It won’t be an exaggeration to say that the crypto market ever stands still. There are always new developments taking place. New types of assets constantly pop up. While it all started with Bitcoin, today more than 9000 cryptos are circulating in the industry. Cryptos are not the only asset that has been the talk of every household, another major crypto-asset making its round to every technical and financial discussion is non-fungible tokens or NFTs.
NFTs have blown up since last year and have been creating records for themselves in 2022 as well. Did you know the monthly volume of OpenSea, one of the largest NFT marketplaces, crossed $5 billion in January itself? LooksRare, a new NFT marketplace has seen million dollar transactions within the first month of its existence. Big corporate giants like Adidas, Nike, Tech Mahindra, Microsoft, Disney, etc all have dipped their feet into the ocean of NFTs. Every day a new project pops up and launches its own NFT which sells for millions.
However, the main question here is how to assess the value of an NFT? Is the bid price reasonable for the type of NFT you are buying? What factors to look up while buying any NFT? We understand you must have these questions while you come across all the NFT related news. Don’t worry, we have got all your questions answered in the next section of the blog, so keep reading!
Let’s understand the factors that drive the value of an NFT project.
Additional Read: What are Non-Fungible Tokens
It is difficult to determine the precise value of an NFT, why? Because this asset class is quite new. While there is a defined value for tangible collectibles such as the Mona Lisa painting or physical collectibles like NBA player cards, investors might have to grind their teeth while deciding whether the NFT they are about to buy is worth the price and whether they need it.
However, looking at the fast and steady growth of NFTs into several industries within a few years and reaching high levels of valuation, there are a few main factors that one must consider while gauging their worth.
This factor translates into how rare or scarce the specific NFT is. Great examples of rare NFTs are the first-of-its-kind artwork from various famous illustrators in the digital art industry. NFTs created by certain celebrities also sometimes make their way into this category of NFT. Another factor that drives the rarity of an NFT is the effect it shall provide, for example in the case of video games. Rare game items that are also NFTs make into this category.
People usually find themselves attracted to these NFTs because of the intrinsic value it holds. The owner of the NFT holds the blockchain proof of ownership. This gives those NFTs a sense of distinction and determines their premium value. Examples of NFTs that are priced high because of their rarity are CryptoKitties and Everyday’s-The First 5000 Days by Beeple.
The utility value of any NFT is dependent on how that NFT can be used. Two major categories of NFTs have high utility value and these are tickets and game assets. For example, Coachella has started to sell lifetime passes to its event in the form of NFTs which also include other perks like getting the front row in the 2022 festival, tickets to every concert, etc. Another example of such an NFT is a powerful and rare Crypto Space Commander battleship that was sold for $45,250 in 2019. Another way to determine the utility of an NFT is the use of the same in different applications. Imagine using the same battleship in a different game, the value would definitely increase.
However, this interoperability in the gaming world is still far away. This reason being developers must first build massive ecosystems for the games and come up with attractive use cases. Engin and Dapper Labs have already started their work in this direction. Another way to increase the utility of the NFT is via a partnership with other businesses that provide advantages to the people who hold those NFTs.
Higher the liquidity, the higher the value of an NFT. Liquidity is the main reason why a token built on-chain should have a higher value than off-chain assets. Investors always prefer to invest in those NFTs that have high trading volumes because high liquidity reduces the risk of holding the NFTs. NFTs built on the ERC standard can be easily traded on various platforms without much friction and can be bought by potential buyers holding Ether (ETH). This significantly increases the value of those NFTs. NFTs that are not built on Ethereum often suffer a lack of liquidity and the value gets discounted for those NFTs. Experts believe that companies must come up with token economics which in turn encourages the users to increase the engagement with their NFTa and trade them thereby increasing the liquidity.
The future value of the NFT is a product of two factors future cash flow and valuation. Although speculation is the main driver of valuation sometimes it also acts as the main driver behind price appreciation. For example, in December 2017 the price of CryptoKitty #18 jumped from 9ETH to 253 ETH within 3 days. Few experts argue that price movement solely driven by valuation is negative for NFTs but that’s how human nature is and we cannot deny the fact that speculation is also a part of the current financial system. The scarcity of supply and speculation are two main driving forces behind the valuation.
A great way to guide your speculation is by including the price-performance charts of the NFT items. Future cash flow can be interest or the royalties earned by the original owner of the NFT. SuperRare lets its NFT creators receive 3% royalty every time the artwork is resold on the secondary market. NFTs are often leased and collateralized to create additional cash flow. Game NFTs often fall into this category where a fellow user requires a rare NFT to create a certain mission which in turn increases the value of that NFT.
In certain cases, the value of an NFT depends on the identity of the issuer and the previous stakeholders of that NFT. NFTs that have high ownership history value are often the work of famous artists or companies that have a strong brand presence. For example, the first authorized NFT representing a Formula 1 care was sold for $113,124.
Additional Read: How to create an NFT & Sell it?
Value at large is a matter of personal perception, however intrinsic value does obey several market rules. In the case of NFTs, the rules are locked in the above five points discussed. These factors in themselves depend on the issuer of the NFT. The versatility that NFTs bring with them clearly highlights the endless possibilities that can be explored. NFTs are clearly more than just collectibles or digital representations of an object. In the physical world application, NFTs can be used for basically everything and anything starting from voting rights and plane ticket verification to stamping objects from getting stolen.
There are some famous NFT marketplaces like OpenSea, where you can gauge the attributes associated with an NFT and bid a price for them. However, it is always recommended to do your own research before buying any NFT. Evaluate the rarity, utility, future value, liquidity of the protocol it is built on, and the ownership history of that NFT before making a purchase.
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Read more blogs on NFTs
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