What Gives Different Types of NFT's Value?
There’s a lot of debate on what makes NFT’s valuable, or if they have any value at all — in this article we’ll present what makes NFT’s valuable to some people, what makes them valuable to us, and why we believe those who say they have no value are wrong and fundamentally are ignoring critical elements of NFT’s and the larger art market as a whole.
To put it simply, the NFT market is similar to the art market where there’s little to no fundamental or tangible value to the assets, however due to the tax-advantages and networking they provide they certainly have value, albeit the value is entirely subjective.
What types of NFT's have value, and where does their value come from?
There’s many types of NFT’s, including ones that are claimed to be ‘art,’ others that act as unique objects in video games allowing you to have unique skins/looks in games or unique items, others that give digital property rights over a space in a game, on a webpage, or some form of ownership over a larger asset.
Their value derives from different things, some are more speculatory than others and could go straight to $0, others have a good base of support and value, albeit nonetheless intangible.
“Art” NFT’s (Think: Cryptopunks, CryptoKitties, the classic NFT’s)
There’s three elements that gives Art NFT’s value, and these are arguably the least speculatory NFT’s you can own currently.
The one you’ll most often hear is the classic that they’re ‘works of art’ and people like them because they’re beautiful and people will frame them on the wall, it’s like buying a mona lisa, etc.
In our opinion this is nonsense, as we have experience in the traditional art world, and ultimately this is all a facade the ‘art community’ portrays to hide the dark reality of what art is really about: Tax avoidance and networking. People do value art as art, but it’s not what makes it worth hundreds of thousands to millions of dollars most of the time.
To Explain: In the ‘art community’ people network with other people who have ‘valuable pieces’ and speculate together to raise the prices of each others pieces, and ultimately once the price is high enough they will generally donate them to a museum, non-profit, or another NGO entity — in doing so they’ll receive tax write-offs matching the value of the donated piece.
Essentially someone can buy a cryptopunk in early 2020 for a few hundred dollars and today they could donate it to a museum and receive an inflated $500,000+ tax writeoff. So long as the others in the ‘community’ keep up the scheme the price will not collapse and they can effectively ‘donate’ the ‘works of art’ to get huge tax savings, when in reality nobody would pay such a price for the pieces if not for the tax writeoffs they can provide.
There’s another side to this community though, it’s not all tax-avoidance — for many NFT projects they’ll have community chatrooms for owners of the NFT’s to participate in, as a result by buying a Cryptopunk people get access to multi-millionaires and a ultra-exclusive private investors group.
In such groups they can organize and pick upcoming NFT projects to buy into together, discuss investment ideas, and share knowledge at a much higher level than can be found on general chatrooms or forums.
Essentially buying expensive “art” NFT’s and getting into exclusive communities gives access to massively valuable networking opportunities among ultra-rich people, which inevitably causes you to come across better investment opportunities, increasing your returns and opportunities to get in projects early — and later down the line you can get tax benefits by donating them to non-profits.
“Property” NFT’s (Think: Digital Land, Decentraland, etc)
These are more speculatory than “art” NFT’s as there’s no real gaurantee these platforms will even survive, and there’s no real use of them currently, nor is it reasonable to donate them for tax benefits/avoidance.
Ultimately these have huge upside, and can provide value in the form of rental income or advertising states in the future, but that’s provided they last and actually have adoption in the future, and ultimately we believe it’s too soon to pick winners, or even know if this industry will survive and succeed anytime soon.
“Digital Asset & Gaming” NFT’s (Think: Video Game skins, special weapons, Characters, etc)
These are the most speculative of NFT’s with little to no fundamental value — but they do have value, and this value derives from the general gaming community that uses them and their rarity — similar to steams CS:GO gun skins and the like, but on blockchains and verifiably rare.
One of the first successful projects in this category was Axie Infinity, and if you got in early you made a ton of money. The way it works is you can buy a ‘Axie’ in their game which is a digital asset, and you can breed your Axies with other Axies to create special offspring, or sell them to others for a profit.
Because the ‘spawn rate’ of rare breeds is so low, and there aren’t that many made, they’re effectively rare digital assets — with no real use case outside of the game the value derives from this rarity and the special traits they inherit from their parents.
That’s not to say several dozen other projects don’t exist, there are dozens of them out there, but Axie Infinity has already had some success and they’ve already made it work on the live network, so we think this is one of the most likely to succeed. If you’re interested in learning more about this category of NFT’s I’d recommend reading more about Axie Infinity, or rather watching some youtube videos on the game, as it’s too complex to really cover justly in this post.
NFT Market FAQ's:
Below we’ll cover some of the most popular questions we’ve been asked or seen asked elsewhere online, and
So What Kind Of NFT’s are a good investment?
Ultimately it’s down to what you’re looking for in an investment. For example, if you’re looking for medium to high risk and moderate to high returns, then buying an art NFT might be worthwhile, but you’d likely need lots of capital/money to be able to afford to buy into worthwhile ‘art’-nft’s rather than speculative new projects.
However there’s many other types of NFT’s that could be considered, and they all have different risk profiles, utility potentials and usage patterns.
If you’re more into speculating and don’t mind heavy research and experimentation then non-art nft’s like digital land or gaming nft’s are likely the better choice for you, as they have more upside and potential, albeit higher risk particularly if you aren’t familiar with the space.
Are NFT’s bad for the environment?
While there’s a lot of talk about NFT’s being bad for the environment it’s truly absurd — especially when it comes to NFT ‘art.’
This is because while it does use quite a bit of energy to produce it these calculations people do ignore the fact that regular art takes way longer to make and many resources that must be transported long distances, rather than a simple computer and some time to produce a NFT.
In summation it’s true that NFT’s take up a lot of energy, but so does nearly everything in our modern world and so does their non-digital counterparts; after all even with Bitcoin mining which consumes more energy than most African nations Bitcoin is still more environmentally friendly than cash or gold when you account for the extra security gold requires and the energy government beaurocracies take to sustain cash/fiat currencies.
The same is true with NFT’s, while it may take quite a bit to produce them, it’s still cheaper than traditional versions, particularly when you account for the physical security, maintence, and storage that physical alternatives require.
Are NFT’s the Next Big Thing?
There’s been a lot of hype about NFT’s being the next big thing, and while this is true in many ways they are still firmly in the beginning stages of development, and are far from reaching their potential.
Ultimately it’s likely that NFT’s will eventually be used by most people, but it’s very likely that it won’t be for some time, and it’s arguably certain that they’ll evolve in ways few if any could predict today.
The way we look at NFT’s are that they have huge potential, huge risk, and while they’ll likely succeed in the ultra long-term it’s still a big unknown if any of the ones today will succeed or if newer ones will in the future as the space evolves.
Afterall, one must remember in the early days of cryptocurrency, even back in 2016, the majority of big projects, and little projects, are now irrelevant and valueless just a handful of years later. The same will likely be true for many of today’s big NFT projects, and future ones.