NFT Valuation: 8 Factors to Consider
NFT valuation is impossible and there is no rule book for valuing an NFT. The performance indicators we investors typically use to value company stocks or traditional investment products like gold, silver, etc. simply cannot be applied to NFTs. Typically, the last payment made by the NFT buyer provides an indication of value. However, with NFTs, it is difficult to estimate what the next buyer might pay, depending on the estimate.
Statistically determining the value of NFTs is therefore impossible and is all guesswork currently. And sellers will always find it difficult to determine the monetary value of the tokens they own. So, the value of NFTs is based on the perceptions over which both buyers and sellers may have no control.
So what factors determine the value of NFTs
Digital artwork NFTs from famous artists or tokens associated with reputable physical assets may have defined values. However, in most cases, investors and traders find it difficult to determine the value of an NFT.
The demand for an NFT is directly proportional to its perceived scarcity, but how can you determine NFT is rare? Unique artwork by renowned illustrators might be good examples of rare NFTs. Some rare game items may also fall in this category. The rarity factor adds a lot of intrinsic value to these NFTs.
An immutable proof of ownership gives the holder of the NFT a sense of distinction and consequently value. Everyday’s: The First 5000 Days by Beeple and Jack Dorsey’s first non-fungible token created out of his first-ever tweet are prime examples of NFTs with rarity factor.
To determine the value of NFT, utility turns out to be a key defining parameter. To carry a value, an NFT must have a real-world application. For example, NFTs could be used to tokenize real estate, precious metals, and even securities; to represent virtual land or gaming assets; and in many other ways.
Immediately after minting, an NFT derives value from its inherent properties. Over time, the value rises depending on the utility and community strength of the underlying project. A great example of such tokens are decentralized and NFTs that relate to virtual properties.
NFTs that are associated with real-world objects draw an element of tangibility. Along with the immutability of ownership on blockchains, it creates immediate value in terms of tangibility. NFTs can be used effectively to underscore property rights and eliminate instances of fraudulent activity. The practical use of NFTs in the projects in which they are involved affects their value.
NFTs with tangible value are perfect for short-term and long-term trading. Some NFTs, such as tickets, may have an expiration date, while others, such as those representing real estate, may increase in value over time.
Another factor that determines the value of NFT is usability, i.e., the ability to use the tokens in different applications. For example, if the same gaming component can be used in different games, there is more chance that the token’s value will grow. How the non-fungible tokens work on different blockchains will make transactions easier further.
However, it is impossible to check the interoperability because developers need to build a huge network of applications on which the tokens can be used. Another strategy developers could follow is to build partnerships with other projects to bring benefits to both NFT creators/sellers and buyers.
(5) Social value
The social value associated behind an NFT is one of the critical factor in determining its valuation. Checking their profiles on social media platforms like Facebook, Twitter, LinkedIn and Instagram can assist in estimating the value to some extent. If the numbers are low, it indicates that they don’t much value.
Social proof indicates what people in general think about something, which then helps to gauge its value. Since there is a natural human tendency to take inspiration from the people around them
(6) Ownership history
The identity of the NFT creator and previous owners also impacts its value. Tokens created by reputable individuals or companies (e.g. Jack Dorsey from Twitter) holds a high ownership value. You can increase the NFT value by partnering with individuals or companies with strong brand equity.
Reselling NFTs previously held by renowned individuals is another way to determine the value. But this is possible only when the details of previous owners are available on different NFT marketplaces. Highlighting the addresses of investors who sold an NFT trading at a great price helps build trust among the buyers and gain valuable insight.
(7) Liquidity Premium
NFTs with high liquidity also have higher value. Buyers and sellers invest money in NFT categories with high trading volume. And greater liquidity helps in easing the profit making. A highly liquid NFT is likely to retain its value even if the associated platform is closed. Bottom line is liquidity will drive up the value proposition of NFT.
There are times when speculation pushes NFT’s price up. For example, the price of CryptoKitty #18 sky rocketed from 9 ETH to 253 ETH in a matter of three days in December 2017. Humans naturally behave differently to speculations.
Even in the conventional financial system, instruments like derivatives are based on speculation. With this in mind, it is no surprise that speculation is becoming a non-trivial part of the NFT ecosystem. Price-performance charts of NFT items, changes in the assets underlying projects, and even events beyond your direct control can fuel speculation and drive up the prices of NFTs.
The Ever Evolving NFT ecosystem
NFTs are currently in a nascent but constantly evolving stage. Various factors affecting the value of NFTs are evolving rapidly, and to increase accuracy, traders need to consider them all. In addition, value is by and large a subjective concept, although you may argue that the discussion revolves around intrinsic value. In this scenario, solving how you determine future NFT value becomes even more difficult.
Since NFTs are an asset class with infinite possibilities, experts expect their versatility to grow steadily and lucrative opportunities to become available in various subcategories. The number of use cases for NFTs has grown rapidly. Now NFTs can be used in applications such as ticket distribution to secure voting rights.
When researching and determining NFT value proposition, remember that, not everything that glitters is gold. So be patient and consider a whole host of factors when making a decision. At a time when all kinds of NFT marketplaces are emerging, it becomes especially important to do your due diligence and make an informed decision before buying an NFT.
Perfect example when value of NFT may plummet
The value of Jack Dorsey’s NFT created on his first tweet nose-dived 99% within a year. It’s value went down from $2.9 million to $280 in April’22 and interestingly the bid value was $48million.
Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].