NFTs have risen to fame and made several headlines in 2021. Some of you might remember NFTs being sold in different auction houses, like Sotheby and Christie’s, with the total sales reaching around $25 billion in the year. While Beeple’s “Human One” has broken the record with a $69.3 million price tag in a Christie’s auction, there are many NFTs with enormous popularity that are worth mentioning such as the Bored Ape Yacht Club collection. Today we are going to talk about NFTs and how it matters to us as an investor.

History of NFT

The idea of NFTs emerged from what is called a “colored coin”, initially issued on the Bitcoin blockchain in 2012-2013. Colored coins are tokens that represent real-world assets on the blockchain and can be used to prove ownership of any asset, from precious metals to cars to real estate, even equities, and bonds. Although not as sophisticated, this original idea was to use the Bitcoin blockchain for assets like digital collectibles, coupons, property, company shares, and more.

What is an NFT?

According to Crypto Theses for 2022 by Messari, NFTs represent verifiably scarce, portable, and programmable pieces of digital property. An NFT (Non-fungible token) is a unique and non-interchangeable token that is used to represent ownership of specified items. What it means by non-interchangeable is that no two NFTs are identical and they each represent a different asset, unlike other cryptocurrencies like Bitcoin and Ethereum where two Bitcoins have the same value. It is worth noting that an NFT is essentially a piece of data that points to a specific server hosting an object (such as art piece, collectible and music) and does not grant the NFT’s owner copyright inherently. Technically, the person owning the server could change the content within it.

Types of NFT

There is a common misconception that NFT is art collectables. However, as mentioned, NFTs actually have different forms and represent verifiably scarce, portable, and programmable pieces of digital property.

An NFT could be a share of stock, a virtual sword in a MMORPG, a profile picture on social media, a new digital art piece, a plot of land in the metaverse, or your data record on Facebook. The potential for NFTs is essentially unlimited as blockchains become global transaction ledgers for both natively virtual property and physical property (or at least, their digital receipts).

The “real world” version of an NFT might be something like the deed to my house (verifiably scarce), if I could prove ownership to my insurance company by signing a transaction in a wallet that holds the receipt of my deed (digital representation of property). I could grant access to the house for Airbnb guests with the NFT (programmable), or I could take out a home equity line of credit and pledge the NFT as collateral on a peer-to-peer lending platform (portable).

Value Creation of NFTs

At this point, it is natural for readers to ask the question: what makes NFTs valuable? NFTs provide value for users and investors in the following ways: being pioneering or the first of its kind, rarity, utility and the history of ownership. While not all NFTs process all four qualities, the more quality an NFT processes, the more valuable they are.

To dive into the NFTs’ value creation, let’s imagine a piece of artwork, say da Vinci’s Mona Lisa or Van Gogh’s The Starry Night. If it is reprinted multiple times, it is very sensible that the first and original art piece (the first edition) would be the most valuable one, the same logic applies to NFTs. Furthermore, if the NFTs are rare, like only a handful of copies have been minted, the value will be higher. In terms of utility, an NFT will have more utility and hence more valuable if the token brings real-world benefits (say the right to exhibit Mona Lisa and receive fees). Last, an NFT’s value may skyrocket if it had been owned by famous people or having an interesting ownership history.

When talking about NFTs making headlines, mentioning the Bored Ape Yacht Club (BAYC) collection is a must. The BAYC is probably the most recognizable NFT collection at the time of writing with a collection of 10000 art pieces. Officially launched on April 30th 2021, the collection was sold out in just a day with the entry price around $210,000 at the beginning of 2022 (excluding fat finger incidents). While it is easy to associate the collection with characteristics like rareness and being pioneering, it is worth noting that some of the BAYC NFTs are owned by celebrities like musicians Eminem and Snoop Dogg. This will potentially increase the value of those pieces due to the ownership history, and also make owning the BAYC collection as a sign of social status. The ability to demonstrate social status by showing or exhibiting the collection to others solidify the BAYC NFTs’ value, hence explaining the utility function of an NFT.

Some NFT collections create value of uniqueness through special editions while other NFTs gain attention due to endorsement by big brands or celebrities. Monkey Kingdom is one of the examples for the former with four special editions of art pieces, like the Alien and Golden editions of the monkey Wukong. As for NFTs endorsed by big names, the Bored Ape (collaborations with Addidas) and Phanta Bear (endorsed by Taiwanese pop artist Jay Chou) are good cases in point. With established names’ support. Such NFTs could market themselves with ease to people in crypto world and the wider audience. Potential investors interested in NFTs could look for such signs to assist investment decision making.

In this article we have briefly talked about the nature of non-tangible token and how it creates value. In the future, we will cover more about the evaluation of NFT projects, NFT scams and the outlook of NFT.

By Arthur Kwan and Ezreal Kung at Art of Trades

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