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What is an NFT? And How Does It Work? featured image
Previous: 1. What is an NFT? And How Does It Work?

2. Why Are NFTs Valuable? Reasons Why I Bought a $9K Ape JPEG

My brain completely broke when I discovered that people were buying pixelated jpegs for hundreds of thousands of dollars. Who in their right mind would spend that money on a digital image when they could just as easily right-click and save the image to their desktop?

Curiosity got the better of me. I tumbled down the NFT rabbit hole. The deeper I dug, the more NFTs—and the value attached to them—started to make sense. Here’s what I learned.

Some NFTs are worth hundreds of thousands of dollars thanks to a combination of:

  1. Perceived value
  2. Exclusivity
  3. Timeliness
  4. Scarcity

To collectors, these ingredients make NFTs viable long-term collectibles, investments, social signals, access passes, and more. In this post, I’ll dig into each of those facets and explain why I believe NFTs will not only retain their value but be a lot more popular in years to come.

But first—let’s address the elephant in the room

For transparency’s sake, let’s talk about my journey. Two years ago, I brushed off NFTs as a cash grab. Today, I own hundreds of them.

Before you get your torches and pitchforks, let me just say this: I’m not trying to convince you to follow me down the rabbit hole. There are no affiliate links or sales pitches in this post.

My only goal is to create something educational. There’s so much bad intel out there that it can be hard to know what to trust. When I was doing my research, I was starved for a non-biased source. Maybe you are too.

If you walk away with more knowledge in your back pocket, I call that a win. And if I can remove even a little bit of the stigma around NFTs, that’s more than enough for me.

1. Perceived value

To even begin to understand why some NFTs are worth eye-popping amounts of money (to the right people) and others aren’t worth a dime, we need to talk about actual vs. perceived value.

Actual (or real) value is the calculable cost of a thing without any outside forces acting on it. So, if we’re talking about a piece of art, the actual value would be the cost of the oils and canvas used to make it, plus (arguably) the cost of the artist’s time.

Perceived (or intrinsic) value is the value that society places on a thing. So, if we’re talking about art, it’s the amount of money that an investor is willing to pay for that piece of art.

The difference between actual vs. perceived value is sometimes insane. Leonardo da Vinci didn’t use $850-million-worth of materials to paint the Mona Lisa, but that’s the current valuation.

Speaking of crazy perceived value, let’s talk about something that society has collectively agreed on for thousands of years: gold.

If you add up all the gold in the world, it’s worth more than $11T, but only 8% of gold has a legitimate use case. You may argue that jewelry is a use case for gold, but the only reason we're inclined to make jewelry out of gold instead of other material is because we’re told gold is valuable. And the only reason we think gold is valuable is because society has deemed it to be. It’s kind of a vicious circle, isn’t it? But for some reason, we’ve all collectively bought into the lie, which makes gold the most valuable meme of all time.

Just like famous paintings or gold, most NFTs have very little actual value. The cost to create an NFT can be as little as a penny (I explain more about what NFTs are, if you’re interested).

But the perceived value of some NFTs is astronomical. One of the most valuable NFTs in the world is CryptoPunk #5822. It sold for $23.7 million in January.

Punk #5822

With all of that said, it’s important to note that perceived value differs from person to person.

I wouldn’t spend $850 million on the Mona Lisa, even if I had that much to spend. You probably wouldn’t spend $69.3 million on Everydays: The First 5000 Days. But somebody would. And that’s enough.

Of course, no NFT just has perceived value by virtue of existing. That’s something that it gradually earns (or doesn’t) thanks to a combination of the other things I talk about below.

2. Exclusivity

“Okay,” I hear you say, “But there’s only one Mona Lisa. There are probably millions of people who have copy+pasted any given NFT. So what makes this jpeg special?”

To continue with my original analogy, it’s important to establish that making a copy of a piece of art doesn’t diminish the value of the original as long as you can prove which one is the original (I’ll come back to this in a moment). The same is true of NFTs.

There’s only one original Mona Lisa. You can visit the Louvre Museum and take a picture of it. You can buy an identical replica and hang it on your wall. You can even make a copy of your copy, and then make a copy of that copy, and so on, forever. But doing so doesn’t mean that you own the Mona Lisa. And you definitely can’t sell your replica for $850 million.

Similarly, you can save the NFTs that I own to your phone. You can even use my NFTs on social media, if you want. But only I can prove that I’m the owner of mfer #8099.

My mfer #8099

Yup. I bought that.

It’s kept in my digital wallet, but I can sell it whenever I feel the urge. And, just like art, even if everyone who reads this post collectively decides to copy+paste my mfer and use it as their pic for every profile on every social media account, the value of my NFT isn’t diminished.

