The beauty of the crypto market is that it is always on the move and nothing ever stays still. The crypto market is dominated by cryptocurrencies such as Bitcoin and ETH but these aren’t the only things that are grabbing the attention of investors in the crypto space.
Non Fungible Tokens or NFTs are grabbing the attention of every investor and crypto enthusiast. Since last year, NFTs have blown up and they are creating new records for themselves in 2022.
The monthly volume of OpenSea crossed $5 billion in January this year and a new marketplace, LooksRare saw million-dollar transactions in its first month of inception. This shows how the NFTs are growing in popularity and the interesting investment opportunities they offer.
What are Non-Fungible Tokens?
Non Fungible Tokens or NFTs are one-of-a-kind digital assets that are stored on blockchains. These digital assets are unique and no two NFTs can ever be the same which means that establishing their proof of ownership on the blockchain becomes very easy.
The real and the virtual worlds are coming ever so close, and NFTs are going to play a big role in bridging the gap that remains. Any real-world or digital asset can be tethered to an NFT, thus we can now associate real-world items with digital environments.
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How to Assess the Value of an NFT?
We have seen NFTs being sold at outlandish prices in the recent past. We have also seen fairly similar NFTs not getting even close to those price points in bidding. The conundrum that most investors find themselves with is how to judge the real value of the token they are buying. Are there any indicators that can make the job easier?
The real answer is that there is no rule book on how to judge an NFT for its value. If you are judging the value of a private company or shares you can rely on various matrices. NFTs are a very new asset class and those matrices simply aren’t present for NFTs.
This is true for both buyers and sellers. Most buyers are using their instincts and relying on guesswork to ascertain the value of an NFT. And sellers too don’t know what money they will be making by selling the tokens that they currently hold.
Just like any other art form, the price of NFT depends a lot on perception over time. Neither the buyer nor the seller has any control over this market perception. But there still are a few factors that drive the value of an NFT and can help you make an educated guess of the real value of the NFT you are holding or intend to buy.
Factors That Impact The Value Of An NFT
- Utility: The utility of an NFT can be determined by its application in the physical and the digital world. The physical and the digital world are becoming ever so closer and the NFTs that can translate their value in both these worlds will be of higher value. NFTs are one-of-a-kind assets but that’s not all that gives them value. They can be used in games as clothing for characters or resources for building. They can be used as power-ups for characters or spells.
Without utility, an NFT has a very low demand, and a strong utility bags an NFT high upfront value which tends to accrue over time. Some NFTs can be used to exchange real-world prizes such as access tickets for a concert or a sporting event. Some NFTs can be used as collateral for loans. All these physical and digital world applications of a particular NFT give it a valuation that is different from other NFTs.
- Rarity: Everything that is rare is priceless not just in the physical world but also in the digital world and this applies to the world of NFTs as well. If an NFT is a first-of-its-kind or one-of-its-kind artwork from a famous illustrator in the digital world, then that NFT is bound to be more valuable. This is the reason why NFTs that are created by celebrities find themselves to be priced higher than those minded by other creators.
The law of supply and demand and the law of scarcity are also at play here. Rare NFTs which are in demand will often be craved by more buyers and thus will command a bigger valuation. Thus NFTs’ popularity, trading volume, and the number of owners all determine how rare the NFT is and thus its real value.
- Community Size: The price of the NFT is driven by exactly how many potential buyers and users it has on the open market. This is where the community size comes into the frame. The bigger the community size of the NFT project, the more people will be looking to buy it, and hence the value of the said NFT project will be higher.
A popular NFT collection like Bored Ape has such a large community that it helps the collection reach a wider audience, and connect with more potential buyers and this drives up the valuation. If an NFT is available on a secondary market and has low bidding or buyer activity, this means that the NFT is abundantly available and its value is low.
- Liquidity: A common rule of thumb is that the higher the liquidity the more the value of the NFT. This is one of the primary reasons why tokens built on-chain have a higher intrinsic value than the tokens built off-chain. Because high trading volumes reduce the risk of holding the NFTs, investors generally want to put their money in liquid NFTs. NFTs built on Ethereum generally fetch higher value because it is the world’s leading blockchain network. This gives higher liquidity to the NFTs.
- Future Value: Future cash flow and valuation are the two determining factors in the future value of an NFT. While speculation alone should not be a reason for you to invest in an NFT, even in the conventional financial system, instruments like derivatives are based on speculation. And thus speculation sometimes becomes the main driver of valuation and price appreciation. One of the best examples here is that of CryptoKitty #18 whose price jumped from 9ETH to 253ETH within three days.
Bottom Line
NFT indeed is a new asset class, and its prices and valuation are bound to fluctuate akin to the crypto space in general. Some factors still help us understand the intrinsic value of the NFTs we hold or want to buy. But never put on your blindfolds before investing your money in NFTs. Coingape brings you all the news and headlines from the NFT world to help you make the right decisions and find opportunities worth investing in this space.
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