With iconic internet moments, popular memes, and captivating artwork being turned into high-value digital assets, you may have heard a lot of buzz about NFTs. How could you not? From reputable news outlets to famous celebrities, everyone is either talking about these assets or dealing with them actively.
But that sudden exposure to these assets also opens doors to a plethora of questions. Exactly what is an NFT? How does it work? How do you buy it? And most importantly, what gives an NFT value?
Fortunately, the answers are not hard to find. With just a few key points, you can learn all that you need about these rapidly growing digital assets.
To help you through the process, here’s a lowdown on NFTs, their functionality, and their accrued value.
What is an NFT?
The term NFT stands for non-fungible token, and refers to a type of digital asset that is based on blockchain technology. These tokens come with their unique identification through metadata and corresponding signatures.
As the name suggests, an NFT is not fungible, which means it cannot be replaced or replicated by another item of its kind. This makes each NFT original in its form. This distinctiveness is what contributes to the fervor around such blockchain tokens.
Due to this reason, when an NFT is attributed to a conventional asset or digital property, it creates a unique token on the blockchain with its metadata and associated details. This allows the token to represent the respective asset in a digital form. Further, the digital form can be exchanged between the buyer and seller of the property in question as proof of ownership.
This means that anyone who has created or purchased a sole NFT of a particular item has full claim over the associated asset. This ownership claim applies whether the asset exists in a digital form or a tangible property. As a result, the easy transfer of ownership claims has become one of the biggest reasons behind the popularity of NFTs.
What Type of Assets Can Be Turned Into an NFT?
When you think of fungible assets, you can refer to cryptocurrency such as Bitcoin, which can be replaced by another unit of its kind. But when you look at non-fungible assets, a piece of real estate property stands out as a good example of something wholly unique in its status.
That is why NFTs can be attributed to several non-fungible or distinct assets that include but are not limited to the following.
- Artwork such as oil paintings and digital sketches.
- Online content such as social media posts and opinion articles.
- Music content such as songs, remixes, symphonies, and background score.
- Video content such as short-form and long-form videos.
- Real estate such as residential and commercial properties.
Practically, anything unique in its form can be turned into an NFT and have its status preserved on the blockchain. Since an NFT is a representation of the actual asset and its ownership, this gives people a lot of flexibility in what type of assets they want to convert to NFTs.
NFTs Are Not Limited to Single-owner Arrangements
NFTs are generally perceived as a single-owner arrangement, where anyone who has an NFT is considered the complete owner of the associated asset. While this notion is true to some extent, it is not always applicable. In many cases, shared properties can be successfully turned into several NFTs.
In these arrangements, one can create multiple NFTs for a collection of items or shared ownership offerings. This means that an apartment building can create distinct NFTs for each of its residential units and sell them off to different buyers. But the flexibility is not limited to unique ownership segments in a property. For instance, a single piece of jewelry or rare collectible can have multiple NFTs attributed to it, with each one sharing a fraction of its value and ownership.
This particular mechanism turns NFTs into more than a single-token arrangement and gives them immense adaptability. This also opens doors to the usage of NFTs in multiple forms, such as private equity arrangements, shareholder agreements, and commercial property distribution.
What Gives an NFT Value?
After learning about the basics of NFTs and their functionality, the next question that comes to mind is about their value, price, or cost. Who exactly sets this price is a common question for those who have never dealt with NFTs or blockchain technologies before.
To be fair, it is quite a natural inquiry because NFTs are not restricted to typical assets such as conventional paintings with a real-world value attached to them. They also extend to digital content such as social media posts that usually come without a price tag.
This means that an NFTs value depends on the type of asset that it represents on the blockchain. If the asset in question is a tangible property such as residential real estate, its real-world price is reflected through its NFT on the blockchain. But suppose that the asset is a digital piece of content that doesn’t come with a pricing label, then its value is purely speculative. In essence, it's value depends on the market, supply and demand.
You can think of this as dealing with a specific type of artwork, where each piece’s value is determined on market sentiment and what potential buyers are willing to pay for it. This means that the seller can set the price of their specific artwork to any level they want. Whether the buyer will pay that cost to gain ownership of the asset is a completely different thing altogether.
But when these two factors in terms of a seller’s asking price and a buyer’s willful costs or their desire to pay align together, it decides the speculative value of an NFT. This covers all types of assets that don’t have a real-world price tag attached to them. This includes content such as social media posts, digital trading cards, and digital artwork.
NFTs With Speculative Value Can Sell At Massive Prices
Perhaps one of the most famous examples of a digital content NFT being sold at a significant value is a 2006 tweet by Twitter CEO Jack Dorsey.
As the first tweet by Dorsey, the post is considered one of the most iconic pieces of content on the web. When this digital item was turned into a digital asset on the Ethereum blockchain, it allowed the tweet’s corresponding NFT to be sold at over $2.9 million on March 22, 2021. For reference, the bids for the tweet started at $1 back on December 15, 2020.
