When it comes to investing in NFTs (Non-Fungible Tokens), understanding the value of an NFT and the factors that influence its value is critical. In this blog post, we’ll assess the important factors that contribute to an NFT’s value, so you can make an informed decision before purchase.
NFTs have exploded in popularity since last year, and they are expected to set new records in 2022. OpenSea, one of the largest NFT marketplaces, reached a monthly volume of $5 billion in January. LooksRare, a new NFT marketplace, has experienced million-dollar transactions in its first month of operation.
However, the important challenge is how to determine the value of an NFT. Is the bid price appropriate for the sort of NFT you’re purchasing? What are the considerations to consider before purchasing an NFT? We understand that you must have these queries as you read all the NFT-related news. Don’t worry, we’ve answered all of your questions in the following section of the blog, so keep reading!
How To Analyse the Value of NFT
Why is it difficult to ascertain an NFT’s precise value? Because this asset class is relatively new. While tangible treasures such as the Mona Lisa painting and physical collectibles such as NBA player cards have a definite value, investors may have to grind their teeth to determine whether the NFT they are going to purchase is worth the price and whether they require it.
However, given the rapid and consistent spread of NFTs into multiple industries in a few years and their high valuations, there are a few key elements to consider when determining their worth.
What Determines the Value of An NFT?
1. Rarity
The rarity of the particular NFT is determined by this element. The first-of-its-kind artwork from a variety of well-known illustrators in the digital art sector is a fantastic example of a rare NFT. This class of NFT also occasionally includes NFTs produced by certain celebrities. The impact an NFT will have, such as in the case of video games, is another aspect that contributes to its scarcity.
This group includes unusual game goods that are also NFTs. The inherent worth of these NFTs is often what draws people to them. The blockchain evidence of ownership is held by the NFT’s owner. This establishes the premium worth of those NFTs and makes them stand out. Examples of NFTs with excessive prices due to their rarity include Everyday’s The First 5000 Days by Beeple and CryptoKitties.
2. Utility
The utility of any NFT depends on its potential applications. Tickets and game assets are two main types of NFTs that have a lot of utility value. For instance, Coachella has begun offering lifetime passes to its event as NFTs, which come with additional benefits such as access to the. tickets to every concert, front row seats at the 2022 festival, etc.
One illustration of this kind of NFT is the formidable and uncommon Crypto Space Commander battleship that sold for $45,250 in 2019. Using an NFT for various purposes is another method to assess its value. In a different game, the same battleship would undoubtedly have a higher value. But this interoperability in the gaming industry is still a long way off.
Because of this, developers must first create huge ecosystems for the games and develop compelling applications. This is the path that Dapper Labs and Engin have already begun to take. A collaboration with other companies that offer benefits to NFT holders is another approach to improve the value of the NFT.
3. Liquidity
The value of an NFT increases with its liquidity. The primary reason why a token created on-chain should be more valuable than off-chain assets is liquidity. Because high liquidity lowers the danger of owning the NFTs, investors usually choose to invest in NFTs with high trading volumes. NFTs created using the ERC standard are simple to trade on a variety of sites without a lot of friction, and they can be purchased by anyone who holds Ether (ETH).
The worth of these NFTs is greatly increased by this. The value of NFTs not based on Ethereum is sometimes reduced by a lack of liquidity. According to professionals, businesses need to create token economies that, in turn, encourage users to interact more with their NFTs and trade them, hence increasing liquidity.
4. Future Value
The future worth of the NFT is determined by two variables: its future cash flow and its valuation. While speculation is occasionally the primary factor in valuation, it can also be the main catalyst for price increases. For instance, the price of CryptoKitty #18 increased from 9 ETH to 253 ETH in just three days in December 2017.
The notion that the price of NFTs is entirely determined by value is generally accepted by experts, but it is in our nature to accept the fact that this is the case. The reality that speculation is also a component of the existing financial system. The valuation is primarily influenced by speculation and the shortage of supply. Including the price-performance graphs of the NFT products is a fantastic method to direct your conjecture.
The royalties made by the NFT’s original owner or interest might be the source of future income. When a piece of art is resold on the secondary market, SuperRare allows the NFT maker to collect a 3% royalty. To generate more cash flow, NFTs are sometimes rented out and used as collateral. This is a typical scenario in game NFTs, in which one user needs a rare NFT in order to accomplish a specific goal, thereby raising the value of that NFT.
5. History of Ownership
The value of an NFT might occasionally be determined by the identity of the issuer and the prior owners of that NFT. The majority of NFTs with significant ownership history value are created by well-known artists or businesses with a strong brand presence. The initial permitted NFT depicting a Formula 1 vehicle, for instance, fetched $113,124. Further Reading: How Can I Make and Sell an NFT?
In Conclusion
Intrinsic value is governed by a number of market regulations, whereas value in general is subjective. The regulations governing NFTs are established by the aforementioned five criteria. The issuer of the NFT is the only factor upon which these elements rely. The limitless potential that NFTs provide is clearly demonstrated by their versatility. NFTs are, without a doubt, more than simply artifacts or digital representations of things.
In the physical world application, NFTs may be used for almost anything, from verifying plane tickets and voting rights to preventing item theft. You can bid on NFTs on well-known NFT marketplaces like OpenSea, where you may also assess their characteristics. However, it is always advised that you conduct your own study prior to making any NFT purchases. Before making a purchase, assess the NFT’s ownership history, the protocol it’s based on, its rarity, utility, future value, and liquidity.
