NFT enthusiasts and detractors alike have always wondered what determines the value of an NFT.
When an NFT artist puts their digital media for sale on OpenSea, how do they determine the price of their own creation?
On top of that, how can you be sure that you’re purchasing an NFT at the right price and not overspending on something you might not be able to trade later?
A common misconception made by NFT enthusiasts is that any NFT can sell for any price, and that there are no rules influencing the value NFTs. However, if that were the case, anyone selling an NFT would already be a millionaire.
So, how can we accurately assess the value NFTs before purchasing it?
Let’s find out what are the concepts that set the value of an NFT:
Ownership history is an important factor in determining the value of an NFT. An NFT with high ownership history value was created by a celebrity, an influencer, or a famous artist. This is why NFTs created by Beeple, which have been some of the highest ever sold, sell for millions. On the other hand, an NFT owned by your average Joe might not sell as easy or highly-priced as one by a renowned artist. This is because an NFT might see an increase in value if an artist or celebrity owned it, especially if this famous artist or celebrity will become more prominent in the coming years.
Scarcity is one of the main factors that drive up the rarity of any product. Thanks to scarcity, art paintings fetch such high prices, and it’s also thanks to scarcity that brands like Supreme can thrive in the hype beast market.
Scarcity is as crucial for NFTs for paintings and luxury brands, perhaps even more. That’s because NFTs are digital goods, which tend to be appraised differently than physical objects as these are.
As explained in another of our articles, there are two types of scarcity:
- Absolute scarcity is the X number of NFTs available in a project. If the project only ever produces 10,000 NFTs, then there won’t be an extra 100 NFTs after all the original 10,000 have sold out. This scarcity increases the value of the original 10,000.
- Relative scarcity determines the amount of NFTs in a given collection with similar characteristics. NFT projects tend to feature NFTs with traits. For example, the CryptoPunks project features punks with eyes, but only a specific number of punks will have green eyes.
There can only be one actual owner of one particular NFT. An NFT collection, like Bored Ape Yacht Club, might be able to drop a finite number of NFTs with similar traits, but no two apes are precisely the same as another, so there’s only one of them. Only one person can have this particular NFT at a given time.
The less available an NFT is, the more likely people will pay for it.
However, in practice, that should mean everyone dropping a collection of any NFT should be a crypto millionaire by now. Since we know that’s not the case, how does a scarce NFT increase price?
Some NFT properties can imply a higher value due to functionality. MekaVerse, for example, features NFTs that can be used as avatars in the Metaverse. The NFT’s value will increase if its functionality also increases.
Other NFTs have functionality beyond the visual, such as NFT access tickets to Coachella or Decentraland real estate.
These utilities make them far more valuable than a simple digital illustration, which ties into the following factor of making an NFT valuable.
Tangibility is the concept of tying an NFT with a real-world value, which makes them a more secure investment as they have utility outside of the digital world.
An NFT with tangible value is better used for short-term investments than longer ones, as, for example, an NFT ticket to a convention will most likely have a date of expiration.
Is the NFT part of a specific niche, for example, the NBA? If it’s part of a niche or a community, it’ll be easier to market and sell to the members of that community and fans of it. For example, Jack Dorsey’s first tweet is a particularly rare NFT. There’s only one first tweet in existence, and it has already been sold as an NFT. Niche is a big play on a famous person with an important ownership history. For example, an NFT of a collectible card signed by Tiger Woods might not be as valuable to someone who doesn’t know Tiger Woods.
The state of the market
Another factor to take into account is the current state of the market. The value of an NFT is highly influenced by what the market would bear, as the reason people purchase and sell NFTs is to have someone eventually buy it from them for more than what they paid.
There’s a reason that a specific type of NFTs, such as those involving apes, sold like hot cakes for a time. The market evolves as people’s interests evolve, and what sold on arrival during one point of history might struggle to make sales at a later point.
There are art collectors out there who collect NFTs for the sole purpose of art, but many NFT traders are there to profit.
The utility of a digital asset is another significant factor in valuing the price of an NFT. It might be an oft-repeated joke on the world of NFTs, but a JPEG of a rock won’t exactly fetch the same price as a lifetime pass to Coachella would.
Some NFTs have a higher and more diverse utility than others, which translates even into the physical world.
The highest publicized NFTs have been visual art, video, and music NFTs, many of which have created sold for millions of dollars.
Here’s a brief overview of the utility of each type of NFT and how that can be used to determine its value:
Visual art NFTs
Visual NFTs have the advantage of being used as a way to showcase ownership or as profile pictures. You might have seen influencers on Twitter, and Instagram using an NFT of their own as a profile picture. Others can use them as background images, video call backgrounds, and items that can be sold in online digital galleries.
Visual NFTs are also some of the easiest to be used as collectibles. Trading cards, such as those sold by Autograph.io, are an example of collectible visual art NFTs. Other types of NFTs such as music and video are also collectible by nature, but it’s easier to showcase ownership of a profile picture of a monkey than an artist’s song.
Gaming NFTs, such as items you obtain in The Sandbox or Decentraland, have the utility of providing bonuses in-game besides being an NFT within the Metaverse. Weapons, outfits, and even special characters sold in in-game marketplaces make sales easier to execute and thus more valuable to the players of those games. On the other hand, a person who doesn’t actively play the game where this NFT resides won’t find it as useful, though they might still be interested in collecting it just for the sake of future profit.
A music NFT works like a certificate of ownership of any kind of musical file, such as songs or even podcast episodes. Because they can be used for personal entertainment or bragging rights, musical NFTs might seem more valuable to some than static illustration NFTs. On top of that, music NFTs tend to provide fans a direct relationship with an artist without the need to involve middlemen such as a music-streaming service.
Similar to music NFTs, as music and video tend to go hand in hand, video NFTs have the added functionality of being playable and easier to use for entertainment purposes.
The liquidity of an NFT tends to be directly correlated to its value. When an NFT has a high trading volume, it makes it easier to be traded later and thus increases chances to make profit. NFTs that are made on ETH tend to be more mainstream and can be quickly sold even in secondary markets. Therefore, the easier it is to liquidate the NFT, the more valuable it is. If no one wants to purchase an NFT, it’ll be almost impossible to liquidate it and sell it for the price set by the seller.
Many believe that NFTs fetch value randomly, but the truth is that there are a certain amount of market rules that can increase or decrease the perceived value of an NFT.
Understanding how functionality, rarity, utility, and scarcity make the NFT valuable or not will make it easier to grasp how to value an NFT upon closer inspection.
Find out more about NFTs by reading our other articles here.