This transaction mechanism around Dorsey’s tweet-turned-NFT outlines that an NFTs value can indeed start from the lowest amount possible. But if interested buyers are willing to pay higher amounts, you can expect wonderful things to happen. As long as the market shows a high demand for the asset or NFT in question, the bidding can go as high as you can imagine.
This means that the sky’s the limit for NFTs that don’t have their prices tied to a real-world asset. Since their value is decided by how much buyers are willing to shell out, these NFTs can surpass the wildest expectations of original sellers.
Another example of NFTs’ values going way beyond anyone’s imagination is Cryptokitties, which are collectible digital cartoon cats that reside on the Ethereum blockchain. These tradable, digital cats were once labeled as “digital beanie babies” for the excitement that surrounded them. They are still considered a popular form of NFTs along with other types of digital art such as NBA Top Shot trading cards for what it's worth.
Apart from the uniqueness, other attributes such as the content creators’ signature or other distinct details in the metadata can also go a long way in deciding the value of its NFT for the better.
But most of all, what really drives up an NFTs value is the importance of its associated asset. The more intensity that surrounds the corresponding asset or its distinct property, the higher the chances a seller has for trading their NFT at a higher price. This especially holds for NFTs that do not have a starter value in the real-world. A few examples in this regard include but are not limited to social media posts, unreleased music, and digital artwork.
The Value Mainly Depends on the Type of Asset Being Sold
Typically, the value of an NFT is either dependent on its real-world price or speculation. This gives you highly fluctuating values for in tangible assets and digital content for different types of NFTs.
While real-world value is the point of reference for tangible assets and speculative value plays a major role in digital properties, that is not always the case. In many cases, both factors can contribute to the value of the respective asset.
For instance, while transacting a real estate property through an NFT, the NFT’s price is decided by the asset’s real-world value, but the actual asset’s cost depends upon a plethora of market factors. When put together, it gives you the NFT’s primary value that’s represented on the blockchain.
Conversely, when you are dealing in an NFT that is based on digital content or media, its value doesn’t start from its tangible property price. Note that there is no starting value, to begin with. As a result, the NFTs value is purely speculative and depends upon the respective market sentiment. That is also why many tweet-based NFTs are seen as starting their bid from as low as 1 USD.
Whether you are buying or selling an NFT, you must keep these points in mind. Otherwise, you can buy an NFT at too high of a price tag or sell your NFT at too low a price point. By being mindful of these factors, you can make an informed decision that helps you get the maximum value out of your respective NFT.
Where Can You Trade in NFTs?
NFTs are based on blockchain technology, which makes them highly secure and ensures their uniqueness in the long run. But this also makes them stand right beside conventional cryptocurrencies that are also based on blockchain. These examples include but are not limited to Bitcoin, Ethereum, Litecoin, and Dogecoin.
Due to being non-fungible, these cryptocurrencies cannot replace the NFT itself. However, cryptocurrencies can still be used to make payments to the seller of the NFT. For instance, NFTs based on the Ethereum blockchain can accept payments in Ether, which is the blockchain’s default cryptocurrency. But if you want to make a note to accept payments through other methods, you can set that up as well.
Creating, selling, and buying NFTs is a detailed process. Depending on the type of asset you want to trade, you can select a platform specializing in buying and selling a particular kind of item.
For instance, if you want to create an NFT from a tweet or buy someone else’s tweet, a platform such as Valuables by Cent will be perfect for your needs. But if you are more interested in selling digital artwork, a platform such as Rarible will be more suitable.
Similarly, if you create an NFT out of a high-value asset such as real estate, you may need to go through specialized platforms to verify the asset’s price. In April 2021, a California home was put on sale on OpenSea as an NFT and artwork to complete the package.
By exploring different platforms, requirements, and methodologies, you can find a home for your own NFT or a place to buy NFTs created by others. Since the space has just started to kick off, it is safe to say that new platforms could emerge that are dedicated to various types of content, properties, and assets. This would add to the convenience and accessibility factor for NFT sellers and buyers alike.
Where Are NFT Values Headed?
As more types of assets are turned into NFTs or transacted via the blockchain, we can expect to see transactions that will finalize for regular amounts and exceptionally high value. This notion holds for collectibles that are bought for joy rather than functional use, as well as real estate units or equity offerings that are tied to commercial or real-world utilization.
For instance, some digital artwork may sell for regular costs, while some tweets might sell for increasingly high value. Similarly, some real estate properties would make their mark due to their massive transaction amounts, while the cost of some real-life paintings may surpass the imagination of their sellers. It all depends on the type of asset sold on the blockchain and the demand surrounding it.
In either case, NFTs are here to make their mark, especially for those who see digital collectibles or online transactions as the next big thing. By tapping into the trade of rarities, artworks, and real-world properties, blockchain technology may have just found the next big thing for its survival and expansion into the mainstream medium.