NFT valuation: How NFTs create value in the marketplace?
One of the confusing questions about NFT is why it costs millions of Dollars. What makes them so valuable? If you’re thinking the same thing, and you want to know how NFTs create value? keep reading to find out why and how.
How NFTs Create value?
According to blockchain experts, the growth in the value of bitcoins, together with the coronavirus pandemic, fueled the NFT mania. The craze for NFTs shot up in the mid-2020s among investors as big wigs worldwide started investing and endorsing them.
Although NFTs rose to popularity, the common public still wonders whether NFTs are really worth their time and investment. Some of the concerns people have regarding NFT valuation are – Does their value in the marketplace increase? How non-fungible token valuation is done?
So let’s address these issues and check what parameters influence their value.
Although intangible, NFT is a digital asset that follows the age-old supply and demand law.
As the demand for specific NFT increases, their value also increases. Moreover, endorsements from well-known brands such as Coca-Cola, Nike, and Lamborghini also boost NFT’s value.
Other factors that make NFTs go up in value are:
While this is not a comprehensive list, one can look at these aspects to assess if an NFT can increase in value or not.
Scarcity is the condition created while converting a digital file to an NFT. As NFT guarantees authenticity, there will never be another NFT that challenges it which adds up as a positive factor for its value.
In contrast to traditional assets, such as the stock market, which depreciate due to a company’s external and internal environment and inflationary pressures, NFT assets do not depreciate.
Apart from scarcity, an NFT’s valuation depends on speculation and rarity. Like stocks, NFTs are highly speculative, and any negative or positive comment on them can depreciate or appreciate their value.
NFTs have the ability to increase in value due to speculation and scarcity. Consequently, reselling the asset could result in a much higher resale value than the original purchase, depending on what buyers believe the asset is worth.
For example, in 2017, the popular CryptoPunks series was initially priced between $1 and $34. Since then, the series has become more scarce and popular. They are now being auctioned for tens of thousands to millions of dollars.
Rarity and desirability are the other two aspects that drive the NFT value. Both these factors are linked to each other. The rarer an NFT is, the higher the desire to possess it.
NFTs valuation: What gives NFT value
One of the fundamental questions concerning NFT is its valuation. After all, NFT is intangible at its best. Therefore, one wonders, what gives NFT value? Or how are nfts valuable?
Upon investigating the characteristics of NFT and its rise, it can be concluded that there is no single parameter that determines an NFT’s value. Instead, numerous things affect the value of an NFT.
Here are some key factors that help evaluate the longevity and value of an NFT:
- History: The origin or history of any particular thing or item is one of the valuable aspects that people love. Something is charming about owning the first edition of something, no matter what it is.
For instance, physical collectibles, such as Pokemon cards, are frequently valued based on their print date. Furthermore, the original edition also shows that the cards are from the set’s first print run, which raises their worth.
Another example, CryptoPunks are highly valued because they were one of the first NFTs established on Ethereum. They were also the first NFTs to be used as profile pictures, which has now become its own subcategory of NFTs.
A recent example of history in action is Sam Bankman-Fried’s first-ever NFT, a crudely drawn “test” in MS Paint. This painting sold for $270,000 because people wanted to possess a piece of history.
- Story: Stories are essential to human existence because they give meaning to the routine existence of life. This holds true in the case of NFT too. In fact, stories surrounding any work or product can influence its value to a great extent.
Beeple’s Everyday: The First 5,000 Days is one great example of being the first NFT with a fantastic backstory. These NFTs that can captivate the audience with their stories are likely to appreciate value.
- Utility: The utility of NFTs is nothing but actual application in the real and virtual world. A digital asset with no utility has no use case and thus will have poor demand. In short, utility forms the core of any asset.
NFTs with high utility provide immediate value that may grow over time. In fact, it depends on how popular the underlying project is and how much traction it gains.
The utility can be found in Play-to-Earn NFTs such as Axie Infinity and others, where NFTs play an essential role as in-game assets with distinct attributes from which NFTs generate value. Because gaming NFTs are now the most useful, the value of NFTs will expand inside the gaming ecosystem as new communities of gamers form.
