What gives an NFT value?

Conceptualizing NFT Collections and Their Origins of Value

When first hearing about NFT’s you may have had a thought along the lines of:

“It’s just an image. I can copy paste it! What’s the big deal?”

While, yes, this thought is correct. It is incomplete. Here are some frameworks to understand what gives an NFT value:

NFT Tokenomics

Tokenomics is the study of blockchain token models and their economic implications. It includes such questions as: 
Why did a particular team decide to issue tokens, instead of just using Ether (the Ethereum blockchain’s native currency) or another blockchain? 
Which token model(s) did they choose? 
How will the token model(s) affect the token’s marketability and the token’s liquidity?
How will the token model(s) affect the token’s volatility?

As for NFT tokenomics, they can be understood through the same type of inquiries.

Utility

The utility of an NFT can be understood through the benefit it brings to the user for holding the NFT. Different NFT collections have different types of utility attached. For example,

Gambling Apes
Like to gamble! They set up weekly gambling tournaments, sports betting, and even own a casino in Decentraland — that pays profits to holders! Their Discord is very active and has many specific channels for specific gambling discussions, and just recently added a lot of different gambling activities to their main site.
Floor price — 0.87ETH

Crypto Punks
Are one of the first NFT collections ever created. As such, gives it a type of uniqueness and historical significance forever.
Floor price — 60ETH

inBetweeners
Wants to spread love and positivity. The art was created by Gian Piero, and has tons of support and interest from people like Justin Bieber, Stevewilldoit, And most recently, Kyle from Nelk boys, seen trying to get some faster car service by showing off his inBetweeners to a valet 😂. They are going to be having live events, art shows, Yacht parties, and so much more! On top of all this, 3% of all the transaction fees go towards a community wallet that is used for community activities. This current collection equates to millions of dollars per month added to the community wallet.
Floor price — 0.89ETH

These are just some of the thousands of NFT collections being created daily by artists, designers, celebrities, companies, brands. The options are really endless…

Supply

Supply usually has a correlative effect on price. The usual correlation is that lower supply = higher price. But it’s not always this direct. There are other influences, as stated in this article, that can affect the weighting greater than just supply.

Inflationary/deflationary?

This refers to the rate at which the NFT you are buying is distributed to the public. Most NFT collections have a fixed amount of NFT’s that are available for purchase and are also publically available to buy. Some NFT collections, however, may have an inflationary schedule to them. Such as CryptoKitties. With this collection, you are able to take 2 NFTs and “breed”/create another NFT.

This overtime will create dilution and decrease the value of the NFT. Similar to how the dollar loses value over time through central entities increasing the supply.

Floor

The “floor” refers to the cheapest NFT available for a specific collection. This is also how you roughly determine the market cap of an NFT collection.

For example, Bored Ape Yacht Club has a floor price of 78ETH and a total supply of 10,000.
78000 ETH = ~312m $USD

market cap can be a good indicator to determine how valuable the collection is currently being viewed. Sometimes, when NFT collections have a surge in buying pressure, the NFT’s “on the floor” get bought up, and the floor price begins to rise very rapidly.

Some entities will purchase millions of dollars of NFT’s from a single collection up until a specific floor price, and then start to sell them off slowly at the new higher floor price.

When buying an NFT, it’s useful to pair the analysis of the market cap with the holder distribution to determine if it is being manipulated.

If the market cap is high, and the NFT’s are distributed evenly amongst the current holders, then this is considered “better”
if the market cap is high, and the NFT’s are focused towards a small amount of people, then this is considered “worse”

Internal Rarity

Within NFT collections there are some that may look different than others. There are some NFT collections, as well as people/investors, that put emphasis on this rarity. Either for the collection by providing a special sort of utility to the owner for them or for the user just wanting to have a really cool 1/1 piece and show off to their friends. Both strategies create internal demand for specific NFTs over others — Thus increasing value relative to those that are non-rare.

Marketing

Superficial price inflation through purchasing

There’s an interesting phenomenon that can happen when one entity buys a lot of a single collection’s NFT’s off the floor. As purchases go on, the floor price will begin rising, volume increase, and FOMO begins.

One good idea is to check the contract address of the NFT you are purchasing, to see the distribution of NFT’s held amongst the holders. If there are only a couple of wallets that have the majority of NFT’s within it — this can be looked at as selling pressure.

Crypto marketing

Depending upon how deeply affiliated the NFT collection is with the cryptocurrency community, can have a massive effect on short-term price.

There’s only so much liquidity within the crypto industry and even less within the NFT realm. That being said, there are many very deeply integrated Twitter accounts, and agencies affiliated with the general NFT community, that can sway this liquidity with ease.

Some NFT collections will devote a lot of effort towards marketing and the generation of general awareness for their collection. As this effort is important, and vital for healthy community resonance, it throws up some red flags as pure marketing without substance is very difficult to sustain.

Community

Having a thriving community is extremely important when contemplating what NFT collection to place your value in. It’s important to understand and get to know the communities of these NFT collections. The community is the driving force behind the success of the project and the price of the NFT. The communities for some of these NFT collections are worldwide, extremely active, and you can find a lot of people online 24/7!

As you can see, there are a lot of different ways that NFT’s and NFT collections can fluctuate in value. And trying to get to the single reason as to why an NFT has a price can be difficult to answer simply. But if I had to say…

The value of an NFT can be understood as a resonance of collective will. And the greater this resonance is towards the NFT collection in question, the higher the price of the NFT — with a lot of other caveats of course…

Well, that’s at least how I conceptualize it!

Thanks for reading :)
- Stu

DeFiKnowledge

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