Next Gen Investing

NFT trading volume hit $10.7 billion last quarter—here are 2 reasons why people are spending thousands on digital assets

Share
CryptoPunks — one of the most popular non-fungible tokens — displayed in Times Square on May 12, 2021.
Alexi Rosenfeld | Getty Images

NFT, or nonfungible token, trading volume surged in the third quarter of 2021 to $10.67 billion, a report by analytics platform DappRadar found. That's a 704% increase from the previous quarter.

August, in particular, fueled this growth. It was a record-breaking month, according to DappRadar, with over $5.2 billion in trading volume. Though things cooled off slightly in September, it still accounted for over $4 billion in trading volume.

This massive spike is the result of a number of factors, DappRadar found, which tie into two key reasons people are spending hundreds – and sometimes millions – on NFTs.

1. Belief in the tech

First and foremost, NFT investors see long-term value in them and believe they will appreciate over time.

NFTs are digital assets and can be anything online, such as art, collectibles and even memes. Certain projects are considered rare, like CryptoPunks, which was one of the first NFT projects. CryptoPunks are highly respected within the community and commonly sell for six or seven figures each.

Many investors are also bullish on the tech that surrounds NFTs and see a number of use cases for it.

NFTs are represented by code on a decentralized digital ledger called a blockchain. Each NFT can be bought and sold, just like a physical asset, but the blockchain allows for the ownership and validity of each to be tracked. The technology is extremely versatile and innovations are happening rapidly, which is exciting for investors in the space.

One example: NFTs have the potential to store, certify and document a number of different assets and data, beyond art.

"NFTs started with artwork that people use as their profile picture, but it could expand to a whole host of other items like passports, music, airline tickets and even houses and cars," Benyamin Ahmed, an NFT coder and developer, previously said.

A current lucrative use for NFTs is in-game items, in which users can buy things like skins or accessories to be used in blockchain-based video games. In the third quarter of 2021 alone, in-game items generated $2.3 billion in trading volume, DappRadar found. This represents 22% of the total NFT trading volume.

2. Social capital

Owning NFTs also offers a form of social status in the crypto community, just like a Rolex or a Lamborghini does in "real life," notable NFT collector Gmoney previously told CNBC Make It. Like most people in the crypto community, he is known only by his online alias and prefers to remain anonymous.

"When someone buys a Rolex in the real world, they don't spend the thousands of dollars because of the watch's utility value. A simple $5 watch could perform the same utility. It is to 'flex' their status," Gmoney said. "With an NFT, by posting it as my avatar on Twitter and Discord, I can quickly 'flex' with a picture."

This "flex" can give an investor access to and acceptance in the crypto community, which is "the single most valuable aspect of NFTs," Cooper Turley, a widely known crypto and NFT investor, previously said. "Without a community, NFTs have no value. My NFT investment thesis is based solely around the strength of an existing community, or the potential for one to emerge."

As the communities surrounding NFTs have grown, NFT projects are becoming more like brands, DappRadar points out. "Renowned celebrities like Snoop Dogg, Shaquille O'Neal and Steve Aoki are amongst the latest members to join exclusive communities, further strengthening the social outlook of the NFT space," the report said.

As Gmoney puts it, "wanting to be part of something and wanting to be part of a group is natural."

Sign up now: Get smarter about your money and career with our weekly newsletter

Don't miss: This NFT investor spent $170,000 on a CryptoPunk to 'flex' online—it's like 'wearing that Rolex in real life'

VIDEO6:0206:02
'Culture is currency' with NFTs: CoinShares' Demirors