Counterintuitively, you might actually help my mfer increase in value.

A lot of perceived value is based on how famous (or infamous) a thing is. The more my NFT is shared, the more it enters social awareness. The more it enters social awareness, the more desirable it will likely become to collectors.

I explain this more in-depth in my first post, but the TL;DR of what separates an NFT from your run-of-the-mill jpeg is exclusivity. The owner has a proverbial ‘bill of sale’ that enables them to prove that they own it—and that they are the only person who owns it.

3. Timeliness

Everybody wants to be part of making history.

I’ve been collecting baseball cards since I was a kid. And one of the crown jewels for any card-collector is the famous T206 Honus Wagner. This card is worth a crazy $7.25 million.

Sure, the Honus Wagner card is valuable because it’s scarce. But more importantly, it comes with a good story of Wagner being the first athlete to pioneer endorsement deals. As long as professional sports remain culturally relevant, so will this card.

Timeliness isn’t something you can fake. Most NFTs won’t be relevant for more than a few weeks before they softly vanish without making an impact. But a few are going to be important historic milestones.

Some collectors think CryptoPunks (from 2017) will stand the test of time because they’re the first collectible avatar project and represent a milestone in blockchain history.

Other collectors think projects like Autoglyphs, Fidenza and Ringers will remain relevant because they’re some of the first generative art projects on a blockchain.

Fidenza by Tyler Hobbs

And some are betting that projects like the Bored Ape Yacht Club have the potential to become the next Disney in terms of intellectual property because the Apes appear in books, comics, a series of movies, and a video game (some of the owners are already using their Ape as branding for new restaurants, beer, and coffee beans).

Whatever your opinion of the Bored Apes, they’re always a talking piece on social media and blogs after celebrities like Snoop Dogg, Tom Brady, Justin Bieber, Jimmy Fallon, Post Malone, and Kevin Hart buy an Ape.

Will the Bored Apes become a media brand as powerful as Disney? Probably not! But some collectors who are attracted to BAYC are making the long term play that the brand will maintain and increase in cultural relevancy over time.

So yes, NFT collectors want the value of their items to increase, but it’s not always for the purpose of exchanging them for dollars. Sometimes it’s just about owning a piece of history.

4. Scarcity

Do you remember Beanie Babies? In the 90s, Ty created those instantly-recognizable little stuffed toys, along with a narrative that Beanie Babies were scarce.

It was an interesting strategy that might have worked… if they hadn’t then flooded the market with millions of toys and consequently destroyed their own scarcity.

I can’t help but wonder… would Beanie Babies have remained more culturally relevant if it was possible to mint them on the public blockchain?

It’s tough to tell, but let’s think about it logically:

  1. The public would know exactly how many babies were in the collection, who owns them, and no other babies could be added to the original collection.
  2. Ty would be operating under additional scrutiny. If they decided to make a second collection, the public would know about it immediately (and the backlash would be real).
  3. Buyers wouldn’t have to worry about the condition of the babies or the possibility of counterfeits, because it would be easy to prove authenticity.
  4. Sellers wouldn’t have to worry about taking pictures, getting their collectible officially graded, or shipping to the buyer. There’s a lot of risk in that process!
  5. If Beanie Babies were purely digital property (vs. physical objects) you could buy and sell them much more easily and efficiently.

It’s pure speculation, but I think that at least some parts of this process would have helped Beanie Babies gain more staying power. At the very least, adding more transparency to the process would only have been a good thing.

We can already see that at work in NFTs. NBA Top Shot lets you buy, sell, and trade 10-second video highlight “moments” from your favorite NBA players. For a time, it looked like they were just going to churn these out year-after-year and dilute the pool. But after public pressure from collectors, NBA Top Shot radically changed their stance on its future supply.

But even if I’m wrong, and NFTs never become something that’s globally recognized, there’s still some value to be had here. Some of the rarest Beanie Babies still sell for thousands of dollars, which proves that mainstream attention isn’t needed for something to have value.

Many of the current NFT projects are probably destined for these niche communities.

Will my NFT be valuable in the future?

The short answer is… I don’t know. The long answer is… what do you consider valuable?

If you’re asking if it will be worth a lot of money, then for all of the reasons listed above, the answer is a solid maybe. But, like making smart investments in crypto, it does take some research, some industry knowledge, and a little bit of luck.

That said, in my experience, the overwhelming majority of collectors are still collecting because they genuinely like their NFTs and see them as a store of value. That’s why many communities are thriving despite poor market conditions.

A common criticism of NFTs is that they’re like flypaper for greater fools. Investors are lured in and they make overpriced purchases because they hope to flip it for more money (and thus get rich quick). That was certainly true during the peak NFT mania cycles in August of 2021 and then again in January, but it’s less common these days.

