How to Assess the Value of NFT
The crypto market is constantly integrating new innovations and developments. Ever since NFTs made their entrance into the DeFi market, and especially since their mainstream introduction last year, people can’t stop talking about this new digital asset. Even big brands like Nike and Microsoft have started developing their own NFTs.
NFTs run the entire spectrum in terms of market valuation. Amitabh Bachchan’s latest NFT collection of autographed collectibles and posters were sold at a spiking high value of $1 million, and no one can forget that one of Beeple’s pieces sold for $69 million at Christie’s auction house.. However, with the market flooding with NFTs, just as some will be worth millions, others are hardly worth anything at all.
So how does the market evaluate NFTs, and what makes some more valuable than others?
Factors that influence the value of NFTs
NFTs (also known as non-fungible tokens) are unique assets, in that they give immutable ownership rights to their owners. In the case of other assets, buyers can get an estimate of the value from the sale value of similar assets. However, NFTs are unique assets, so it can be difficult to assess their value. Moreover, NFT values are based on demand and perception. For example, an NFT artwork may be rare and priceless today, but after a month it may lose its value.
In this article, we have outlined a few benchmarks that will help you determine the value of NFTs. So, let’s review some benchmarks that will help you determine the value of NFTs, so you can determine whether or not it’s a good investment.
The value of an NFT is directly related to the demand or the scarcity of the asset. The rarer the asset, the higher the price. Works by famous artists, NFT products created in collaboration with renowned celebrities, and rare video games can fetch millions of dollars. For example, Beeple’s “Everdays: The First 5000 Days” is a collection of 5,000 rare pieces by Beeple, and was sold at $69.3 million. In 2021, Beeple unveiled his latest work “HUMAN ONE” which fetched him a handsome sum of $28.9 million.
Utility is one of the key parameters in evaluating the value of an NFT. The utility determines the use factor of an NFT, like how it can be used in the DeFi world. Gaming collectibles, virtual lands, game characters, game assets, etc., have an immediate value. The value depends on how popular the game is. Demand for video games is on a rise and the market is booming as players are ready to invest hundreds of dollars for a gaming asset. Axie Infinity and CryptoKitties top the list of NFT games. There is also a high value for NFTs that provide value in the outside world, such as tickets to events, festivals, and concerts. Audiences are ready to pay top dollar to get a front-row seat or lifetime passes to these events.
NFTs have a tangible value and are often tied to real-world objects. Tangibility is related to both short-term and long-term NFT assets. When someone buys an NFT ticket to an exclusive event, they get personal satisfaction. The ticket has an expiry date and its intrinsic value is short-lived or short-term. Similarly, if someone buys an NFT tied to a real estate asset, its intrinsic value can be exploited for a long duration.
One of the determinant factors is the liquidity value of an NFT. The higher the liquidity, the higher the NFT value. DeFi assets that have high liquidity demonstrate high value in blockchain networks. High trading volumes contribute to the liquidity value of an asset and decrease the risk of holding NFTs. For example, if an NFT is traded numerous times and maintains a value, then it demonstrates a steady or increasing value rather than a decreasing value. NFTs that are built on the Ethereum blockchain aid frictionless trading in different platforms across the DeFi markets.
5. Speculation and future value
Speculation is one of the driving factors in determining the future value of NFT assets. Future returns are the royalties or interests earned by owners on the subsequent sale of their NFT assets. Future value also depends on the supply of NFTs and their scarcity. For example, the price of CryptoKitty #18 NFT in 2017 jumped from 9 ETH to 253 ETH within a short span of 3 days. This is a classic example of human speculation.
6. History of ownership
In some cases, an NFT’s value may depend on the ownership history of the asset. Sometimes, if the previous owners of an asset were influential people and celebrities, it may directly impact the market value of the asset. The resale value of these assets may be quite high. Ownership records are easily available in the NFT markets.
Though NFTs are still at their nascent stage, we cannot ignore their endless possibilities. The value of NFT depends largely on its rarity, real-world applications, and human perception. But if you want to invest in NFTs, it is diligent to perform your own research. If you are unsure about an NFTs intrinsic value, consider the above factors before you make your purchase.