Crypto space continues to experience fruitions that enable experts and content creators to bring new aspects into the market. Non-fungible tokens (NFT) have continued to attract the attention of investors in recent days. The rise of NTF sales around the globe has led to the expansion of business and career opportunities in various vocations. However, it is difficult for one to evaluate the value of NFT. The indicators that apply in evaluating the value of traditional investments, such as stocks, do not apply in NFT evaluation.
NFT definition
Knowing what an NFT is will be crucial to understanding its valuation process. An NFT is an asset in crypto that runs on a blockchain where each object collected gets a unique identifier. There is no possible way of copying the identifier, thus allowing a proprietor to own the item. Building NFTs follows the same process as creating cryptocurrency. One cannot change an NFT for money, and they do not have an option of changing one for another. For instance, fungible items such as money, Bitcoin, and Ether have value. One dollar is equivalent to another, while a Bitcoin is equivalent to the other, but each NFT has a different value from the other, thus making them non-fungible.
How do NFTs function?
Every token contains a particular area in the blockchain, enabling a proprietor’s unique ownership of an NFT since it cannot be removed or modified. Each token has a unique value whose main determinants are demand and the market. NFTs buying and selling is similar to the trade of art pieces. The uniqueness of the NFT data makes identification, verification, and transaction possible.
Value of NFT
In 2021, the non-fungible token (NFT) generated $17.6 billion in revenue. The amount is a clear indication that the NFT business is highly profitable. An investor must only look for lucrative tokens and be sure of promising returns.
Communities and purchasers feel that NFT is valuable, just like any other artwork and antiques. The personality of an NFT depends on the owner and its utilization in the market. Four main aspects weigh the value of an NFT: ownership history, utility, future value, and liquidity premium.
Valuing NFTs is crucial because each NFT is unique, and there is an attachment between the bearer and the NFT. The owners give legitimacy to the NFT and make it to be original. The database containing an NFT cannot be changed, thus ensuring the protection of smart contracts. Aspects such as liquidity, usefulness, distribution in the network, rarity, and anticipation, together with the buyer’s opinion, add value to NFTs.
NFTs’ valuation background
The worth of an NFT starts from the price paid by the previous owner. Projecting the price the subsequent purchaser can pay might be challenging because other factors kick in when projecting the price. Attributes such as the creator’s popularity, the quality of the art, the effort put towards production, the creator’s integrity, the artist’s social currency, and the narrative supporting the art play a role in valuation.
NFT is in the burgeoning stage, making it difficult to know the exact value of an NFT. The NFTs, which have a physical presence in the art industry, contain a price of 10% of the authentic item. In this case, the physical pieces of art like NBA player cards have an already established price making the investors on the same pieces in NFT need help to devote their money to the products. Although NFT designers determine the prices of their products, there is room for other collectors to assign a particular price using established platforms.
Methods of Valuing an NFT
A manual for determining the value of an NFT does not indicate that it is problematic to carry out the valuation. Here are some of the possible methods of valuation.
- Scarcity and irreplaceability of the NFT
The first way of determining the value of NFTs is by knowing their scarcity levels. The rarity of a piece of art or the celebrity who created the NFT helps to determine the right price for the product. Its effect on the environment, such as the video game sector, determines the premium price of the NFT. Scarce and irreplaceable NFTs attract more prices than easily found or replaceable ones.
- Utility
The usefulness of an NFT plays a role in determining its price in the market. An NFT that surpasses its core intention of implementation becomes highly valuable. For instance, items that can be used as avatars or in the background of a video game have a higher value. The rise of popularity of such NFTs is quicker over time. The higher number of participants in decentralized games will call for payment on the NFT utilization.
- Liquidity
It becomes difficult to convert an NFT into liquid cash because of several factors because NFTs are not liquid assets. The significant way of determining liquidity levels is through evaluating aspects like brand, past ownership, appreciation of value, and the piece’s utility.
- Level of appreciation
The history of an NFT gives collectors a better glimpse into its value. A value monitor put in place to look at the appreciation pattern of the NFT plays a significant role in determining how the NFT rises or falls in value. Every crypto enthusiast who wants to invest in NFTs must closely examine the history of the NFT by examining the trend exhibited by the blockchain.
Final remarks
NFT valuation can be challenging because most purchasers need the requisite abilities to determine the worthiness of NFTs, thus resulting in guesswork. It is important to note that the value of an NFT depends on its reputation, an aspect that needs proper control. In some cases, a particular piece might be valuable at a specific time, making the collectors think that its value is on the rise, just for the same piece to become accessible to the public after a period. Therefore, every investor in NFT must be ready to learn the ways of valuation and understand the trend of NFTs.