Whenever one wants to assess the value of an NFT, they need to consider looking at different factors including utility, ownership, social proof, and rarity. For now, there is no defined rule book on how users can assess a nonfungible token (NFT) valuation.

The metrics you decide to use in the evaluation of private firms or conventional investment vehicles like shares are just not applicable to the NFTs. Normally, the payment that is rolled out by the last buyer offers some indication of the value. But for the NFTs, it is challenging to determine or guess what the next buyer might pay, subject to their estimates.

Thus, understanding the valuation matrix is believed to be quite important. A majority of the buyers do not have the skills to determine the actual value of NFTs logically and base most of their quotes on guesswork.

On the other hand, even the sellers find it quite hard to determine what they may end up receiving for the tokens that they hold. After some time, the value of these NFTs is underpinned by a perception over which both the sellers and buyers may lack any control over the market prices.

An example can help in explaining this point better. An artwork nonfungible token might seem to be in huge demand for a specific time, with the possible buyers assuming that it is the rate and expecting to derive value in the short term. Then, suddenly, they might discover that digital image is readily and freely available on the Internet. In such a case, there might be no buyers left for the NFT.

Factors That Determine The Value Of NFTs

Artwork NFTs of popular artists or tokens that are associated with some tangible assets of repute may have defined values. In a majority of these cases, nonetheless, the investors and traders find it quite hard to determine what an NFT is worth.

Rarity

The demand for an NFT is directly proportional to its seeming scarcity. But, how can you tell how rare an NFT is? The unique artworks from renowned illustrators may make a perfect example of rare NFTs as will the tokens that are minted by top-grade celebrities.

Some of the rare game items can also call for this category successfully. In that context, the rarity factor introduces lots of intrinsic value to these NFTs.

An immutable proof of ownership offers the holder of the NFT some sense of distinction and value. Jack Dorsey’s first NFT and Everyday’s The First 5000 Days by Beeple are good examples of NFTs that come with a rarity element.

Utility

For determining how to evaluate the NFT projects, utility comes up as a major parameter. To hold value, NFT has to have a utility in a real application. For example, NFTs can be used for tokenizing precious metals, real estate, and in some cases securities; to represent virtual game assets or land and in many other ways.

The world of nonfungible tokens is still at a budding stage and as it continues to mature, new innovations and use cases are expected to emerge in the future. Immediately after minting, an NFT attracts value from its inherent characteristics.

After some time, the value increases subject to the utility and community strength of the underlying project. The Decentraland NFTs that refer to virtual land plots in the project is a perfect example of these tokens.

Close up of an NFT marketplace

Tangibility

The nonfungible tokens that are linked with real-world objects attract an element of tangibility. Clubbed with significant ownership and immutability on the blockchain, it develops an instant value in its tangibility. In most cases, NFTs can be effectively used to underline the ownership rights and then eliminate the incidents of fraudulent activities.

The real use case of NFTs in the project where they are involved has a bearing on their value. NFTs that hold tangible value is the ideal fit for near-term and long-term trading. Some of the nonfungible tokens, like the tickets, may have expiry dates. On the flip side, others like those that represent real estate can cultivate a lot of value over time.

Interoperability

A major factor in the NFT value proposition is its interoperability; which is the ability to use the token in multiple applications. For example, in case the same weapon can be used in various games, there is a higher likelihood that the token will accrue lots of value rapidly. How the NFTs work on various blockchains is always going to make transactions simple.

It is quite challenging to realize interoperability, nonetheless, since the developers must build a massive network of applications on which the tokens can be used. A set of attractive and interactive use cases help in infusing interoperability of the NFT. Another functional strategy that the developers may follow is to develop partnerships with multiple projects to bring a lot of benefits to the people that own their tokens.

Social Proof

The social proof that is associated with the project behind an NFT is among the decisive factors that determine the NFT’s value at any given time. Reviewing their profiles on social media platforms like Instagram and Twitter can help a person in gauging their acceptability. In case the numbers lie low, it shows that they have not yet managed to create a solid ground for themselves.

Whenever you are encountering a person or project for the first time, there is always a natural tendency to take cues from the people who are working around the project. Social proof shows what people, generally, think about a project and enables investors to make informed decisions.

NFT non fungible token

Ownership History

The identity of the issuer and the past owners of an NFT has a bearing on its value. Most of the tokens that are created by eminent persons or corporate brands benefit from a high ownership history value. You can readily boost the nonfungible token value proposition by working in tandem with the people or enterprises that have strong brand value for issuing the NFTs.

Reselling NFTs in the past held by influential individuals is another way to gain traction. Sellers and marketplaces can help the buyers find information about the past owners of NFTs by offering a simple tracking interface. Highlighting these addresses of investors that took home a decent amount from NFT trading will enable the buyers to gain some valuable insights.

Liquidity Premium

Nonfungible tokens that have high liquidity carry higher value too. The secondary markets offer a venue to trade BSC or ERC standard NFTs in a seamless manner, instantly offering access to the buyers. In most cases, the traders prefer to invest in NFT categories that have a high trading volume as more liquidity helps them take their profits easily.

A highly liquid NFT might easily retain its value even if the associated platform is closed. Token economics insist on increasing engagement and eventually, liquidity helps in propelling the NFT value proposition upwards.

An in-built system that depreciates NFTs on being idle for long and encourages competitive assets can help in the creation of a robust market. As the nonfungible token market grows, systems come in place to support the liquidity of assets.

Speculation

There are times when speculation becomes the main catalyst behind price appreciation. For example, the price of CryptoKitty #18 surged from 9 ETH to 253 ETH within three days in December 2017. While one line of thought critically opposes speculation as one of the forces pushing valuation, speculating comes naturally to humans and cannot be eliminated practically.

Even in the conventional financial system, instruments like derivatives are based mainly on speculation. In that light, speculation becoming a non-trivial component of the NFT ecosystem is not a surprise. The price-performance charts of NFT items, changes in the assets lying underneath of projects, and even the events beyond your direct control can increase speculation and push the NFT prices higher.

NFT, Non-funglible token

Constant Change In The NFT Ecosystem

NFTs are a budding ecosystem that is undergoing continuous evolution. Different factors that influence the value of NFTs are also changing rapidly. Hence, to augment accuracy you need to take all these factors into account.

Furthermore, value is majorly a subjective concept, although one may say that the discussion is about intrinsic value. In this case, resolving how you determine future NFT value becomes highly challenging. Since NFTs are an asset class that has endless possibilities, it is safe to assume that their versatility will constantly grow and lucrative opportunities will become available in different sub-categories.

The number of use cases of NFTs has been growing rapidly. Today, NFTs can be used on applications like ticket distributions to guarantee voting rights. While exploring an NFT value estimator, you just have to be mindful that all the things that shine are not diamonds.

Therefore, always be patient and consider a wide array of factors while getting to a decision. At a time when all types of NFT marketplaces are cropping up, from the all-inclusive platforms like OpenSea to the niches like Real Nifty, doing due diligence and making informed decisions become highly important.

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