One of the trends in crypto is the NFT, or Non Fungible Token. We see astronomical prices passing by, but also large price drops. This, of course, raises the question of whether an NFT has any value. If so, how should the value of a Non Fungible Token be determined? We explain it using 7 criteria when determining the value of NFTs.
There is much speculation about the value of an NFT. Sometimes record yields make the global news. At other times we see huge price drops.
This leads critics, including Bill Gates, to argue that the value of an NFT is based on the greater fool theory. In other words, there is no actual value. Buyers are only buying in the hope that they will find a ‘greater fool’ who will be willing to pay more for it later. However, this is too short-sighted. There are indeed criteria you can use to estimate the value of an NFT. We list the 7 criteria.
Scarcity determines the value of the NFT
The first criterion is obvious. The scarcer an NFT is, the more valuable it is. Therefore, it is important to make sure that an NFT comes with an unconditional proof of ownership. This way you can be sure that you are the only owner and that your purchase is scarce.
In addition, of course, it is also important who is causing the scarcity. An unknown artist will probably get less money for a unique work than a world famous NFT artist.
Yet we saw from the dramatic auction of Twitter founder Jack Dorsey’s first Tweet that scarcity alone does not guarantee high returns.
What is the NFT Utility?
A digital image can of course be beautiful in its own right, but if the token can be applied in a real application it offers added value.
For example, you can think of Decentraland-NFTs. Here the token refers to the ownership of a virtual piece of land. Also, of course, an NFT ownership token of precious metals has the value of the underlying metal anyway.
How tangible is your Non Fungible token?
The tokens are of course virtual, but can create additional value for the owner if they are connected to a tangible aspect.
For example, you can think of a token that gives the owner access to a festival in addition to a work of art. In doing so, an annual right of entry to a popular event often adds more value than a one-time entry.
An example of this is Bored Ape Yacht Club. Members of this virtual club can buy exclusive access to events where they can meet world leaders and celebrities for hefty sums of money. Thus, the owner of an NFT can buy access to a network that is normally not easily accessible to them. Of course, attendance at such an event is also a status symbol.
An NFT becomes more valuable through interoperability
By interoperability, we mean that an NFT can be used for multiple applications. Suppose you buy a Token for a unique skin. Then it is worth more when you can wear that skin in multiple games, than when it is only suitable for one game.
NFTs like this are rare. This is because each game has its own developer and developments are still in their infancy. Thus, in the future, experts expect collaborations between developers and also interoperability between different titles from one game producer.
Social proof for proof of value
Since NFTs are virtual, it is important for value that an organization/project/person behind an NFT has built a good reputation on social media. The larger the group of interested people, the more likely multiple interested people will want to buy your NFT at a high price in the future.
Of course, this also offers the possibility to get in as an early investor for relatively low prices and speculate on a ‘discovery’, but this is very specialized as the market is still at the beginning of its development and trends are difficult to predict.
Who was the previous owner?
Also within NFTs, the status of the previous owner is an important factor of the valuation. You can compare this to a soccer jersey. A shirt of your favorite soccer club can be bought for a reasonable amount in any fan shop.
If, however, that shirt has been worn by a famous player and bears his signature, it suddenly becomes worth many times that amount. So heritage also plays an important role in the world of NFT. Of course the question of the young market also plays a role here. Who will be the most valuable previous owner in the future? To stay with soccer shirts for a moment, a signed and worn shirt of Marco van Basten is worth more than that of Wilbert Suvrijn, yet they were both in the selection that became European champion in 1988.
What is the trading volume in a type of NFTs?
Again, how popular the organization behind an NFT is is important. If there is very high trading volume in a particular collection of NFTs this gives investors the reassurance that there are many interested parties if they want to sell. This feeling gets even better if it turns out that those users are not tied to one particular marketplace.
Of course, despite all these handles, there remains a speculative element to trading NFTs. We saw this earlier with the example of the NFT from Jack Dorsey’s tweet. Therefore, it is interesting to see how experts expect the market to develop. Here we paid attention earlier. What will the NFT 2.0 be?
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