How Do NFTs Gain Value?

NFTs Gain Value Through Community, Hype, Scarcity and (Sometimes) Fraud 

Despite the ups and downs of the crypto market, NFTs are still an incredibly hot commodity. According to blockchain analysis firm Chainanalysis, more than $40 billion in NFTs were sold in 2021 alone. As of July 2022, $42 billion NFTs had already been sold, meaning that total sales could reach $60 billion or more by the end of the year. 

Beeple’s famed multimedia NFT, Everydays: the First 5000 days. 

It’s not just overall sales of NFTs, however, that have been impressive. Many individual NFTs have sold for record-breaking, eye-watering amounts, including Beeple’s famed Everdays: the First 5000 days, which sold for $69.3 million in 2021. In February 2022, Julian Assange and Pak’s Clock NFT sold for $52.7 million, and, in that same month, CryptoPunk #5822 sold for a staggering $23.7 million. 

With all of that said, you might be wondering exactly how NFTs gain value. As a specific asset, NFTs gain value in multiple ways, including via the strength of the community around the NFT or NFT collection, the preexisting reputation of the artist or group minting the NFT, and via less ethical methods, such as wash trading. NFTs can also vary in value due to various secondary factors, such as the blockchain they’re minted on.

In the end, however, NFTs, like any other asset, gain or lose value based on supply and demand. In this article, we’ll discuss these factors and other reasons why NFTs may gain (or lose) value over time. 

NFTs By Traditional Artists Take Advantage of the Artist’s Pre-Existing Reputation to Gain Value  

For NFTs minted by the individual artist, the value depends almost completely on the artist’s existing reputation, both in the traditional art world and online. Unless an artist already has a significant reputation in either the gallery world and some reputation on social media, or alternatively, a very strong social media presence, their NFTs are not likely to gain significant value. 

Damien Hirst is one major example of a famous legacy artist successfully entering the NFT space. Hirst is considered the world’s top-selling living artist, having sold more than $200 million of art, and was a major player in the Young British Artists (YBA) movement of the 1990s. Unlike Beeple, who has geared toward selling extremely expensive individual NFTs, Damien Hirst has favored the collection route, with his 10,000 NFT collection “The Currency” starting at $2,000 per NFT, and eventually ballooning up to more than $20,000 per NFT (though floor prices have recently fallen to around $8,200-$9,200). 

For established artists, it’s unclear if minting a few NFTs or many will be more profitable, but the fewer NFTs an artist mints, the more expensive those NFTs are likely to be. 

This NFT price and sales chart from NonFungible shows an average NFT sales price of $1,448 as of early August 2022. 

With prices so high for these “blue-chip” NFTs, what are things like for your average NFT artist? While it’s true that the average NFT sold for around $6,900 in January 2022, and around $1,400 in August 2022, that number does not at all represent what the average artist makes, due to the numbers being skewed by multimillion dollar sales. In fact, using median price data, some experts suggest that the average NFT artist is actually bringing in closer to $1 per sale. 

What NFT Groups, Presales, Mint Prices, and Floor Prices Mean for NFT Valuation 

As we previously discussed, some NFTs are singular pieces by already-famous artists, such as Beeple’s 5000 days. However, many of the most popular NFTs are large collections created by previously unknown groups, such as the famed Bored Ape Yacht Club (BAYC), which consists of 10,000 images of anthropomorphized apes. 

In general, the hype around an NFT collection begins before a single NFT has ever been minted. The creators of the collection will often start posting on Twitter from multiple accounts, (usually the central project account and the accounts of several of the creators) as well as creating one or more Discord or Telegram groups. 

Larger projects may create different Discord and Telegram chats for different countries or languages. Using these channels, they may leak sample images of the NFTs, create memes and videos, and discuss the meaning behind the upcoming collection. The more successful this marketing push is, the more likely an NFT collection will spike in value once launched. 

During the pre-launch period, some NFT creators may begin creating an exclusive whitelist that will allow some individuals to mint the NFTs during a specific “presale” period, which could last several hours to several days. This potentially allows them to purchase NFTs at a significantly lower price than the general public, should the project become popular. 

NFT collections with the highest price floors, courtesy of NFT Price Floor. 

Before the presale, the NFT creators will set an initial mint price, the lowest price at which an NFT can be minted. If a project is popular, as the bidding continues (either presale or post-presale), the floor prices of specific NFTs, and eventually the entire collection, will continue to rise. After the NFT is resold by existing owners and begins circulating on the secondary market, the floor price becomes the lowest price that a reseller is currently willing to sell the NFT for. 

