NFT Valuation: Definition, Importance & Factors to Value NFTs
Non-fungible tokens (NFTs) have recently emerged as a hot topic in cryptocurrency and digital art. For a quick reminder, NFTs are unique digital assets that utilize blockchain technology for fungibility. They can be anything, from digital artwork and collectibles to virtual estate and music rights. Understanding how NFT value is calculated is critical to discovering its potential and what each piece can offer its users.
This article is our take on NFT valuation. We will define this process, list all the factors taken into consideration when predicting the prices of NFTs, and take a closer look at the methodologies the community utilizes to do it. Our goal is to make this concept more understandable, which would lead to even higher interest in NFTs. They can offer much more than many skeptics think.
What is NFT Valuation?
To explain the definition of NFT valuation, we should ask another question: Why do NFTs require determining their value in the first place? The answer is simple. It’s due to the non-typical nature of these digital assets. At first, they were perceived as expensive images that couldn’t be used for anything more than showoffs on social media. However, with NFT financialization, including lending, rentals, and fractionalization, each part plays a more significant role in decentralized finance (DeFi). They also provide numerous benefits to their owners, even temporary ones.
Using any asset for different types of money-related activities means they need to have a price. With NFTs, it’s difficult because each piece is a limited-edition, one-of-a-kind item. Thus, NFT valuation refers to the process of establishing the worth of each non-fungible token. It uses various factors and methods to forecast the value of each NFT for the potential user. To effectively evaluate NFTs, multiple factors should be considered and applied. We will discuss them below, so read on.
Factors to Consider for NFT Valuation
Many variables can influence the price of NFTs. Depending on the token, some will be more essential in the valuation process, and others will be optional or less important. So let’s take a closer look.
NFTs are often ranked by scarcity. The ones that are considered to be rare can command higher prices because of how limited traits are distributed. The harder it becomes to gain ownership of a specific asset, the higher the cost of some pieces. This factor can be crucial for celebrity-issued tokens or unique artworks.
The utility factor shows what functional uses a token presents. For example, its value increases if it can provide virtual spaces, access, or be used in games.
One example of utility can be seen with the project Hedgies by the exchange, dYdX! Those with a hedgie “will receive a one-tier increase in $DYDX fee tier discount on the dYdX protocol. This incentives community, branding and engagement on their platform.
Tangibility means that the NFT has an actual connection to a real-world item. If it can offer some type of ownership, it makes them more expensive. Tokens with such traits are outstanding for trading because they represent another object that, in the eyes of the buyer or seller.
If a digital asset can be used in more than one place, the community will perceive it as more valuable. For example, an item that can be used in multiple games is an NFT that will definitely increase in price. Developers engaged in NFT-related projects put a lot of effort into making networks and partnerships that would boost the interoperability of non-fungible tokens. This will definitely influence their value in the long run.
Liquidity equals higher potential when it comes to trading and other DeFi transactions. From the beginning, NFTs were challenging assets to sell. Thus, the easier it gets, the more value a token presents. Several factors can influence NFT liquidity. For example, if its utility is high, it will sell faster than other assets. The same goes for branding or value appreciation, for example, when the NFT is promoted by someone famous.
Speaking of celebrities, NFTs can become more expensive when owned or issued by someone recognizable. This is especially true when you look at a project like Bored Ape Yacht Club (BAYC). However, it doesn’t have to be a single person. Established brands with influential power are also considered a remarkable entry in the NFT’s ownership history. Also, companies with a strong value proposition behind their NFT collection are appreciated by users interested in digital assets. That directly corresponds to the NFT value.
The social media buzz around NFTs proved to be one of the essential factors when estimating their value. The pieces broadly discussed and presented on Instagram, Twitter, or even LinkedIn often gain instant popularity, and their prices level up. This factor comes from a sociological mechanism where people look up to others to decide whether they should do something. So when they see many users talk about a specific NFT, they feel like it’s a good reason to buy it.
