Ask CryptoVantage: Why Are NFTs So Freaking Expensive?

What Are NFTs?

Before explaining why NFTs are so pricey, it is helpful to know what an NFT is. An NFT is a Non-Fungible Token.

It’s 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 might be of equal value, but are not interchangeable with each other; NFTs are exactly the same as this painting scenario.

In the field of cryptocurrencies and digital assets, most NFTs act as a record of ownership over a digital good. Most notably is the case of NFT art, but other collectables have emerged in the market since the rise of NFTs in 2021. Given the growing and changing nature of the NFT market, just why are NFTs so expensive?

Collector’s Items and Perception of Scarcity

One reason for the high price of NFTs is their collectability and by extension, scarcity.

While we can expect NFTs of all kinds to keep rolling out for the foreseeable future, particular NFT runs are designed for collectability. For example, the Bored Ape Yacht Club (BAYC) is an NFT collection that now has other content which revolves around it, but new BAYC collectables cannot be introduced to the original collection.

That original collection of BAYC NFTs cannot be reproduced as copies or have additional content added to it. For that to happen the company would have to launch a new NFT collection which may or may not be as collectable or scarce or as valuable, etc, as the first collection.

Since the launch of NFTs, they come in many price ranges, and are becoming much more flexible in terms of price. However, just like the art world which is also associated with collectability, the expensive sales are the ones that make the news.

Paintings for example sell frequently for between three and five figures, but these are not reported since 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 a perception that NFTs are ludicrously expensive, and some are, but there are a growing number that are affordable.

An NFT Bubble

It’s debatable that NFTs have been in a tulip-style bubble since they hit it big in 2021. To be brief, an economic bubble is when an asset has an inflated price because investors are sort of playing hot-potato with it. The asset keeps being sold for a higher and higher price because each owner of the asset is shooting for a quick sale they can profit off of. Owning the asset is not desirable, but selling it to somebody else with lots of money is desirable, and that’s the trick that a bubble relies on.

When the bubble “pops”, this is no longer possible and the asset loses a lot of this inflated value. One such case of this with NFTs is Jack Dorsey’s first tweet which first sold for $2.9 million dollars lost 99% of its sale value, selling later for just $280.

This isn’t uncommon, especially in the field of emerging technology which attracts a number of risks and venture capitalists come out of the woodwork for it. The infamous dotcom bubble occurred when the internet first hit it big in the 90’s and finally popped in the year 2000 because websites were being sold simply because they were websites.

Now in the current day, a web bubble would be much harder to find ourselves in, as there are social norms and legal regulations about how websites should function and what they should do. NFTs could be going through the same thing. Making quick turnovers might be an easy way to make money fast in a bubble, but that timeframe may soon be coming to an end and comes with some fairly high risk associated with it.

Tied to the Metaverse

One reason to hold onto NFTs even in spite of a potential bubble inflating the price, is for use in the development of the metaverse.

The metaverse is a proposed virtual universe where individuals can create and consume a number of in-game items, represented by an avatar and can even own digital space, as seen with the emergence of virtual real estate.

Currently, how the metaverse and other digital assets will link up remains to be seen, but given the amount of money behind the development of web 3.0, it’s certainly plausible that the NFTs people are buying now, could be used in the metaverse as in-game paintings on a virtual estate, featured in virtual collections, or used as player avatars in compatible metaverse apps, the sky’s the limit when it comes to speculation about what the metaverse will be like.

Why are NFTs so Expensive?

To sum up, NFTs are expensive because they are currently in a bubble, because they are scarce and collectable, and because of speculation about the developing metaverse and web 3.0 technologies.

While not all NFTs cost millions of dollars, the industry is becoming more like the art trading world. Some pieces are as cheap as twelve cents, while others are worth tens of millions.

Which pieces retain their value will remain to be seen as the NFT bubble deflates, but it’s impossible to predict which ones these will be, likely ones that have made a cultural impact, such as the BAYC, or ones made by digital artists making a name for themselves.