NFTs (non-fungible tokens) have exploded in popularity recently, with sales reaching billions of dollars in 2021 alone. As interest grows, many new investors are wondering—what makes some NFTs increase dramatically in value, while others languish or even lose value over time?
Scarcity
One of the main factors that can drive up the value of an NFT is scarcity. NFTs are minted in limited quantities, and those that are especially rare tend to be more coveted by collectors. Bored Ape Yacht Club, for example, famously only minted 10,000 NFTs. The scarcity makes each BAYC NFT more valuable to own. Other NFT projects purposefully burn (destroy) a certain number of NFTs to make the remaining ones rarer still.
Scarcity on its own doesn’t guarantee value, however. The underlying art, utility, and community buzz around the NFT also play a role. But in general, lower mint counts and provable scarcity tend to increase prices on the secondary market.
Utility
Utility refers to any special perks, access, or functionality that comes with owning an NFT. This utility value can drive up prices as well.
Some examples of NFT utility include:
- Access to exclusive events, spaces, or content
- Privileges like merch, airdrops, or discounts
- Governance rights to vote on a DAO
- Revenue sharing or royalties
- Metaverse land and avatars
The more usefulness and privileges an NFT grants, the more desirable it becomes. Top NFT projects pour resources into delivering value and utility to holders, knowing this directly impacts floor prices.
Community
The community surrounding an NFT collection also influences its valuation. NFT projects thrive on social buzz, word-of-mouth, influencer endorsements, and a shared identity among collectors. Projects with the strongest communities tend to enjoy higher prices and trade volumes.
Vibrant communities drive more interest in the secondary market. They also build camaraderie and loyalty among collectors, who are then less likely to sell their NFTs. With fewer sellers, prices stay higher.
Celebrity Endorsements
Celebrity endorsements and partnerships legitimize NFT projects and generate hype. This too can increase market demand.
For example, when rapper Eminem bought a Bored Ape Yacht Club NFT in 2021, the news made headlines in the mainstream media. It signaled that BAYC was becoming a cultural sensation. More celebrities, athletes, and heads of industry have since bought BAYCs and flaunted them on social media. Their star power has sustained incredible demand for the collection.
Social Trends
Like many assets, NFT values can rise and fall with social trends and hype cycles. Projects that go viral online tend to see temporary price spikes and selling frenzies. Bored Ape Yacht Club rode the wave of meme culture to boost its success. Cool Cats also surfed the NFT hype in 2021. And celebrity connections keep demand high around popular projects.
However, trends fade. Speculators may dump their NFTs after a price peak. Values tied mainly to hype can collapse quickly when interest shifts elsewhere.
Major Exchange Listings
When an NFT gets listed on a major NFT marketplace like OpenSea, the added exposure and legitimacy can boost its value. Top marketplaces allow anyone to buy, sell and trade the NFT instantly.
Listings on centralized cryptocurrency exchanges like Coinbase have a similar effect. They make the NFT easily tradable to millions of new potential buyers.
Increased liquidity from major exchange listings tends to raise the crypto asset floor price. More demand enters the market.
Mainstream News
Mainstream media coverage of the NFT space often sparks investor FOMO (fear of missing out). Reporters look for exciting narratives around select NFTs that outperform others.
For example, news stories about Doodles and Azuki blowing up focus attention on those collections. They present case studies of people buying early and flipping for massive profits. This sort of coverage directly feeds speculative demand.
Founder Reputation
The reputation of an NFT’s founders impacts its market value as well. Collections created by established artists, celebrities, technologists, or entrepreneurs tend to enjoy greater trust.
BAYC’s founders have track records in Silicon Valley and the crypto industry. The CryptoPunks creators were early NFT pioneers. These reputations provide a certain quality assurance to buyers and investors.
Anonymous and pseudonymous founders have succeeded as well with great NFTs. But perceived trustworthiness and expertise still matter.
Artwork Quality
Although subjective, the quality of the underlying NFT artwork influences prices. Better art generally commands higher valuations.
Factors like visual appeal, uniqueness, stylistic consistency, and rarity all contribute to artwork quality. For profile picture projects like BAYC, CryptoPunks, and Gutter Cat Gang, collectors want NFTs they actually enjoy showing off.
Artwork should match the project’s brand identity as well. Bored Apes famously have a crude and twisted aesthetic that buyers have embraced. The art reinforces the culture and community.
Roadmap Execution
The future roadmap for the NFT collection matters too. Developers need to deliver the promised utility, metaverse integrations, and community benefits to keep demand strong long-term.
For example, the BAYC roadmap has rolled out exclusive member benefits, token airdrops, and metaverse games to great success. This execution maintains faith in the project’s direction. Owners are less inclined to sell before realizing the full roadmap.
Trading Activity
Higher trading volumes for an NFT tend to drive increased attention and demand in a self-reinforcing cycle. More transactions signal market momentum and liquidity.
Active Discord channels and high bid counts on NFT marketplaces also advertise buyer interest. This sort of trading activity feeds bullish sentiment and higher valuations.
Unique Blockchain Metadata
NFTs with rare attributes, traits, or other on-chain metadata can sometimes command premium prices. Since all metadata lives transparently on the blockchain, collectors can analyze listings for especially unique characteristics.
For generative profile picture collections like BAYC, some trait combinations occur less frequently. Collectors covet the rarest combinations. Similarly, lower mint numbers indicate earlier mints, which some view as more valuable in the historical context.
Interoperability and Composability
As NFT technology improves, new forms of interoperability and composability are emerging. This means the NFT can integrate with other NFTs and apps to unlock combined functionality.
For example, buying two mutually compatible NFTs might produce a special aggregated NFT with powers from both. Or an NFT could interoperate with a separate metaverse or gaming app.
Greater composability expands what NFTs can do and thus raises their utility value. Projects enabling these NFT lego blocks could benefit.
Financialization
Financialization refers to the increasing extent that financial institutions and markets interact with certain assets, like NFTs. This process can affect valuations.
For example, specialized funds for collectively investing in NFTs are launching. Platforms are offering loans and other financial tools using NFTs as collateral. Certain NFT indexes even track the market like the S&P 500 does for stocks.
As the legacy financial system recognizes and incorporates NFTs, it tends to legitimize them. And deeper liquidity allows for larger transactions that can influence prices.
Case Study: Bored Ape Yacht Club
Bored Ape Yacht Club demonstrates many of these value drivers in action. Here is an overview of key factors that boosted its valuation:
- Scarcity due to only 10,000 apes minted
- Must-have social status and community identity
- Celebrity endorsements and mainstream media hype
- Cool, quirky art style with collector appeal
- Roadmap execution with metaverse, airdrops, events, etc.
- Mutant Ape spinoffs adding more utility
- Listed on OpenSea and other major NFT markets
- Interoperability with upcoming metaverse game and others
- Speculative mania and FOMO from price gains
As one of the most prominent NFT brands, BAYC enjoys a perfect storm of value drivers. However, collectors should remember hype often cools off. Only projects with real long-term utility remain valuable over time.
Conclusion
Many factors make select NFTs rise dramatically in price, while failing to impact others. These drivers include provable scarcity, utility, community, celebrity connections, artwork quality, roadmap execution, trading activity, composability, financialization, and speculative hype cycles.
Still, fundamental utility and community ownership seem to be the most sustainable value generators over time. NFTs relying too much on hype often crash hardest in bear markets. Discerning investors should focus on quality projects poised to deliver lasting value and joy to collectors.