What we’re seeing now is that most of the short-term speculators have been washed out. There’s still money to be made, but it’s not quite so easy.

But there is value to NFTs beyond a price tag, if you’re interested in that sort of value. Here are a few of the ways that I gauge the value of my collection:

NFTs give you clout in the crypto world

Let me tell you about a story where I was overcome with excitement over an NFT and then explain why I sold it because it was becoming too valuable.

In crypto, there’s a term called “apeing” which refers to when crypto traders hear of an interesting project and buy into the project without doing any research. After years of being deep in the crypto weeds, seeing “Bored Ape Yacht Club” for the first time made me laugh. There was something about the traits from the artwork that I loved too.

After I saw a few people who I respect changed their Twitter profile picture to an Ape, I realized that I wasn’t the only one who resonated with the collection, so I bought my first Ape for $2k.

I later traded my original Ape for a different one that I vibed with more, then I used it as my Twitter profile picture. I thought it’d be cool to own an interesting story from the early days of crypto. I wasn’t expecting the price to move much up or down, but I was comfortable with the price going to zero.

My Bored Ape #1880 (Sold September 2021)

As the year went on, I ran into a problem: my Ape became way too valuable.

It got to the point where my cartoon picture was such a large portion of my net worth that it made my palms get sweaty and made me feel uncomfortable.

I ended up selling it for $180k to NFL player, Marlon Humphrey, but I didn’t take the decision to sell lightly. I debated it for months. A few weeks before the sale, I was secretly hoping that my Ape would stop increasing in value, so that my rational brain wouldn’t force me to sell.

My Ape became a part of my identity online and I met some like-minded crypto nerds along the way. But most of all, my Ape became a signal that I was early AND right about NFTs.

For people who relish in the feeling of being right or trend-setting, there's nothing better than bragging to your friends that you found a new band or TV show before it goes mainstream. Now, you can prove how early you were to anything. Your tokens are a signal of your taste.

So sure, the money was nice, but there was more to it than that.

NFT profile pictures can be seen as a networking tool to connect with other like-minded people. NFTs are in their early days, so owning them only appeals to a small group of “crypto bros,” but my bet is that this trend trickles out to other internet communities. We’re already beginning to see this play out with Reddit’s digital collectible avatars.

NFTs are social signals

This is related to the above point, but I’ve been thinking about it a lot lately.

Each year, I would stay up until 3 AM to pre-order the newest iPhone. It’s hard to justify why, considering my old iPhone worked just fine and there were other phones on the market that would work just as well. But man, I had to have that new iPhone.

And I’m not the only weird one. My wife is obsessed with her Yeti water bottle collection. Some of my family members adore their Bombas socks. Then there are other people who must have a $20k+ Hermès Birkin bag or a $100k+ Rolex watch.

Why do we buy items when there are viable alternatives available for less?

We want to own things that show others who we are and what we stand for. Some signal to others through their religion, sports teams, political parties (or hundreds of other things), but there’s a solid percentage of people who do this through their favorite brands.

In economics, this phenomenon is called “conspicuous consumption” and most people engage in it in some small way, even if it’s just at the grocery store.

NFTs are just the digital version of this phenomenon. It’s a way for me to signal to like-minded people that I’m part of the in-crowd.

The interesting flip side to that is when an NFT skeptic sees someone with an Ape profile picture on Twitter, it’s probably a clear signal of who to avoid. But even the people who mock our profile pics are engaging in social signaling, just to a very different crowd.

If you understand social signaling, but it’s still unclear why someone would choose an expensive digital item over a physical one, let’s consider our screen time. Kids are spending an average of 7.5 hours staring at a screen per day. And 31% of adults are online “almost constantly.”

I’m convinced people will want to own digital status goods instead of physical status goods as people progressively spend more of their lives in the digital space. I’m obsessed with the internet and spend an enormous chunk of my day on it, so owning cool NFTs is preferable to a fancy car. The more you value internet culture and the communities you’re in, the more NFTs will make sense and be desirable to you.

Gamers, who tend to spend lots of time on screens, are no stranger to wanting to own highly sought-after digital items. Last year, gamers spent billions on in-game skins, which usually serve no purpose aside from signaling to other players who you are.

Some NFTs come with exclusive perks

There’s that word again, "exclusive."

Many NFTs work as a pass that grants you access to gated content, software, Discord channels, or future NFT mints. And some NFTs even give you access to real-life events.

On NBA Top Shot, owning certain NFT moments from your favorite team qualifies you for free tickets to your team's games. For the 2022 playoffs, Top Shot gave away ten tickets to each playoff game. I own the complete set of Celtics players, which put me in the running for free tickets for 11 potential games, but unfortunately, I struck out each time.

