On What Basis is the Price of the NFT Decided
Price determination of the NFT is difficult since some characteristics are unique to individual buyers. Some investors looking at digital assets might have difficulty deciding whether a given collectible or asset is worth their money and whether they need it. If you have never dealt with NFTs, you might wonder who exactly sets the price. In this article, we will look at key elements that seem to play a role in determining the value of an NFT.
Table of Contents
How to Assess the Value of an NFT?
New assets constantly emerge, like altcoins, stablecoins, and other tokens. However, every few years, a new type of crypto asset can make a big splash in the market by triggering fast-rising valuations and the creation of several new use cases.
NFTs have proliferated in almost every sector of the decentralized industry as a bridge between the digital and real worlds. As the name suggests, NFTs are unique tokens that give their owners immutable ownership rights to certain assets.
As an asset class that can be attached to a piece of art, a pair of sneakers, or a video game collectible, Non-Fungible Tokens have become highly sought-after in the crypto market.
NFTs Valuation Matrix
There is no set rule on how to measure different NFT types. The metrics you use to evaluate private companies or traditional investment vehicles, like shares, don’t apply to NFTs. Usually, the payment that the last buyer makes gives some indication of the value. However, for NFTs, it is hard to predict what the next buyer might pay, depending on their estimates.
Most buyers lack the skills to logically determine the value of NFTs and base their quotes on guesswork. It isn’t easy even for sellers to determine what they can get for the tokens they hold. Over time, the value of NFTs is determined by a perception over which both the buyer and seller may have no control.
An example can make the situation even better. An NFT artwork may be in high demand for a certain amount of time, so potential buyers assume it’s rare and expects to receive value shortly. Then, all of a sudden, they may find that the digital image is available on the Internet for free, and there may be no buyers left for the NFT.
Fake NFT Websites
Experienced fraudsters can create fake NFT sites and marketplaces to trick you into compromising your account and wallet credentials. The replicated websites look so legitimate that even expert NFT owners cannot distinguish a counterfeit from a real webpage. How to avoid NFT scams:
- Look for a blue checkmark to be sure the seller is verified.
- Verify the URL of the Marketplace page then do your purchase.
Factors that Determine the Value of NFTs
Artwork NFTs of well-known artists or tokens associated with tangible assets of reputation may have defined values. However, it could be difficult for investors and traders to determine what an NFT is worth in most cases.
Demand for an NFT is proportional to its perceived scarcity. But how can you determine how rare and how “hard-to-get” a specific NFT is? Good examples of rarity are unique artworks from renowned illustrators in the digital arts industry or an NFT created by a celebrity or company. Another rarity factor is the effect like an NFT that would provide in a video game.
Thus, these cases lead to the fact that the ownership of the NFT gives the owner a sense of distinction and prestige. Consequently, this helps determine its value.
In the crypto industry, solid examples of the unique effect are the first CryptoKitties, Everydays – The First 5000 Days by Beeple, etc.
The utility comes from the actual application of an NFT, whether in the physical or digital world. For instance, some NFTs are collectibles since you can use them in games (Illuvium, Shiryo Inu, Age of Gods) like virtual terrains, spells, or avatars. These characteristics of NFTs give them immediate value, which matures over time depending on the underlying project’s popularity.
The community of a decentralized game’s players is increasing, so many will be eager to pay top dollar for a unique card.
Excellent examples of such tokens are Decentraland property, the Euro 2020 NFT Tickets, or collectible cards like Geralt of Rivia in The Witcher Universe Gwent Card Game.
Some NFTs are tied to real-world objects, which provide value in terms of tangibility, integrated with immutability and traceability of ownership. An NFT can back anything up to consolidate ownership rights. However, it doesn’t make the object unique or high-demand. Such an object has an underlying value that determines its scarcity, practicality, and the personal satisfaction it gives users.
In addition, there are NFTs with tangible value, which are more suitable for short-term trading in the marketplace. For example, items that expire over time, such as an event ticket. Other collectibles, such as a specific NFT limited edition clothing item, can accumulate value over time. This happens because the number of items in circulation decreases.
However, the third criteria are not a tool that allows us to make even a rough estimate of an NFT value. That’s why studies continue, and further research will be conducted. This is necessary to understand what factors can determine the success of an NFT and, therefore, its value.
Interoperability is the ability to use the tokens in different applications, and it’s a critical factor in the NFT value. For example, if the same weapon can be used in various games, it’s more likely that the token earns value. How NFTs work on different blockchains is always going to simplify transactions.