Like any asset, digital or not, NFTs are prone to price speculations. Global events, changes in charts, new information about projects behind NFTs, or even a single Tweet can skyrocket the price of a specific piece. The community observes and analyzes multiple indicators that might give away what value some NFTs will have. Then, they make decisions based on their predictions. There is no possible way to eliminate this factor, so it’s better to consider it when doing transactions with non-fungible tokens.
NFT Market Conditions
Blockchain is still a pretty new area online, although it’s had its moments of hype and decay. NFTs are a novel concept to most people, and the environment is constantly changing. New projects are created, ideas to raise NFTs liquidity are thrown around, and users verify what works and what doesn’t. This rapidly evolving ecosystem not only attracts new potential buyers but also can have an enormous impact on prices.
Methods to Value NFTs
There are several approaches to NFT pricing that are applicable depending on the current situation of the token and multiple potential variables. Community members often inspire their price research with traditional valuation methods, starting with exit price, market price, and asset value. If it’s a new asset that didn’t participate in any transactions yet, the user must estimate how much it would cost based on different datasets. These are some of the models used for that:
The asset approach estimates the price of an NFT by calculating the worth of all base assets that are included in it minus the obligations they are under.
On the other hand, the market approach values a single token based on similar available assets. Its main drawback is that it assumes that similar assets would be sold for a comparable price, which is different regarding NFTs. Especially in the case of Blue Chip NFT collections like CryptoPunks or Bored Ape Yacht Club, where the costs of some images can escalate based on various factors while other pieces are less expensive.
When information on similar transactions is unavailable, or the liquidity of the NFT is not high enough to rely on prices, the cost approach method can be used to estimate how much money would be required to buy an NFT. Using this approach, the user tries to predict how much it would take to produce or replace a particular asset.
Discounted Cash Flow Model
Another method, the discounted cash flow model, estimates the value of an asset by forecasting its future cash flow. Its primary purpose is to predict how big a return on the investment the next owner will get.
NFT Valuation Challenges
There are several difficulties to be aware of when performing NFT valuation and engaging in NFT transactions. Here’s what you should remember:
- NFT pricing is still a guessing game. Some pieces will not have a few factors to consider, making the estimations less reliable. Others could be easier to predict, but since the NFT market changes dynamically, a single event can increase or decrease the price in a blink.
- NFTs are digital assets that can be sold and bought in numerous ways. One must always figure out what currency to use in an NFT transaction. Some platforms require specific crypto coins, and others can operate on fiat money. That means there might be several steps needed to finalize the purchase.
- Valuation requires a lot of time and effort put into market observation and being updated with community-related events. In addition, reputation rapidly evolves, and ordinary users have zero control over that. That can lead to market fluctuations that can be risky for potential investors.
- The demand for NFTs had ups and downs in recent months. Some newly issued pieces gain momentum, but then their value drops immediately, which means they become almost useless for buyers who want further transactions.
- NFTs are still in their growth state as a part of the broad online space. That means changes, verifications, and failures will happen until the ecosystem is stabilized. Unfortunately, that also makes the NFT valuation procedure more complicated.
- Fraud within NFT projects happen, which harms newcomers’ trust and reputation. It’s not about the reliability of blockchains but about fake transactions and scams involving non-fungible tokens. Furthermore, the number of new “users” can influence the prices of NFTs, and bad players sometimes take advantage leading to distrust.
The remedy to most of these challenges is time. The world of NFTs is shaping every week, and many problems have been solved. Developers and NFT enthusiasts are working hard to fix issues that can drive away potential users. In addition, they want to establish best practices that will guide owners and buyers to get the best deals on NFTs and gain various benefits from these transactions.
NFT pricing is quite a challenging topic. However, we hope this article provided suitable answers to most of them, as one of the freshest concepts within the digital space. Fortunately, NFTs’ valuation has already evolved a lot. As a result, there are ways to short to long on their valuations and earn returns on the NFTPerp platform. To learn more about it, check out our discord.
NFT valuation guides are the next step toward a bright future for non-fungible tokens. Knowing what can influence the price of assets and how to estimate the potential returns on investments is essential to be an aware, successful NFT market participant. Thus, it’s crucial for the broader adaptation of NFTs within the blockchain community and online space.