As of August 2022, the NFT collection with the highest floor price, was, unsurprisingly, the Bored Ape Yacht Club, with a floor price of 84.19 ETH, nearly $137,000. 

The Importance of Community, Hype, and Shilling for NFT Values

We’ve just discussed a bit about the social media marketing aspect of NFT launches, and this is extremely important when it comes to NFT price action, both in terms of short-term prices and long term NFT values. However, it’s not just what the actual creators of the NFT do and how many followers they have, it’s also how the community develops, reacts, and engages. 

One NFT collection in pre-launch mode could have a Twitter account with 1 million followers, but these followers are not engaged, leading to a less-than-successful launch. In contrast, another collection could have only 15,000 Twitter followers, each of which is highly committed to the cause, leading to a highly-successful launch. 

This type of engagement and commitment can be (somewhat) measured by the number of organic Twitter interactions, as well as the amount of organic, unofficial Telegram and Discord groups that are created as group fan pages.

However, when it comes to NFT marketing, looks can be deceiving. While it isn’t often discussed, there are entire marketing agencies devoted to making an NFT collection look “hot” before launch. The activities these agencies engage in can range on the spectrum from honest strategies, like paid advertising, to less honorable tactics, like buying fake (bot) followers, and paying tens (or even hundreds) of real Twitter, Telegram, or Discord users to publicly promote the project. 

However, sometimes it isn’t just random users these marketing agencies are paying. Many major influencers are being paid significant sums to “shill” for certain NFT collections. Some data suggests that celebrities are paid as much as $20,000 for a single tweet promoting an NFT collection. 

For example, well-known YouTuber and boxer Jake Paul has been harshly criticized for shilling multiple low-quality NFT collections, including taking heat for his recent promotion of Animoon, a Pokemon-inspired NFT collection whose founders lied to fans and failed to deliver on their many promises. It’s estimated that Paul has earned around $2 million promoting crypto and NFTs, around 90% of which have turned out to be scams, or, at the very least, extreme disappointments for users and fans. 

Despite the criticism that projects and influencers have taken when a project fails, in many scenarios, it’s very hard to determine if a project’s initial followers were paid or organic. Therefore, as long as the NFT project succeeds, many NFT creators and marketing agencies can get away with some pretty shady stuff– and avoid criticism while doing it. However, if an NFT project does get caught engaging in shady activities, or makes promises that they don’t deliver on, this could lead to a drop in value in the NFTs themselves. 

Scarcity, Trait Rarity, and Token Burning in Regards to NFT Value

Inside the same NFT collection, NFTs can vary drastically in price. For instance, we already mentioned that, as of August 2022, the least expensive BAYC NFT was priced at almost $137,000. However, an NFT in that same collection sold in October 2021 for more than $3.4 million, 2400% more than the current floor price. 

Most of this price difference comes down to rarity, which itself increases the scarcity of the end product– reducing the supply aspect of the supply and demand equation. When it comes to generative (i.e. computer generated) NFT collections like the Bored Ape Yacht Club, the creators typically program in some traits that are either extremely common or universal, some uncommon traits, some rare traits, and some traits that are ultra-rare. NFTs in a collection with a combination of multiple extremely rare traits will typically gain the most value and have the highest floor prices. 

Taking the example of the BAYC NFT that sold for $3.4 million, the NFT in question had “Solid Gold” fur, one of the rarest traits in the collection, as well as a silver hoop earring and a wool turtleneck, also considered to be quite rare. 

There are multiple methods used to determine the overall rarity of a single NFT. These may include determining the rarity based on the rarest trait, statistically assessing rarities, or averaging the rarity of all the NFTs traits. 

Data on the rarest Moonbird NFT, according to NFT rarity tracking tool Rarity.tools.

In fact, NFT rarity is so important to collectors that there are a multitude of online tools dedicated to determining the rarity of specific NFTs. Some of these include Rarity.Tools, Rarity Sniper, Traitsniper, and Rarity Sniffer, each of which provide a multitude of rarity and price data on thousands of NFT collections, including established collections and new (or upcoming) releases. 

However, NFT scarcity can be achieved with more than just programming some NFTs with rare traits– it can also be artificially created by destroying, or “burning” some of the NFTs in a collection. An NFT, just like cryptocurrency, can be burned by sending it to a non-existent or locked wallet address, which, in practice, takes the NFT permanently out of circulation. 

