Non-Fungible-Tokens (NFTs) are unique digital tokens that represent ownership. NFTs can be applied to Art, Music and even physical items like deeds. Read my NFT explainer if you’re new to the scene.
The exciting thing about NFTs is that it is not just for collectors – it’s also for investors and traders. With traceable ownership and easy access to trusted platforms, many people are now jumping on the bandwagon and making profits from NFTs.
Artists are creating and selling NFTs, while non-creators are flipping NFTs to make attractive returns in a short period of time.
A rise in NFT demand
There was a surge of activity on OpenSea, the first and largest peer-peer marketplace for digital collectibles.
Despite a having slow start in 2021, OpenSeas’ past 30-day volume has surpassed USD 2.5B, with a total of 2.45M transactions, according to DappRadar.
This is a testament to the demand and activity in the NFT scene. With most NFT being minted on the Ethereum blockchain, it’s natural for Ethereum’s price to also increase.
What caused the spike in demand?
There are many reasons behind the popularity of NFTs.
A possible reason is the participation of huge traditional brands such as Visa entering the NFT scene with a bang. On 23 Aug 2021, they purchased a Cryptopunk for 49.5 Ether, which cost about USD 150K at the time of purchase.
Another potential reason is Sotheby’s auction of the Bored Ape Yacht Club NFTs which sold for USD24 million in September. This sale enters the NFT’s hall of fame as one of the most expensive works to have ever been sold.
These are just a couple of examples of blockchain and NFTs going mainstream, which will attract more and more people to join in the excitement of this growing digital space.
So, how can you make money from NFTs? In general, there are two different ways.
- Create and sell your own NFT creations
- Resell and “flip” NFTs for profit
For non-artists, option 2 is significantly more attractive due to the high effort needed to create an NFT project. It requires not just artistic talent but also programming and marketing skills as well.
I’ll cover how you can choose which NFTs to invest, in my next article. But before that, we need to understand the fundamentals of human nature and why people are willing to pay a premium for art and luxury goods. These are the same drivers and reasons to why people purchase NFTs.
Why do people spend money on non-essentials like luxury watches, handbags, and cars?
1) Status and prestige
People use luxury items as a status symbol, flaunting a brand mark or logo to be recognized by others as wealthy or belonging to a certain social status. In crypto terms, it is called ‘flexing’.
2) Belonging
People have a herd mentality – we innately desire to belong and blend in with others. We also like and do the things others doing in order to fit in. If someone sticks out by doing something different, it is highly possible they would be expelled from the group for not conforming. Hence, we tend to do what others are doing to become part of the group.
3) Authenticity
If people purchase luxury goods to show off and to get a sense of belonging, wouldn’t a triple-A grade knock off work? The feeling that comes with owning something original is not the same as buying a knockoff. Buying authentic goods gives us a sense of accomplishment and pride that knock-offs do not.
4) Emotion
The object you purchased invokes an emotion, a memory and creates sentiment value. For example, the watch that you got with your first paycheck is worth much more to you than to anyone else. In the same way, a painting that depicts a time when there were no cameras, that moment in time is forever captured in the artwork and gives us a glimpse of the past.
When you look at that watch or the painting, it triggers an emotion or memory that you want to hold on to and that gives additional value to the object.
5) Scarcity
There is a sense of pride in being the exclusive person that holds a unique piece that no one else can get their hands on.
6) Representation
People resonate with the meaning and message behind the object; it reminds them of something they value and shows others who they are. This trait is best seen in industries such as fashion, where people choose clothes that represent their personality. For example, a functional person would choose clothes purely based on their comfort while a socialite would decide based on the event that person would be attending.
Conclusion
In summary, the same reasons why people buy NFTs are the same reasons people pay for luxury goods. A simple way to process this is by thinking of NFTs like luxury goods but these items are in the digital world, not physical.
We are increasingly using digital channels to interact and we need new ways to be able to represent ourselves. NFTs are like branded handbags and flashy cars we can use as a signal of our status in the digital world.
In the next article, I’ll be sharing how to identify undervalued NFTs and flip them for profit.
Disclaimer:
This is not financial advice. Any action you take is solely your own responsibility. Cryptocurrencies are extremely volatile, only invest with what you can afford to lose.