How Do NFTs Gain Value?
Some NFTs (non-fungible tokens) are worth millions of dollars.
But why? How does a digital asset like an NFT gain value?
What makes some NFTs worthless while others rapidly gain value over time?
If you can identify an NFT that’s likely to maintain or gain value, it’ll reduce the risk that you’re left holding the bag with a worthless dud.
Thankfully, there are some key indicators that you can use to separate a good NFT project from a bad one.
In this article, we’ll explain how NFTs gain value over time. You’ll also learn where NFTs get their value from in the first place and how to assess the value of an NFT for yourself.
What drives the value of NFTs?
Currently, speculation drives the value of many NFTs.
Speculation can be a big problem, as it makes the value of NFTs extremely volatile.
The sale of NFTs has declined 92% from the peak in September 2021 to May 2022. And the number of active wallets in the NFT market fell 88% to about 14,000 from a high of 119,000.
That’s why it’s critical to pick NFTs that offer true value and not simply chase the latest fads and trends.
You want to invest in projects that will hold their value and stand the test of time.
The most famous examples of NFTs are digital artwork that can be copied and pasted. Even though they provide proof of ownership, it doesn’t really mean much in the grand scheme of things if anyone can copy them.
For real-world examples of the risk and volatility in the NFT market, just look at some of the most popular art NFTs like Cryptopunks or Bored Ape Yacht Club (BAYC).
The floor price of Cryptopunks dropped 50% from April to May of 2022.
Bored Ape Yacht Club NFTs were similarly down 55% in May.
Luckily, you can avoid this kind of fluctuation by looking for NFT projects that hold their value over time.
Some things to look for before buying an NFT include:
- Membership in a group or community (and a sense of personal identity)
- Proof of ownership
- Identity verification
- Some level of scarcity or rarity (the promise that NFTs are truly limited edition and won’t be mass-produced at a later date)
- Ability to derive future value from ownership. For example, access to exclusive deals and events.
- Utility - A good NFT should be linked to a product or service. For example, Stack Browser offered 500 lifetime package NFTs for $99 each. Since a regular subscription to Stack costs $84 annually, the NFT pays for itself in a little over a year. Then, it keeps its value for the rest of your life. For $99, you gain thousands of dollars in value for backing the project early on.
- Functionality - You should know what an NFT does or how it can be used before purchasing one. For example, CryptoKitties or Axie Infinity NFTs are digital items that can be used in their respective games. But their value as game items depends on the game remaining popular.
- Tangibility - Look for NFTs that are linked to real-world objects. For example, NFTs that act as tickets for sports events or entitle you to redeem a real product.
- Interoperability - An NFT will be more valuable if it can be used across multiple apps or games or between one blockchain network and another. This will be a crucial feature for NFTs in the metaverse.
Each key factor above provides value to an NFT project. The more of these an NFT can demonstrate, the better.
How do NFTs gain value?
At the most basic level, NFTs gain value whenever somebody is willing to pay more for them than the previous owner.
Utility is key when it comes to NFTs preserving long-term value and sustainability. NFT teams may add extra perks or features for NFT holders over time to increase their value.
The brand values and mission of a particular NFT project can also drive demand. According to one report, 83% of millennials choose brands that align with their values.
The opposite is also true. An NFT project that finds itself embroiled in a scandal or drama is likely to see a dramatic drop in price.
Other factors that can cause an NFT to gain value include:
- Market speculation and perceived future value
- Collectibility (e.g., NBA Top Shot NFTs, which act like digital collectibles, similar to physical basketball cards)
- Ownership history (e.g., an NFT that was previously owned by Paris Hilton, Justin Bieber, or Jimmy Fallon will have more innate value)
- Institutional support (e.g., venture capitalists investing millions into NFTs)
However, we don’t recommend chasing NFTs that exhibit these characteristics.
By the time you realize there’s a lot of speculation and hype around a particular NFT, its price has probably been inflated significantly. The same is true when investment companies begin pouring money into NFT projects.
If you’re late to the party, you might buy at the peak and be left with an NFT that loses value. All we have to do is look at historical examples like the boom and bust of Beanie Babies to see what might be in store for many of today’s most popular NFT projects.
Another example would be the Dutch tulip bulb mania, which was one of the most famous asset bubbles and crashes of all time.
These are the kinds of projects you’ll need to avoid if you want to find NFTs that gain value over time.
How do you make money with NFTs?
Most of the profit that people make from NFTs comes from reselling. A few NFTs also pay a dividend or allow holders to earn interest. In this way, they act like a digital piece of the NFT project, similar to being a shareholder in a company.
We don’t recommend treating NFTs as a speculative investment. The opportunity to lose big is just as likely (or more likely) than winning big. Remember what we said earlier about a few NFT projects losing 50% or more of their value in a single month?
Instead, it’s best to look at NFTs more as a tool than an investment or speculation vehicle.
If you weren’t able to re-sell your NFT to someone else in the future, does it still offer you enough value to make it worth owning? Or does its only value come from the ability to sell it at a higher price to someone else?
Be sure that you’re not falling victim to the greater fool theory. This is the concept of some people buying an already overpriced asset for the sole purpose of selling to an even "greater fool" in the future.
The problem is that a time will eventually come when nobody wants to buy a given NFT. In that case, you might get stuck holding it forever or selling it at a loss.
Instead, seek NFTs that offer you a worthwhile product or service. That way, you can make your money back (in terms of value) without ever having to sell.
For example, NFT Wine Club offers you ownership of a grapevine in a world-famous vineyard. Each vine is RFID tagged and linked to a unique NFT.
Ownership entitles you to either receive all wine produced from that vine or sell it and get the profits. Plus, your NFT and resulting products could gain value as the vineyard's reputation increases over time.
How to assess the value of an NFT
Earlier, we talked about some key factors that drive the value of NFTs. However, there are other points to keep in mind when assessing the value of NFTs.
- Examine the leadership team and see who is involved in the project. Do they have previous experience in the cryptocurrency or NFT space?
- Look at the NFT project’s track record or history. What have they accomplished so far?
- Read the white paper or roadmap. What blockchain technology is the NFT operating on? What does the team have planned for the future? What is the overall vision for the NFT? All of these details should be listed on the project’s website.
- Speaking of websites, an official project website is a must. If the website looks shoddy or has spelling errors and other problems, it may be a reflection of the project as a whole. Check the social media accounts associated with the NFT project as well.
- Think about economic factors surrounding the NFT. What are the price, total supply, liquidity, historical pricing, etc.? (The individual value of an NFT from a project with only 100 unique NFTs will be higher than one with 10,000 NFTs.)
- Does the NFT already have an established community and social proof?
Find valuable NFTs using Stack Browser
A number of different factors can cause NFTs to gain value.
Some of these traits are not so desirable, such as NFTs that go up in price based on pure hype.
Other NFTs offer real utility and functionality. Their developers may even add extra features over time. These are the sorts of NFTs we prefer.
Why not try out Stack Browser while you’re searching for NFTs? It’s a smart browser for internet multitaskers.
Stack Browser allows you to keep all of your NFT research organized, so you can focus on what matters most.
Best of all, you can navigate between all of your apps at lightning speed. Start Stacking today!