Token burning is sometimes done by big-time collectors who think the loss of the NFTs they burn will be more than recouped by the increase in the price of their remaining NFTs. However token burning is more commonly done by the creators of the NFT collection themselves to introduce scarcity into the mix. 

For example, in the case of Damien Hirst’s NFT collection The Currency, collectors who bought into the project had one year to determine if they wanted to own the NFT or the accompanying physical artwork (they could not own both). Anytime a collector chose the physical artwork, the accompanying NFT was burned, and whenever they chose the NFT, the artwork was destroyed. 

After the final exchange deadline in July 2022, 5,149 NFTs were burned in exchange for the physical artworks, leaving the NFT Supply at 4,851. This was likely a major driver in the 10x increase in floor price ($2,000 to $20,000+) that the collection experienced during that time. 

Merchandising, Metaverses, and New Collections

An early promotional still from the BAYC Otherside metaverse, courtesy of TechCrunch. 

One way that an already successful NFT collection can see a price increase is through additional brand and product development. For example, the Bored Ape Yacht Club, via its parent company, Yuga Labs, has now grown into a multibillion-dollar entertainment empire, with multiple NFT collections, expensive merchandise, and its own metaverse land game, Otherside. Of course, this can also go wrong; if an NFT collection announces new initiatives, like games or merchandise, but does not follow through, this could easily lead to a crash in that collection’s NFT prices as the brand loses its followers’ trust. 

Wash Trading, Insider Trading, and Rug Pulls 

While we previously discussed NFT shilling by influencers, we should note that there’s a far more insidious game being played by some NFT creators and collectors; wash trading. Wash trading occurs when someone buys an asset at a low price, and then secretly sells it back to themselves at a higher price to deceive the market. This leads to overinflated asset prices offering both fake and real bids on the same NFT or same collection. 

30-day sales data for the NFT marketplace LooksRare, courtesy of DappRader. 

Unfortunately, NFT wash trading is incredibly easy- all someone needs is enough crypto and two wallets in order to create a ridiculously high floor price for any NFT. The issue is so serious that some crypto experts believe that over 33% of NFT sales volume consists of wash trading. Blockchain data platform CryptoSlam has even estimated that wash trading accounts for 95% of the trading volume on the popular NFT marketplace Looksrare.  

Insider trading is another issue in the NFT market that may impact NFT values in certain scenarios. In June 2022, a former executive at OpenSea became the first person to be charged with NFT insider trading in the U.S., after the executive reportedly used confidential information about NFT listings for his own financial gain. Like wash trading, insider trading schemes can sometimes temporarily increase the price of an NFT only for the price to crash later, leaving a potential victim holding the bag. 

Rug pulls are yet another issue in the world of NFT valuation. NFT rug pulls happen when the creator or creators of an NFT set up an entire project, engage in social media marketing and promotions and allow people to start minting the NFT, only to immediately abandon the project and take whatever money they could gain from sales. In these situations, the “rug has been pulled” from under the victims. Just as with wash trading and insider trading, NFTs from a new project may spike in value during the minting period, only to crash when it’s discovered that the founders have left the project.

Blockchains and NFT Values

There are several blockchains currently used for NFT minting, with Ethereum being, by far, the most popular. Other popular blockchains for NFTs include the Ethereum Layer-2 blockchain Polygon, as well as the alternative Layer-1 blockchains Solana and Binance Smart Chain. 

SolMonkeys for sale on the popular Solana NFT marketplace SolSea. 

Most of the best-known and most expensive NFTs, including CryptoPunks and the Bored Ape Yacht Club, have all been minted on the Ethereum blockchain. For example, while Ethereum NFTs have sold for tens of millions of dollars, the most expensive Solana NFT to date sold for a (comparatively) small $2 million. In January 2022, Solana NFT sales volume finally broke $1 billion, an impressive number, but a far cry from Etherem’s sales volume percentage, which was still hovering around 80% as of that month. It’s unclear what the most expensive Binance and Polygon NFTs have sold for, as there is comparatively little data. 

However, with the popularity of Solana and Polygon increasing, OpenSea recently added functionality for both of these blockchains. This means that we may see NFTs minted on these blockchains slowly begin to catch up with Ethereum’s prices. However, unless the creator of an NFT is already a celebrity (like Damien Hirst), they will likely be able to command the highest prices if they mint on the Ethereum blockchain. 

