The Psychology Behind NFTs: Why We Spend Millions On JPEGs

By Tereza Bízková

Whether you go down the non-fungible token (NFT) rabbit hole on Reddit or open a thread under a tweet posted by a new proud Bored Ape holder, there’s one question you’ll often come across: “Why would anyone buy an NFT when you can right-click & save the image?”

While initially sparking heated discussions, it’s now used almost ironically within the NFT community. That’s because those JPEGs are actually selling for millions of dollars, and they reached an impressive trading volume of $17.6 billion in 2021.

But it’s true that in the past, the ownership of digital goods didn’t really make much sense. If everything online was abundant and ubiquitous, why bother to pay, much less collect something? Well, NFTs have changed that. Their ownership and validity can be directly tracked and verified from the moment the data gets uploaded to a blockchain ledger.

NFTs make the internet ownable, meaning we can finally draw the line between using and owning a digital asset. This creates major money-making opportunities, but there are also interesting psychological dynamics suggesting that our attraction to NFTs goes way beyond their monetary value.

Scarcity draws us in

We could buy the precise replica of our favorite painting, but would it feel as special as hanging the original in our living room? Hardly. As humans, we simply love the concept of genuine authenticity and scarcity.

According to Mark Cuban, NFTs tick these boxes well. “The buyer knows how many will be made and has blockchain proof of ownership.”

When it comes to our collector instincts, rarer means better. The most sought-after NFTs are the most difficult to get. Interestingly, psychology claims that the hunt – the process of searching and trying to acquire the item – releases more dopamine than the ownership itself. It’s the apparent unattainability that our minds find both attractive and challenging at the same time.

We chase social status

In October last year, CryptoPunk #6046 shocked the world by declining an offer to sell the NFT for 2500 ETH (roughly $9.5 million at that time). Even though this could have been “the largest-ever on-chain NFT sale in USD,” the owner said the punk had become his social media identity and helped them build a successful brand in the space. 

With holders like Jay-Z, Steve Aoki, or Serena Williams, the iconic pixelated characters have built a strong reputation. So much so that having one as a profile picture screams, “I’m someone relevant in the space.”

We want to feel unique – and owning a rare item can help us achieve that. Spending money to enhance our social status is something very human. However, what’s interesting is that while it may have been a Ferrari or a Prada handbag in the past, our status symbols shift now that we increasingly start to inhabit digital worlds.

Gary Vaynerchuk is convinced NFTs will play precisely this role in the future. “We’re talking about social currency; no different than what car you drive, where you live, what clothes you wear,” he says. And the more we can show off our unique digital assets in virtual spaces, the more we value them – a reason why Twitter implemented the profile picture NFT verification.

Community plays a key role

Science suggests that the primary motivating factor for many collectors – consciously or subconsciously – is to enhance their network of friends. This goes true for NFTs, too, as token ownership comes with a deep social motivation.

Connection and engagement are at the heart of many NFT projects. Through exclusive communities, holders can interact with people with similar values and unlock Zoom links, invitations to private chatrooms, and even real-life events.

These relationships are designed to be long-lasting. NFTs don’t represent a mere one-way transaction between a business and a customer, where the exchange ends once a good is traded for money. Usually, they tend to have well-thought-out roadmaps sprinkled with interaction incentives with rewards and ranking systems.

Decentralized autonomous organizations (DAOs) are also a strong psychological magnet. As holders of the NFTs or governance tokens, we can gain voting rights and become much more integrated within the project.

We want to live unique experiences

Ownership implies capabilities, and as owners, we can do something others can’t. Be it a party in Decentraland or a chat with Tom Brady, NFTs lure us with utilities and unique experiences we wouldn’t be able to obtain elsewhere.

One great example is Untamed Elephants, the first mission-driven project in the NFT space. As part of their utility package, one of the NFT holders was invited to visit Sri Lanka for two weeks and see the elephant sanctuary the project supports, with most costs covered.

It’s also worth noting that who we are is inherently formed by the experiences we live. In digital worlds, an NFT can become a tiny fraction of our identity – a digital memory – that we can keep in our wallets forever.

NFTs tap into our sense of purpose

Without the need for a middleman, NFTs encourage new levels of fandom. They allow us to directly support the causes or creators we care about, stay involved over long periods of time, and even get rewarded for believing in them in the first place.

Gary Vaynerchuk shares a great example. “Imagine if Nirvana came out today and said: Hey, for our earliest fans, we are going to give 20% of royalties in perpetuity if you buy this token for $2000 because we don’t want to sign with this label and lose our rights.” This way, we could be listening to Smells Like Teen Spirit, retired and happy we supported a band we loved, even “before it was cool”.

Purpose feeds our sense of self-importance, making us feel that what we’re doing matters. This is a match made in heaven for many social impact and sustainability projects. Since NFTs live on the blockchain forever, if we contribute to saving a species, for example, it’s something that we could be showing to our grandchildren one day.

Chris Dixon noted that ads monetize attention while NFTs monetize enthusiasm. This could be why 68.4% of NFT holders say they possess emotional attachment to their tokens instead of saying, “no, it’s just an investment.” It’s the projects that manage to strike our psychological cords that will be most successful and not die out with their short-lived hype.