Consider many aspects for determining the worth of an NFT, including ownership, utility, rarity, and social proof.
Recognize the matrix of valuing
There is no manual for valuing NFTs. The metrics used to evaluate private companies or traditional investment vehicles such as stocks do not apply to NFTs. Typically, the amount made by the previous buyer provides some indication of the worth. However, for NFTs, it’s difficult to predict what the next buyer will pay based on their estimates.
The majority of purchasers lack the abilities necessary to determine the worth of NFTs logically and therefore base their quotations on guessing. For sellers as well, it’s difficult to predict what they’ll receive in exchange for their tokens. Over time, the value of NFTs is determined by a notion that neither buyers nor sellers have control over.
An illustration can help drive the point home even more effectively. For a period of time, an artwork NFT may be in high demand, with potential buyers assuming it is uncommon and expecting to derive value in the near future. Then, out of nowhere, they may learn that the digital image is freely available on the Internet, leaving no purchasers for the NFT.
The variables that affect the value of NFTs
NFTs of renowned artists or tokens connected with prestigious tangible objects may have defined values. However, investors and traders frequently struggle to estimate the value of an NFT.
Rarity
Demand for an NFT is directly proportional to its perceived scarcity, but how do you determine an NFT’s perceived scarcity? Unique artworks by renowned illustrators, as well as tokens minted by high-profile celebrities, may qualify as rare NFTs. Certain uncommon gaming items may also qualify for this category. These NFTs have a high intrinsic value due to their rarity.
An unchangeable proof of ownership instils a sense of distinctiveness and, hence, worth in the holder of the NFT. Every day’s The First 5000 Days by Beeple and Jack Dorsey’s inaugural NFT are excellent instances of NFTs featuring a rare component.
Utility
Utility emerges as a critical element in determining how to evaluate NFT projects. To be valuable, an NFT must have utility in a real-world application. For example, NFTs might be used to tokenize real estate, precious metals, and even stocks; they could also be used to represent virtual land or gaming assets, among other things. The field of NFTs is still in its infancy, and as it evolves, more inventive use cases are certain to arise.
An NFT derives value immediately after minting from its inherent qualities. Value accumulates throughout time based on the utility and community strength of the underlying project. Decentraland NFTs, which are used to refer to the project’s virtual land plots, are a perfect example of such tokens.
Tangibility
NFTs coupled with physical objects impart a tangibility. When combined with the immutability of ownership on blockchains, it generates an immediate value in tangibility. NFTs can be used efficiently to establish ownership rights and eliminate cases of fraud. The practical application of NFTs in the projects in which they are used determines their worth.
NFTs with tangible value are ideal for both short- and long-term trading. While some NFTs, such as tickets, have an expiration date, others, such as those representing real estate, might accrue additional value over time.
Interoperability
Interoperability, or the ability to utilize the tokens in a variety of applications, is a critical component of the NFT value proposition. For instance, if the same weapon may be used in multiple games, the token’s worth is increased. The way nonfungible tokens operate on different blockchains will always simplify transactions.
However, interoperability is difficult to achieve because developers must create a broad network of applications on which the tokens can be used. A collection of compelling use cases contributes to the NFT’s interoperability. Another technique that developers could employ is to form collaborations with other projects in order to benefit token holders.
Social evidence
The social proof linked with an NFT’s project is a critical aspect in determining the NFT’s value. Examining their social media presence on platforms such as Twitter and Instagram might assist in determining their acceptability. If the numbers are modest, it implies they have not yet established a foothold.
When meeting someone or a project for the first time, there is a natural propensity to pick up on indications from those surrounding the project. Social proof reveals what the general public thinks about a project and aids in decision-making.
Histories of ownership
The issuer and prior owners of an NFT have an effect on its value. Tokens established by prominent individuals or corporate entities have a high value because to their ownership history. You can boost the NFT value proposition by partnering with individuals or businesses who have a strong brand reputation for issuing the NFTs.
Another strategy is to resell NFTs formerly held by important individuals. By providing a simple tracking interface, marketplaces and sellers can assist purchasers in locating information about former owners of NFTs. Buyers will obtain vital insight by highlighting the addresses of investors that profited handsomely from NFT trading.
Premium for liquidity
Additionally, NFTs with a high liquidity level have a higher value. Secondary markets provide a frictionless environment for the trading of ERC or BSC standard NFTs, granting rapid access to buyers. Traders like to invest in NFT categories with a high trading volume since the increased liquidity enables them to earn easily. A highly liquid NFT is likely to preserve its value even if the platform on which it is based is shut down.
Increased involvement and, consequently, liquidity will drive the NFT value proposition upwards, according to token economics. A built-in system that depreciates NFTs after extended periods of inactivity and promotes competing assets can contribute to the development of a vibrant market. As the NFT market matures, technologies to support asset liquidity will be implemented.
Speculation
There are times when speculation acts as a stimulus for price appreciation. For example, in December 2017, the price of CryptoKitty #18 jumped from 9 ETH to 253 ETH in just three days. While one school of thinking is critical of speculation as a driver of valuation, speculating is a natural human trait that cannot be effectively removed.
Even in the conventional financial system, speculative products such as derivatives exist. In light of this, speculation’s ascent to prominence as a non-trivial component of the NFT ecosystem is unsurprising. Charts of the price performance of NFT items, changes in the underlying assets of projects, and even events outside your direct control can stoke speculation and push the price of NFTs.
The NFT ecology is always changing.
NFTs are a developing ecology that is always evolving. Numerous factors affecting the value of NFTs are continually evolving, and in order to maximize accuracy, you must account for them all. Additionally, value is a subjective concept in general, even if one may argue that the conversation is about intrinsic value. In this case, determining the future NFT value becomes even more difficult.
As NFTs are an asset class with virtually limitless potential, we can fairly predict that their adaptability will continue to expand and that attractive opportunities will exist in a variety of sub-categories. The number of applications for NFTs has been rapidly increasing. Now, NFTs can be utilized to ensure voting rights in applications such as ticket distribution.
While examining an NFT value estimator, keep in mind that not everything that shines is a diamond. Therefore, exercise patience and consider a wide variety of aspects when making a decision. At a time when a slew of new NFT marketplaces are emerging, ranging from all-encompassing platforms like OpenSea to niche players like Real Nifty, conducting due diligence and making an informed decision becomes even more critical.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.
