Why are NFTs valuable? A guide to the benefits of the non-fungible

If you’re wondering how NFTs—essentially tokenized JPEGs—have been selling for millions of dollars in recent years, here’s the short answer: it’s because they’re art. Really. It’s as simple as that – in most cases at least. We’ve also seen digital collectibles like NBA Top Shot and PFP NFT projects like CryptoPunks and Bored Ape Yacht Club fetch sensational prices on the open market.

But this still begs the question: why is art in NFTs worthwhile? What makes an NFT valuable? Whether it’s art or a digital collectible, one thing will definitely increase the price of an NFT: scarcity.

What does NFT scarcity have to do with monkey JPEGs?

To answer this question, let’s take a quick tour of Economics 101. Stay with me—we’ll keep it simple. One of the core problems the field of economics hopes to break down and understand is how to effectively manage the virtually unlimited wants and desires of people in a world of limited resources. Simply put – balancing the forces of supply and demand.

Generally speaking – heavy emphasis on generally – the way these forces interact affects a metric that is ultimately felt by the consumer: price. If demand is high in a particular market for a specific commodity in abundant supply, it will result in the commodity having a relatively low price in that particular market.

However, the opposite also applies. When the demand for a specific item far outweighs the supply, it becomes a scarce item – which tends to fetch much higher prices in its respective market.

For a real-world illustration of this concept, let’s look at why fruit is widely considered a luxury in Japan. The island nation’s mountainous topography leaves little room for larger agricultural operations. As such, most fruit farms in there are either “family run or run by small scale businesses”, as noted by Paku in a Wa-Shoku report. But what the Japanese fruit industry may lack in scale, it makes up for in quality. Often, the picture-perfect strawberries, grapes and watermelon you see along a typical Japanese supermarket aisle are given as gifts “to relatives, business partners and customers, to thank those who took care of you,” Paku said.

Right. So what makes NFTs so valuable?

NFTs can be very expensive – or valuable, depending on who you ask – because they somehow managed to do the impossible: introduce scarcity into the global digital market. An NFT isn’t just an overpriced way to buy an image – it’s a way to own it.

When you buy an NFT, you’re not just buying the image itself – you’re buying a permanent token etched on a blockchain that points to that specific image or digital asset. Anything goes, really. Aside from art, music, in-game assets, virtual land, and all sorts of other digital goods are often bought and sold on NFT marketplaces.

So how does doing something to an NFT potentially affect its price? Every time you create a digital good as an NFT, it allows you to effectively limit the supply – thereby “inflating” the price. While this may sound like a simple way to artificially increase the price of a digital good, that’s not what NFTs are all about. So what are NFTs used for, then?

The wide world of NFT art

First, it’s art. In the art world, works by master artists have fetched millions of dollars on the open market. The very value of art is also difficult to understand for the average Joe or Jane. Take the many works by Mark Rothko that have sold for tens of millions of dollars on the art market. At face value, it can be a little hard to process why a canvas painted orange, red and yellow is worth nearly $87 million. Simply put, the price is high because it is the only painting of its kind in existence, and because one of the 20th century’s most brilliant artists made it.

This is why a large majority of the most expensive NFT sales we’ve seen so far are one-of-one works. Like Rothko’s Orange, red and yellow, these special NFTs are the only ones of their kind. In the case of Beeple’s Everydays — which sold nearly $70 million in 2021 — those works are really unique. Everydays featured 5,000 unique works by Beeple, created over 14 years, with the digital artist attempting to create a new work every day.

Value as utility in NFTs

Sometimes NFTs command high prices for reasons far greater in scope than art, or belonging to a collection. NFTs have also been widely used as a means of raising money, thanks to the built-in security found in blockchain-based transactions.

This can be observed in one of the most expensive NFT sales we have seen so far. In early 2022, AssangeDAO successfully arranged the multi-million dollar purchase of Pak’s Clock NFT, which stands (at the time of writing) as the second most expensive NFT sale of all time. NFT sold for 16,953 ETH to be exact, which at the time was valued at roughly $52.7 million. The proceeds from the sale were hoped to go towards financing WikiLeaks founder of Julian Assange’s legal defense.

The NFT solution

Eventually, NFTs may also provide non-monetary value to internet users worldwide. Although the limited supply of digital goods has helped NFT artists and project managers to fill their virtual goods with scarcity, the blockchain can also play a role in ensuring that these goods remain available indefinitely.

Traditionally, digital goods were virtually unlimited. Digital copies of games, books, music and movies can theoretically be purchased an infinite number of times. You will never see digital goods go out of stock – but they will at some point stop being sold. When digital marketplaces shut down, it becomes impossible to obtain certain digital-only goods.

An example, let’s look at Nintendo. The company has had a notoriously negative stance on piracy and emulation, and aims to wipe every single website that hosts games the Japanese gaming giant no longer sells from existence. Unfortunately, this has made it extremely difficult to preserve the company’s countless games and prevent them from getting lost in time.

With NFTs, as long as a blockchain exists, so will all the assets stored on it. As blockchain technology continues to grow and develop, so will the types of NFTs we will see moving forward. Maybe one day you’ll be able to own the digital masters of your favorite movie—not cheap, of course.