Hi friends,
Unless you’ve been living under a rock, you’ve probably heard that NFTs have taken off (again), with digital rocks selling for over $1M
In a previous piece, I touched on how increasingly for retail investors, the purpose of investing isn’t just financial returns. Rather, investing can fulfill multiple different “jobs” for an individual, with different asset classes catering to a different potential set of these jobs.
In this piece, I’ll go a bit more in depth into how NFTs can serve a different set of jobs for different people including:
Financial Returns
Identity
Community
NFTs as Financial Returns
First, let’s get the financial returns aspect out of the way. There are tons and tons of NFT projects right now, and many of them that gain steam are going up in value pretty significantly.
So, a lot of people are obviously in NFTs for the money and there is rampant speculation across the board.
One way to see how NFTs are doing is to look at the floor (i.e., the lowest listing price/ transaction price) or average selling prices for some NFT projects. Looking at the charts below, one can see that
The average selling price of CryptoPunks has gone from under $200 to over $200K, a 1000X return in a span of a few months
Similarly, the floor price on Bored Apes has gone from under 1 eth to 40 eth in a few months, a 40X return in under 2 months.
There are countless other examples of people minting NFTs across various projects for 0.05-0.1 ETH and selling it for 5-10X gain essentially overnight as the floor price rises.
And there are also examples of people buying NFTs for a few thousand and selling them for 7 figures a month later, all of which is contributing to people wanting to get involved.
The financial returns logic is quite simple: anything which is scarce and rare has value, and anything where demand increases as supply stays the same tends to go up in price. To the extent that it’s still early in the NFT ecosystem, and to the extent that they will in the future be a good store of value, people will be willing to pay more for them in the future (especially the projects which take off and / or have some significance).
But given that speculation has been so rampant, and potentially given some of the other reasons below, the prices on these have been extremely volatile and moving very quickly, much faster than on other assets.
NFTs as Status
The need for humans to signal status is a constant. As people spend more and more of their time in the digital world, a lot of the typical real-world objects for signaling status don’t work as well. Yes, social media allows people to post photos of their car and home and vacation, but arguably has gotten a bit overplayed and may appear a bit cringe.
In addition, those don’t necessarily work as well in digital worlds in which people might spend their time such as Roblox. For example, digital goods in Roblox are selling for as much as or more than what the physical version of that item costs. Why? If you spend most of your time in Roblox and want to flex there, you need the digital good, not the physical.
And now consider NFTs, which bring scarcity along with provenance of ownership to digital goods.
NFTs are essentially digital Veblen goods. For those who want to signal status especially in the digital world, “flexing” ownership of valuable JPEGs i.e. NFTs is one of the easiest ways.
One of the most popular forms of this “flex” is NFTs as profile pictures on Twitter and other forms of social media. You’ve probably seen people with these apes or punks or penguins as their profile photos.
[Bored Ape Yacht Club is a collection of 10,000 NFTs, with the lowest going for over $100,000]
Of course, you could flex an NFT you don’t really own. But that’s both frowned upon in the community and could be verified as false (kind of like flexing a fake Rolex or bag).
And in some ways, these flexes can be done more subtly or in less cringeworthy ways than flexing physical status symbols in the digital world.
The reason I think that’s the case is because while one might be flexing an NFT, one can suggest that their motivation is something else, such as:
Representing their identity
Expressing belonging / community
Supporting artists and creators.
And who says you can’t flex it in the physical world too if you want?
NFTs as Belonging and Community
NFTs also serve as a way to participate in a community and find belonging. Today this typically takes the form of virtual communities on Discord.
NFT projects often have extremely active public Discords with over 1000s of members actively contributing and posting.
Owning the NFT also means entry into the true “community” often represented by access to locked Discord channels or membership into an “exclusive club”. Sometimes membership entitles holders to enter some kind of digital metaverse or club, whether it be a game or a virtual world. For example, the Sol Lions project includes on its roadmap access to the Lion’s Den, a home in the digital realm.
People have also been finding others part of their community i.e., holding an NFT of the same project either on Twitter (through hashtags such as #ApeFollowApe) and through other means and meeting up in the real world, as below.
In addition, some NFTs are tying to them perks in the real world, which allow for holders to foster community and get to know each other. For example, Sol Lions which I mentioned above which is aiming to be a hybrid digital-physical society of jungle citizens with events, concerts, and more is a good example of this. Members will be entitled to tickets to physical events and concerts.
NFTs as Fun
Unlike say some forms of “investing” such as buying index funds, NFTs can also solve the job for fun and entertainment.
It does so in a few ways:
Quite literally, NFTs can be the used to play games such as Axie Infinity which requires 3 Axies (represented as NFTs) to get started. Axie Infinity has over a million active players and has done over $2B in trading volume.
2> Speculation
NFTs are also entertaining and fun in that they are great to speculate on. Given how volatile they’ve been and that they trade 24/7, they are more fun to trade and speculate on than say stocks which have limited hours and lower volatility. In addition, given it’s still a wild west, people have the ability to discover diamonds in the rough or projects before they take off, and so in some ways is akin to investing in startups in a liquid market, which adds to the fun and entertainment.
3> Drops, Minting and Thrill of the Chase
The process of NFTs dropping at a set time with thousands scampering to mint them simultaneously adds to the fun and entertainment. It’s kind of like the scavenger hunts and waiting in line which sneakerheads do to cop the latest limited edition.
Given that everyone is on a level playing field during the public minting and there’s the ability to mint a very rare NFT within the project means that it adds a bit of a gambling or lottery element to it.
