NON-fungible tokens, or NFTs as they are more commonly known, are increasingly gaining attention from both ordinary people and investors alike. A not-insignificant reason is due to its attention-grabbing prices, with NFTs occasionally being sold for eye-watering amounts: at the time of writing, the priciest NFT ever sold was Winkelmann’s “EVERYDAYS: THE FIRST 5000 DAYS”, which fetched a colossal US$69.3mil (RM289mil) in auction at Christie’s auction house.
Nonetheless, prior to 2021, NFTs were hardly known, and it is arguable that many still do not understand what an NFT actually is.
In brief, an NFT is a unique token that exists on a blockchain, the underlying technology that drives most cryptocurrencies. The purpose of the token is to serve as a digital “certificate of ownership” of something – whether physical such as drawings, or virtual, such as a digital picture. Possession of an NFT therefore makes the item that the token corresponds to uniquely “yours”.
One common argument against NFTs is that they are inherently worthless, since possession of the NFT does not stop anyone from also having a copy of that item on their phone or computer.
However, a better way to understand why people would spend significant amounts to own an NFT is by looking at the Mona Lisa. Painted by the great Leonardo Da Vinci, the Mona Lisa is one of the most recognisable and valuable art pieces in the world, with an approximate value of US$670mil (RM2.8bil). It is doubtless that if it were to ever go on sale, many rich art enthusiasts would gladly pay its asking price to have the privilege of being its legal owner.
And yet, there is nothing stopping anyone from making a physical (or digital) copy of the Mona Lisa and hanging it up on their own wall. In fact, with modern technology, it is perhaps even possible to have a digital recreation of the famous painting that would be indistinguishable from the original just by looking at it. So why would anyone want to pay for the original Mona Lisa when you can just as easily have a digitally-recreated copy for much less (or free)?
I argue that the value of the Mona Lisa – and NFTs – is not so much economic as it is psychological. Psychological ownership, the feeling of possession over a target, is a theory first published in 2003 (Pierce et al, 2003). It suggests that there is a cognitive and emotional state that individuals attain when a target object is perceived as “theirs”, and is distinct from legal ownership.
A person can feel psychological ownership over an item, a concept, or an entity without legally possessing any rights to it. Yet, the lack of legal possession does nothing to diminish their sense of possession – of them having a stake in it. It explains why people may feel their particular office cubicle is “theirs” even when it’s office property, or why others may feel a product they designed at work is “their baby” even though it belongs to the company, which plans to market and sell it.
Viewed in this context, one begins to understand why art enthusiasts would pay top dollar to own the Mona Lisa (or NFTs), even if it doesn’t stop anyone else from enjoying copies of it on the walls of their homes (or on their phones).
The idea is not so much the possession of legal rights as it is the pursuit of a sense of psychological ownership – the mental and affective state that stems from the belief that something is “yours and yours alone”. And as can be seen by the prices people are willing to pay, this desire for a sense of psychological ownership can be a powerful driving force.
Is it actually worth the millions though? Like most economists would tell you, the value of an item is not inherent, but is largely dictated by what someone else is willing to pay for it. And in the case of NFTs, it appears that possession is indeed 9/10ths of the (mind’s) law of logic and value.