For context, Damien Hirst used the relatively unknown Palm blockchain for his extremely successful NFTs, however, since he was already a pre-crypto celebrity, his usage of a non-major blockchain is certainly an exception to the rule. 

Cryptocurrency Markets and NFT Values

ETH price vs. NFT sales volume chart, courtesy of Coincu News. 

In addition to the community, the hype, and the specific blockchain, crypto prices may also impact NFT prices. However, this is hard to prove, since, as of mid-2022, even with crypto prices tanking, some NFTs are still selling for high prices. From early to mid-2022, overall sales monthly volume has slowed down significantly. So, it can probably be said that crypto prices do impact the NFT market, but are not always directly correlated. 

It should be noted that while NFTs are generally denominated in a specific cryptocurrency, such as ETH or SOL, a drop in the prices of these cryptocurrencies may not always impact NFT prices, as sellers can simply increase prices to combat crypto inflation. 

In Conclusion: Community, Rarity, Branding, Speculation, and Bad Behavior All Impact NFT Prices 

The NFT market is complex, and while all markets rely on supply and demand to determine price, NFT prices can be impacted by a kaleidoscope of secondary factors. Well-branded NFTs with strong, engaged communities generally have successful launches and higher than average floor prices. If an artist or collection successfully maintains and expands their brand over time, this may also lead to increased prices. Plus, in an already successful collection, NFTs with rarer traits may be exponentially more valuable than their more common counterparts. 

However, in the world of NFTs, not all that twinkles is gold, and there are a wide variety of schemes to artificially increase NFT prices. These include bots, shilling by well-paid influencers, and even fake (wash) trading used to inflate prices. In the end, it should also be noted that much of the NFT market also relies on chance, and sometimes, NFTs prices can rise and fall  simply based on the actions of a few wild speculators. 

References:

1. Milmo, D. (Jul. 2022) NFT sales hit 12-month low after cryptocurrency crash. The Guardian. 
2. Thomas, L. (Mar. 2022) The 15 Most Expensive NFT Sales of All Time. NFT Now. 
3. NFTs & Damien Hirst: The Digital vs. The Physical. MyArtBroker. 
4. (Aug. 2022) Damien Hirst – The Currency statistics. NFT Stats. 
5. Kharif, O. (Mar. 2022) NFT Mania Show Signs of Cooling as Average Price and Sales Decline. Bloomberg. 
6. (Aug. 2022) NFT Market Tracker. NonFungible. 
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8. (Aug. 2022) NFT Price Floor: NFT marketplace data aggregator and floor price tracker by market cap. NFT Price Floor. 
9. Knight, D., Prata, L. (Jul. 2022) Jake Paul Promotes Yet Another NFT Rug Pull; Founders Make off With $6.3M. Beincrypto. 
10. Adejumo, O. (Mar. 2022) Jake Paul earned over $2 million by promoting pump and dump crypto schemes. Cryptoslate. 
11. Tahelyani, R. (Mar. 2022) Top 11 Most Expensive Bored Ape Yacht Club NFTs. The Crypto Times. 
12. Ravi, R. (Dec. 2022) 17 NFT Rarity Tools To Check NFT Value. NFT Evening. 
13. (Aug. 2022) #688 – Moonbirds Rarity Score. Rarity.tools. 
14. Matney, L. (Jul. 2022) Bored Apes founders on their plans for Otherside metaverse. TechCrunch. 
15. (Aug. 2022) LooksRare: DappRadar NFT marketplace statistics. DappRadar. 
16. Georgiev, G. (Jun. 2022) Over 33% of NFT Volume is Wash Trading: bitsCrunch CEO Interview. CryptoPotato. 
17. (Jun. 2022) Former Employee Of NFT Marketplace Charged In First Ever Digital Asset Insider Trading Scheme. Department of Justice: U.S. Attorney’s Office, Southern District of New York. 
18. (Aug. 2022) SolMonkeys. SolSea. 
19. Shawdagor, J. (Jun. 2022) SolMonkey becomes the first Solana-based NFT to sell for over $2M. BanklessTimes. 
20. Manoylov, M.  (Jan. 2022) Solana NFT total sales volume crosses $1 billion. The Block. 
21. Canny, W. (Jan. 2022) JPMorgan Says Ethereum Is Losing NFT Market Share to Solana. CoinDesk. 
22. (Jan. 2022) Why is the NFT still active despite the cooling of the spot market?. Coincu News.  
23. Lisa, A. (Jul. 2022) How Do Crypto Prices Affect NFT Values?. GOBankingRates. 

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