Before explaining why NFTs are so expensive, it is useful to know what an NFT is. An NFT is a non-fungible token.
It is a
token like many other cryptocurrencies, but each NFT is “one of a kind” and not directly exchangeable and interchangeable with other tokens. Two paintings may have the same value, but they are not interchangeable with each other; NFTs are exactly the same as in this painting scenario.
In the field of cryptocurrencies and digital assets, most NFTs serve as ownership records on a digital asset. This is particularly the case with NFT art, but other collectibles have emerged on the market since the rise of NFTs in 2021. Given the growing and changing nature of the NFT market, why are NFTs so expensive?
Collectibles and perception of scarcity
One of the
reasons for the high price of NFTs is their collectability and, by extension, scarcity.
While we can expect NFTs of all types to continue to be implemented for the foreseeable future, particular NFT executions are designed for collectability. For example, the Bored Ape Yacht Club (BAYC) is an NFT collection that now has other content revolving around it, but new BAYC collectibles cannot be introduced into the original collection.
Such original NFT BAYC collection may not be reproduced as a copy or have additional content added to it. For this to happen, the company would have to launch a new NFT collection that may or may not be collectible or scarce or valuable, etc., like the first collection.
Since the launch of NFTs, they are available in many price ranges and are becoming much more flexible in terms of price. However, just like the art world that is also associated with collectability, expensive sales are the ones that make headlines.
Paintings, for example, frequently sell between three and five digits, but these are not reported as they are not significant developments in the artistic field. NFTs are moving in the same direction, but given the nature of current NFT coverage, it leads to the perception that NFTs are ridiculously expensive, and some are, but there are a growing number that are affordable.
An NFT bubble
It’s arguable that NFTs have been in a tulip-style bubble since they hit big in 2021. To be brief, an economic bubble is when an asset has an inflated price because investors are playing with it. The asset continues to be sold at an ever-higher price because every owner of the asset is firing for a quick sale from which they can profit. Owning the asset is not desirable, but selling it to someone else with a lot of money is desirable, and this is the trick on which a bubble is based.
When the bubble “bursts”, this is no longer possible and the asset loses much of this inflated value. One such case with NFT is Jack Dorsey’s first tweet that was sold for $2.9 million dollars lost 99% of its sale value, later selling for just $280.
This is not uncommon, especially in the field of emerging technology that attracts a range of risks and venture capitalists come out of the carpentry for it. The infamous dotcom bubble occurred when the internet first hit in the 90s and finally burst in 2000 because websites were sold simply because they were websites.
Now, nowadays, a web bubble would be much harder to find, as there are social norms and legal regulations about how websites should work and what they should do. NFTs could go through the same thing. Making quick trades might be an easy way to make money quickly in a bubble, but that time frame may soon come to an end and carries a fairly high risk associated with it.
Linked to the Metaverse
One reason to keep NFTs despite a potential bubble inflating the price, is for use in metaverse development.
The metaverse is a proposed virtual universe in which individuals can create and consume a series of game objects, represented by an avatar, and can even possess digital space, as seen with the emergence of virtual real estate.
Currently, it remains to be seen how the metaverse
and other digital assets will connect, but given the amount of money behind the development of web 3.0, it is certainly plausible that the NFTs that people are buying now, could be used in the metaverse as in-game paintings on a virtual estate, present in virtual collections or used as avatars of players in compatible metaverse apps. The sky is the limit when it comes to speculation about what the metaverse will look like.
Why are NFTs so expensive?
To sum up, NFTs are expensive because they are currently in a bubble, because they are scarce and collectible, and because of speculation on the development of metaverses and web 3.0 technologies.
While not all NFTs cost millions of dollars, the industry is becoming more like the art trade world. Some pieces cost less than twelve cents, while others are worth tens of millions.
Which pieces will retain their value will remain to be seen as the NFT bubble deflates, but it is impossible to predict which ones will be, probably those that have had a cultural impact, such as the BAYC, or those made by digital artists who make a name for themselves.