Another thing to examine is the usability of NFTs in the real world. Some NFTs can be used to swap for real-world prizes, but others, for example, can be used to gain entry to events. For example, the Lewis Capaldi NFT Collection allows users to earn exclusive incentives such as tickets to a studio session, live show, and authentic products with each Mystery Box collection.
NFTs are also used as collateral for loans by some people. When NFTs are used as collateral, they are rendered inaccessible until the loan borrower repays the loan plus the agreed-upon interest. The NFT will be returned to the borrower once the debt is repaid.
Furthermore, NFT staking is also becoming more popular as an added-value feature. Users that stake a project’s native NFT are rewarded with in-game tokens that can be used to unlock premium content.
- Potential: An NFT’s potential defines how much room it has for development based on rarity and community size. Furthermore, you can calculate an NFT’s growth potential by considering its relative supply and demand.
For instance, NFTs with long-term community support may become more valuable as the project is more likely to sustain or acquire traction over time. This may raise demand and make the NFTs more uncommon and precious.
Star Wars is an excellent example of long-term community attention, as the popular series has been engaging and developing its fan base for almost 40 years.
Thus, users should consider an NFT’s attractiveness in terms of its ability to garner long-term community attention.
- Provenance: The provenance of the NFT is linked to its origins. This can entail researching the NFT creator’s origin, their popularity, the NFT’s backstory, etc. The more well-known the creator, the more likely their works will be considered valuable on the market.
Thus, users can evaluate a creator’s potential for personal improvement by looking at their creative pages and community followings.
- Rarity: Rarity, or uniqueness, is a crucial characteristic of NFTs. In general, the value of in-demand NFTs is higher. Some NFTs are the work of well-known artists. Others are real-world assets that have been tokenized.
However, all these NFTs are one-of-a-kind, irrespective of their ownership. The supply and demand laws and the rule of scarcity state that rare NFTs –
- Create high demand
- Attract more customers
- Sell for more excellent prices
Note: There are third-party services such as rarity. tools that can help assess the rare factor of an NFT.
These platforms calculate the rarity of the NFT by evaluating NFT’s trading volume, popularity, and numerous owners.
- Liquidity: NFTs, like any other asset type, have a liquidity premium. People are willing to spend extra if the asset provides efficient access.
This is evident in the case of NFTs, as collections made on Ethereum are often valued greater than those built on Bitcoin. Ethereum’s ERC standard smart contracts make buying and selling more easier. Similarly, NFTs on Solana are gaining popularity due to the network’s scalability and inexpensive fees.
NFT buyers also prefer to purchase NFTs on a higher volume exchange, another indicator of a collection’s liquidity. In short, the more volume traded, the more buyers are interested, and the more volume increases.
Community size: Any asset with a great community plays an essential role in influencing many prospective users and buyers in the open market. The greater the community, the more positive word-of-mouth an NFT receives.
For example, Bored Ape, a popular NFT collection, has an extensive and active community that helps introduce the project to a larger audience. Users may readily determine the extent of a project’s community by visiting its official social network pages by looking at the subscriber count.
Note: The number of distinct wallets that participated in the NFT market daily, weekly, or monthly is another aspect to keep track of. This is a good predictor of total market demand.
- Personal taste/ aesthetic: Apart from objective parameters, one must also consider their individual preferences before delving into purchasing. It is very much possible that a user will like an NFT for various mundane reasons such as:
- Outward appearance and aesthetics
- Personal connection
- Relevance of the NFT’s application
- Relationship with the NFT project
These are a few factors that influence an NFT’s personal value for its collector. Also, a collector may ask for a higher price for an NFT simply because they place a high value on the asset.
These are some of the factors that help evaluate NFTs. However, it must be noted that there is no hard and fast rule to decide how nfts create value. It is difficult to anticipate their future quantitatively. Creators and traders must research, analyze, and be up to date with things concerning NFTs before making the purchase.
Although NFTs can and do attract profit-seeking speculators, users should carefully balance extrinsic considerations such as an NFT’s utility or rarity with internal factors such as whether they value the Non-fungible taken personally. The worth of such tokens varies according to the beholder. Even NFTs with minimal secondary market value can be invaluable to the proper owner.
Whether you wish to learn about NFT, Blockchain, Web3.0, Metaverse, or other emerging technologies, we have the vital resources that will enlighten and help you make an informed decision.
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