Why are some NFTs expensive? | Economy | DW

Non-fungible tokens – NFTs for short – don’t go off the tongue very well, but they are currently selling well. Bizarre and controversial digital assets are on the rise. Earlier this year, some NFTs auctions fetched millions of dollars. DW was also involved in the sale. She didn’t make particularly high waves. This makes the question even more pressing: What determines the success of an NFT?

In the name of art?

Let’s take a step back: NFTs can be used to prove ownership of digital files. These can be artwork, video game accessories, or even virtual real estate. The fact that the corresponding files are original is entered into the blockchain. This is why NFTs are mostly traded in cryptocurrencies and this is why NFTs also consume a lot of electricity.

Investment bank JPMorgan Chase estimates that the global NFT market is worth €6.3 billion. The Economist’s NFT experiment raised the equivalent of $420,000 to the news magazine in October. The Economist has auctioned off the cover of an issue about cryptocurrencies. It shows a drawing from the children’s book “Alice in Wonderland” titled “Down the Rabbit Hole”. Buyer @9x9x9 told The Economist it was the stock that drove him to buy it.

Taste, investment or manipulation?

But the reasons people pay so much for the rights to create a digital file vary. Crypto entrepreneur Vignesh Sundaresan spent $69 million on NFT for artist Beeple earlier this year. It is the highest amount ever paid for a digital artwork with an NFT stamp.

DW NFT Auction

It was then suspected that Sundarsan, a fan of NFT, who had also invested in the technology, drove up prices with the purchase. He denied it, and it was about supporting the artist and flaunting technology.

For other buyers, scarcity is a key argument. “The buyer knows how many copies will be produced and has proof of blockchain ownership,” Mark Cuban, American billionaire NFT collector, told Business Insider.

What does the data say

Researchers at the state-owned Alan Turing Institute (ATI) in England wanted to know what the data had to say about the phenomenon. “We have found that the success of NFTs is very heterogeneous,” Andrea Baroncelli, associate professor of mathematics at University College London and a blockchain researcher at the Alan Turing Institute, told DW. “Some – very few – are very successful, others sell well and the majority are worthless.”

In a study conducted this year, ATI’s team of experts examined the role of three factors in NFT pricing: NFT’s visual characteristics, past and related NFT sales, and the social network of buyers and sellers.

Using a machine learning model, the researchers examined a data set of 4.7 million NFTs that were exchanged by more than 500,000 buyers and sellers. The result? Previous sales of related NFTs were the most important of these three factors, accounting for more than 50 percent of the price discrepancy.

For example, past sales of NFTs from the so-called “Cryptopunks” group bode well for future sales of NFTs from the same group.

screenshot |  NFT's Cryptopunks by Larva Labs

Stable Sales: Cryptopunks Enjoy Constant Demand

Visual features were the second most important aspect, making up 20 percent of pricing. The popularity of dealers in social networks accounted for ten percent.

Plans for the future include examining other factors, including the platform on which NFTs are sold and the artist’s activity on social media.

A touch of the classic art market

The rarity, social networks and often the content of an artwork determine the value of an object in the traditional art market. Mauro Martino, director of the Visual Artificial Intelligence Lab at IBM Research and co-author of the ATI study, says NFTs have some characteristics that set them apart from their real-world counterparts.

“A big difference between the art market and NFTs is that artists take 10-20% of secondary sales,” he told DW. “Every time a work is resold, a portion of the proceeds goes back to the artist. This is truly a first in the art world and can be a great opportunity for artists.”

This is possible because all future sales of NFTs are recorded on the blockchain, allowing artists to receive their share automatically.

JPEG image of a rock

Anyone who has already made a lot of money using NFT will benefit from these factors. But what about the many businesses that bring in hardly anything?

“Every day there are 10,000 new items for sale,” says Martino. “There aren’t 10,000 new buyers every day to maintain this amazing production.”

For the NFT market to stabilize, it will need to gain more public attention to attract traditional investors. In addition, there is only limited knowledge of cryptocurrencies. According to experts, it will likely be years before enough people will recognize it. In the meantime, there are still some surprises.

“If we assume that the enthusiasm for NFTs today is very similar to the enthusiasm for cryptocurrencies when they started, we can also expect a larger correction,” says Baroncelli of University College London. The effects of the correction are different on a non-fungible asset, for example, on a redeemable asset like Bitcoin, which can be redeemed at will.

“If I had Bitcoin and it went down 40 percent, I would still have 60 percent,” Baroncelli said. “Now if I have a JPEG from a rock, what happens to the value of a JPEG? We don’t know because there is nothing to compare.”

The article is adapted from the English language.

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