My Celtics Full Set

Many of the prominent collectible profile picture (pfp) projects put on real-life conferences and events too.

The Bored Ape Yacht Club just hosted their second annual ApeFest at NFT NYC. ApeFest was a four-day festival that featured free food, drinks and performances from Amy Schumer, Snoop Dogg, Eminem and others.

The cheapest way to get access to ApeFest is by owning a Mutant Ape (currently valued at $20k). I’m not suggesting this event is worth $20k, but it’s not uncommon for VIP passes to popular music festivals to cost $1k, and your Ape gives you annual access, instead of one-time access. ApeFest just has to remain relevant to a relatively small group of NFT nerds, for this perk to have substantial value.

An interesting part about NFT membership passes is that once you decide you no longer want to be part of the club, you get paid to leave the club by reselling your pass on the secondary market.

NFT access passes will have secondary market value as long as the perks of the pass remain. But even without the perks, if the market views the event as something important it may have value as well, in the same way that certain tickets from historical Super Bowl games remain valuable.

A world where all concerts and sporting events come in an NFT form makes a ton of sense. Imagine not having to worry about online ticket exchanges or scalpers. Can’t make an event? Just sell your secure ticket/NFT to someone else and the deal is done.

As for bragging rights, I have a huge stash of crumpled-up paper tickets for every baseball game that I've ever been to. I’d love to be able to organize and display all of my tickets in my digital wallet, like a virtual collage of some of my favorite memories.

You support the art you want to see

This is a bit of a reductive argument that isn’t going to change anyone’s mind, but if you already like NFTs, then supporting NFTs can be its own reward.

I love investing in small creators and watching them gain popularity. It’s sort of like joining a small YouTube community and watching it grow to a hundred thousand subscribers. I get to point to that creator and say, "Yeah, I was there. I helped make that happen."

My Surf Dreamz #143

Of course, this dynamic exists with physical creations but because an NFT is digitally native and the ownership is public, it’s easier for someone’s creation to get attention on social media in NFT form.

Early collectors essentially work as the creators' active marketing team for free because they are naturally incentivized to spread the word. And creators will always have a direct link to their supporters too, which means they can drop future work into the owners’ wallets with just a few clicks if they’re inclined. The token creates a direct relationship where the incentives for both parties align perfectly.

Collectors also work as passive marketing. For example, if you click on my profile picture on Twitter (Instagram and Facebook are working on NFT integration too), it’ll bring you to my public wallet that features all my NFTs. Eventually, if everyone’s collection is one click away on social media, certain creations should get more attention and become more desirable based on which people own things.

The internet and social media have already created more tastemakers by democratizing who has influence. The fact that you’re reading this post from a random guy in New Hampshire proves this. Now, if you add a better way to monetize via NFTs to the growing amount of people with influence, it may allow more creators to be seen. In my two years of collecting NFTs, I’ve seen well-respected collectors bring hundreds of unknown digital artists to the forefront.

Because NFTs are so new, we haven’t seen all the ways that NFTs can help creative people.

One of my favorite examples of empowering creators happened two months ago. There’s a digital pixel artist who goes by the pseudonym @jmw327 on Twitter and has more than 100k followers. Despite having loyal fans, jmw327 claimed they were making less than $10k per year. Desperate for more income, they auctioned their first NFT. After 24 hours of bidding, it sold for $40k. They quadrupled their yearly earnings with just one piece of work!

I’m not suggesting all paintings, songs, photos and videos originate as an NFT anytime soon. But this NFT model should be an interesting experiment in monetization for certain individuals because it may help to increase attention and popularity.

Wrap Up

In a post from 2010, Chris Dixon writes "the next big thing will start out looking like a toy." This trend plays out frequently as technology advances. For example, 15 years ago, almost everyone dismissed early smartphones and wondered why anyone would want a small pocket computer. Now, most people can’t imagine a world without a smartphone.

Time will tell if NFTs are the next big thing or just a toy.

At the very least, I can say that NFTs have captured the imagination of the crypto natives (a small part of the internet) and will remain popular in the crypto community.

My money is on NFTs being a long-term store of value. I think that as our time on screens increases, digitally native assets that gain cultural relevance will become as coveted as their real-world counterparts.

There’s a famous quote that says “Art acts as a collective memory of society.” NFTs are no different. For the first time in the history of the internet, we have a way for culture to be digitized, made scarce, and traded.

Figuring out which NFTs will remain relevant is anyone’s guess, but that’s part of the fun.

Next: 3. Why do people buy NFTs? Three reasons I’m obsessed with NFTs