Since the turn of the decade, the global finance sphere has turned on its head. The first wave of change was the advent of internet banking in the early 2000s. And when Bitcoin burst on the scene, albeit after its slow start, it completely disrupted the finance world. Little did we know that it was only the beginning of the radical wave of digital transformation.
Ever since Cryptocurrency took the world by storm, each time it pops up on the news, it almost always leaves you thinking, “Uhm… what’s going on here?”
So, in March 2021, when it was announced that Twitter co-founder Jack Dorsey had just sold an autographed tweet for $2.9m, it sparked a whole global discussion about a whole new world of Blockchain technology — Non-fungible tokens. In reality, however, NFTs have been around for almost a decade.
But Why Are NFTs Suddenly Gaining Prominence?
The covid-19 pandemic set in motion a paradigm shift in global investment trends. The world witnessed an unprecedented shift towards alternative investment vehicles previously regarded and too risky and unreliable. Stocks, precious Metals, and the Oil markets all slumped drastically when covid-19 lockdown measures ground world economies to a halt. And global fiat currencies took massive hits.
Conversely, Bitcoin, Ethereum and Dogecoin, and other prominent cryptocurrencies enjoyed strong bullish runs. This is was the precursor for the emergence of NFTs.
The NFT fever has been further popularized by celebrities racing to mint their own tokens. To name a few, Snoop Dogg, Grimes, and Tony Hawk have all joined the hype train and minted some non-fungible tokens.
In this write-up, I will explain what NFTs are and why they are valuable and why you too should get involved.
What Makes NFTs So Valuable
This is one big question that analysts have sought to answer over the last few months. Analysts and the general public struggle to understand if it is all hype or if there’s genuine value in NFTs. To derive a plausible answer, we have to go back to the basics.
There are three ways that an item can derive value, Intrinsic Value or Utility, vs Security backing
- Intrinsic Value is the value that an asset has in itself in terms of market value or its potential uses.
NFTs have intrinsic value. The holders can use them to access premium features on the platforms where they are purchased. They can also be staked to earn rewards.
2. Security Backing refers to the value of an underlying asset that backs a particular item. For instance, in the early days of the fiat currency system, each unit of a country’s currency, was usually backed by gold. Nowadays, currencies are only backed by the mere assurance of the governments that issue them.
NFTs are backed underlying assets like art, memorabilia, or real assets. The tokens give the holders legal claims to units of these real-world assets.
3. Sentimental Value: the added value that an item has due to the abstract importance that a person or a group ascribes to it. Sentimental value is often based on social identity, hobby, culture, or historical importance. It is unquantifiable but at the same time, it cannot be understated.
Unlike stocks, the assets that back NFTs i.e Art work, rare memorabilia, Collectibles etc. often have strong sentimental value to different communities and groups of people.
In a nutshell, what makes NFTs exponentially valuable is that they effectively combine all three mechanisms of value (Intrinsic Value, Security, and Sentiments) to establish their commercial viability.
The most valuable items in the physical world like fiat currencies, precious metals, and stocks all fall short of combining all 3 features (intrinsic, security, and sentimental value) the way NFTs do.
NFTs are essentially digitized assets that have intrinsic value and secured by an underlying asset. And when the underlying assets happened to be rare memorabilia or artwork, sentimental value also comes into play.
This is why NFTs have proven to be so valuable for millions of people across the world today.
