How to Value an NFT?
NFT’s are blockchain assets that are designed not to be equal. Unlike Fiat or Bitcoin or Ethereum where each currency note or coin will have the same value as the other, NFT’s are different. The Google Trend shows the word’s interest over time peaked during March when the score rose to 100. NFTs are tokens that represent digital or physical assets — for example, a piece of art, music, or even potentially real estate — and contain additional information that a coin would not carry.
While in the past we have observed several items sell at insane amounts NFT’s derive their major value from the following factors:
a) Partnerships: It is very vital for gaining traction and creating value for the holder. For example, if I am using a particular crypto exchange and holding a kind of NFT can reduce my fee structure as compared to non-holders, it will boost the value of my NFT even as it will have monetary benefits attached to it.
b) Ownership History: Value depends on the identity of the issuer. NFT’s with a high ownership history value is often created or issued by famous artists or companies with strong brands. There are two ways to do this.
1. Tie up with companies or individuals with a strong brand to issue NFT tokens. For example, the first NFT that was authorized representing a Formula-1 car was sold for over $100K. One can track this on Opensea, from addresses of bidders.
2. To resell NFT’s that were previously owned by influential people.
c) Utility: Utility is dependent on how NFT can be used. Two major categories that have high utility value are game assets and tickets. If the NFT’s become interoperable then their value may increase even more.
d) Future Value: This is derived from valuation changes and future cash flows associated with the NFT. Huge speculations could be seen here but the valuation can be derived from scarcity of supply. A potential investor should keep an eye for:
- Interoperability, which can add huge value to any NFT in the future. For example, a battleship in a game in the form of NFT can also be used in some other game.
- Royalty in future sales can also add to the value of the NFT.
- If we can collateralize these NFT in the future and create some additional cash flow.
e) Liquidity Premium: High liquidity translates to high value for an NFT. This is the primary reason why tokens created on the chain have a higher value than off-chain. ERC standard NFTs can be traded easily without friction on secondary markets with anyone who holds ETH, which increases the number of potential buyers.
Hence a high value NFT= Utility + Partnerships and Backing+ Future Value+ Liquidity Premium