It’s challenging to realize interoperability, however, as developers must build a vast network of applications on which the tokens can be used. Attractive use cases help enhance the interactivess of NFTs. Another strategy developers could pursue is to develop partnerships with other projects that benefit the people who own their tokens.
One deciding factor determining the NFT’s value is the social proof associated with the project behind an NFT. Checking their profiles on social media platforms such as Instagram and Twitter can help one get an idea of their acceptability. If the numbers are low, it indicates that they haven’t yet been able to create a solid foundation for themselves.
When you first encounter a person or project, there is a natural tendency to take cues from those around the project. Social proof indicates what people think about a project and helps make decisions.
The identity of the previous NFT owners and issuer has a bearing on its value. Tokens created by reputable people or corporate entities benefit from a high ownership history value. It is possible to enhance the NFT value proposition by working closely with people or enterprises with substantial brand value to issue NFTs.
Another way to gain traction is to resell NFTs already held by influential people. Sellers and marketplaces could help buyers find information about previous NFT owners by providing a simple tracking interface. Highlighting the addresses of investors who took a good amount from NFT trading can help buyers gain valuable insights.
NFTs with high liquidity tend to carry higher value as well. The secondary markets provide a venue to trade ERC or BSC standard NFTs frictionlessly, immediately providing buyers access. Traders prefer to keep their money in NFT categories with a high trading volume as more liquidity helps them take their profits easily. A highly liquid NFT is more likely to retain its value even in case of the closure of the affiliate platform.
Token economics emphasizes increasing engagement; subsequently, liquidity will propel the NFT value proposition upwards. An underlying system that depreciates NFTs on being idle for a long and incentivizes competing assets can help to build a more substantial market. As the NFT market grows, systems will come in to support the liquidity of the asset.
Sometimes speculation becomes the catalyst behind price appreciation; for example, the price of CryptoKitty #18 fell from 9 ETH to 253 ETH in just three days in December 2017. While one line of thought seriously opposes speculation as one of the drivers of valuation, speculation comes naturally to humans and can’t be practically eliminated.
Even in the traditional financial system, instruments like derivatives are based on speculation. Thus, speculation becoming a non-trivial component of the NFT ecosystem comes as no surprise. Price performance charts of NFT items, changes in the assets lying under projects, and events beyond your direct control can fan speculation and drive up NFT prices.
How to Consider Value While Buying or Selling NFTs?
A highly speculative asset has its value depending on a variety of factors. When buying or selling NFTs, it’s essential to know how to approach the digital asset’s value from either end of the spectrum.
You should remember the points based on real-world assets, uniqueness, and utilization as a buyer. Additionally, you can determine whether your ROI will be worth the wait.
Another point to consider is whether selling or holding the asset might give you more profit, even before completing your purchase.
As a seller, you should consider the hype around the NFT and work to raise your overall profile. Creating general buzz can boost the value you need by promoting your NFTs, whether a Facebook post, a tweet, or a digital painting. Adding a digital signature or transferring ownership proof can also help drive the token’s value.
Whether buying or selling, considering all these factors and doing your market research helps you value your NFTs for maximum benefit.
Continual Change in the NFT Ecosystem
NFTs are an emerging ecosystem that is undergoing continual evolution. Various factors affecting the value of NFTs are rapidly evolving, and to increase accuracy, you should consider them all. Furthermore, value is broadly subjective, although you could argue that the discussion is about intrinsic value. In this case, it becomes even more challenging to determine the future value of an NFT.
NFTs are an asset class with endless possibilities; we can assume that their versatility will continue to grow, and lucrative opportunities will be available in various sub-categories. The number of use cases for NFTs has been growing rapidly. NFTs can now be used in applications like ticket distribution to ensure voting rights.
When searching for an NFT value estimator, you must remember that not all things that shine are diamonds. You should be patient and consider several factors while making a decision. When all kinds of NFT marketplaces are coming up, from all-inclusive platforms such as OpenSea to niches like Real Nifty, it becomes especially significant to do your due diligence and make an informed decision.
Thus, we have covered everything that can help evaluate the price of the NFT. For a quick understanding, let’s look at the key takeaways from this article one more time:
- The key factors to consider when assessing the intrinsic value of an NFT are rarity, utility, tangibility, interoperability, social proof, ownership history, liquidity, and speculation.
- The NFT value differs for short- or long-term holding, depending on the asset the NFT represents.
- NFTs create a lot of new ways for values to be made for asset owners and developers.
- Companies should design token economics that encourages users to trade to increase NFT liquidity and engagement.
To wrap up, the difficulty of pricing NFTs is often affected by their low transaction volume and price changes. Manipulated or otherwise, price fluctuations are common in the NFT market, contributing to the NFT’s liquidity.