools for under privilege children in developing countries.
They sold 10,000 NFTs at launch for an average of $300 each. This has provided income to the project of around $3million. This money is being used for marketing purposes to increase awareness of the brand and also to build schools (two have been ordered so far).
I’m not here to promote the project, this is for the KBA founders to do, but the story and roadmap for the project is what will ultimately cause people to be interested and want to invest whether for luxury status reasons, an interest or fan in the artist or for a passion for the ethical cause.
The benefits to the NFT project are royalties for every continued sale. This is the benefit of the blockchain and the marketplace as everything is tracked and attributable. A full audit history can be found of every transaction.
It’s standard for the NFT project to take 5%-10% of Royalties for each subsequent resale on marketplaces such as OpenSea.
This means for projects such as Kindergarten Baby Apes, increased demand in the future and further sales of the NFT holders in the project to other NFT investors means a portion of the selling price is paid back to the NFT creates – even if it is sold ten times or more or sold 3 years in the future. More sales means more opportunity to continue to grow the NFT brand or business – or in KBA’s case more schools.