“You own an NFT?!”, my friend exclaimed when she found out I had recently minted[1] an NFT. This was quickly followed up by, “Why would you pay so much for a picture of a bottle?!”

The question is a valid one, and probably one of the biggest reasons why NFTs still get dismissed by many.

My friend is what the NFT world calls a normie[2], so her surprise was aimed less at that particular bottle, and more at NFTs in general.

Can you guess what her next question was?... “Wait… do I need to buy an NFT?!”, which is a classic example of why someone might pay “that much” for a JPEG – it’s called FOMO[3]. But let’s unpack it from the beginning.

What we’re dealing with here is the concept of value. And if in the world of objective investing the markers are clear – track record, rate of return, market capitalisation – then in the matters of subjective taste, things are not as clear-cut.

What makes something valuable?

If something carries a certain value (e.g. functionality, rarity, sentimental value etc) to you and maybe a bunch of other people, it may be (often is) reflected in monetary terms. A bag doesn’t need to have a Chanel label on it to perform its function of carrying your belongings around. People choose Chanel because they see value in the brand. Perhaps they value the implied status, taste, exclusivity or hundred other things that makes them want to pay way beyond the cost of the leather that bag is made of.

What makes an NFT valuable?

Similar to good ol’Chanel, to me NFTs represent a lesson in brand value building. A lesson that managed to generate a whopping US$23bn in trading volumes last year.

However, in my mind there is a clear distinction between value and price – the two are not interchangeable (but presumably correlated). This is where it feels appropriate to mention the “B” word. You may hear people talk about the NFT bubble, where NFT prices are becoming unreasonable, unsustainable, and largely, unexplainable. But I shall try.

Hype

When lots of people pile into a project for no other reason than ‘everyone else is doing it’, this drives the prices up (both primary and resale), and some people make a tonne of money by buying low and selling high (aka flipping). Does it make an NFT valuable? Not really, but it creates price appreciation. How long that price can be sustained will ultimately depend on the value that the project can deliver to its token holders. So, what builds value?

Rarity

This is essentially no different to collecting stamps or artwork. Some people will simply like how the NFT looks, whilst others will look for rarer attributes. For example, Crypto Punks – one of the very first NFT projects (which makes it valuable in itself…) – is a collection of 10,000 Punks but only 88 of them look like zombies. Hence, people pay a premium for those zombie attributes (like $5 million bucks worth of premium. Yep.)

Community

For me, this is one of the most exciting features of the NFT phenomenon. People like hanging out with people they like – who knew! I’m convinced the pandemic had something to do with it, but either way, the value of the community you associate yourself with is now… tokenised. By buying an NFT you become part of a community and you can flaunt it – kind of like supporting a football club. A community might have a shared purpose, like supporting female founders, for example. Btw.. the ‘picture of a bottle’ happens to have a highly engaged community of supporters (not financial advice! DYOR[5]).

Utility

Once you become part of the community, then depending on the NFT project, your token might carry other utility, like invites to virtual and IRL events, getting mentorship, networking opportunities, access to exclusive content, and discounts when buying physical or digital goods – all because you hold this particular NFT. So, it becomes more like a proper club membership with various benefits attached to it.

Visual appeal

Last but not least, the visual factor. Some of us (ArtBlocks fangirl - guilty as charged!) just appreciate the beautiful image and see value in that. Who’s to say that art is only art when it’s on a canvas? For me, this is the new wave of art - digital art, generative art. And now we can actually own the digital original.

So, will the bubble burst I hear you ask? My prediction is that once the dust settles, there will be a significant correction. A lot of projects will go to zero (yours truly is sitting on a couple of questionable punts herself) and only the ones who offer more than a pretty profile picture will survive. Get your popcorn!

Want to learn more? Check out this podcast episode of Overpriced JPEGs with MetaAngels which covers the concept of value creation really well, and tune into AllBright’s The MetaSisters Summit to learn more about building strong communities in Web3, investing, and more!

[1] Mint (verb) – to buy an NFT in the primary market as opposed to secondary (i.e. you are the first owner)

[2] NFT slang for a person not currently participating in NFTs

[3] Fear Of Missing Out

[5] NFT acronym stands for Do Your Own Research (to prevent FOMO)

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