How to Properly Value NFTs

Source: NFTrade

Compared to stocks and other assets, NFTs are significantly harder to understand and assess for several reasons. But they’re certainly more hyped and require more nuance to cut through the noise. We shouldn’t assume that all NFTs are worth millions just because the news says so. For every multi-million-dollar NFT sold, there are tons of obscure ones that are sold for negligible sums.

At present, there are millions of NFTs flooding the crypto market, with countless new creations popping up each and every day. So, how do you properly evaluate the value of NFTs?

For starters, many components go into the valuation of a particular NFT, such as rarity, topic, artist, utility, and several others. In this guide, we explore the best way to determine the value of any NFT.

Market Comparisons

The simplest way to determine the price of an NFT is to compare it to equally admired pieces by the same exact artist. This process becomes easier when you’re dealing with an already established artist who has several pieces you can compare with, and it is even easier to determine if they have a substantial number of NFTs available in the market.

For instance, let’s look at Beeple, a leading NFT artist who has held auctions that started at just a dollar, but the market price of his other releases has helped people determine a more accurate market valuation.

When you start browsing through Beeple’s NFTs that are available on the open market, you will notice that the most inexpensive piece for sale is priced at 40 ETH, with a current dollar value of about $3500 per ETH, this foundation level serves a “base” of how Beeple’s work is evaluated in the market at the low end. If this is the price of a non-rare print with 271 copies, you can take this as a starting point and a multiplying factor in order to begin determining value.

Rarity

Another vital factor to consider when determining the value of a justifiably scarce digital asset such as NFTs is their rarity. If there is a stable demand in the market, then fewer available copies mean the market will value each copy more.

Rarity is a common trend and topic among NFTs, but that alone doesn’t make pieces valuable. Instead, rarity counts among the factors included in the NFT pricing equation, but can unquestionably provide insight.

For example, let’s say that two works are made into NFTs by a popular artist, one with 30 copies and the other with 60 copies; we can deduce that the NFT with only 30 pieces will be much more expensive just based on its scarcity alone. Although there’s no guarantee that it will also be twice as expensive just because half of the copies are available, it sets an easy-to-understand initial basis for investors, collectors, and speculators to mathematically decide its valuation.

Creator’s Fan Base

This criterion is a tiny bit more challenging to quantify and explain than the previously mentioned factors. Still, it does play a deciding role in determining the price of a creator’s NFTs.

If a creator doesn’t have a significant fan base, that doesn’t necessarily mean that their art is not valuable, but it obviously doesn’t help either. The larger an artist or creator’s following, the more reason for people to want to collect and own their creations, thus essentially fuelling the per asset price.

For instance, if a creator has 15,000 hardcore fans and collectors and only releases 1,000 copies of his most desired piece, then these limited NFT pieces would be way more valuable than a newer and lesser-known artist who releases 1,000 copies of their top piece.

This is one of the primary reasons why we have seen so many athletes and celebrities get involved with NFTs, selling their digitized assets for astonishing amounts. These individuals already have a large fan base due to their titles or job, so it is easier for them to express themselves and digitally connect with their fans through NFTs, thereby also enjoying high prices in many cases. The larger an artist or creator’s following, the greater the likelihood of substantial gain through their NFT creations.

An NFT by famous American celebrity Lindsey Lohan named ‘Lightning’ (from Rarible)

Future Speculation

Last but not least is future speculation of NFTs. It is a hard but necessary feature of NFT valuation and is tied to all the factors mentioned above, particularly creator recognition and fan base size, along with longevity and rarity, but is also an independent factor.

Let’s look at CryptoPunks, for example, which were among the first NFT collections to be created, with many predicting that they will play a crucial role in the history of NFTs and blockchain, for which they command incredibly high prices.

Before the phenomenal rise of the NFT market, people could buy CryptoPunks for a small fraction of their current valuation because there was no substantial future speculation about NFTs being valuable as an asset class. After the pouring in of interest into the asset class and an influx of wealth, the future speculation on NFTs drastically changed. Users are now more comfortable taking long-term speculative positions over certain assets and paying record prices for NFT ownership.

Punk #7804 for sale by CryptoPunks (larvalabs.com)

Similar to art, collectibles, and other such subjectively valued assets, it can be quite complicated to value an NFT and accurately speculate on its long-term price and future trajectory.

The two most basic things that are connected to NFTs are supply and demand. These components are the primary evaluative points for whether or not a specific NFT maintains a value; but as for now, especially when dealing with short-term speculation, you can use these methods and more to help yourself determine the fair and reasonable market valuation of a particular NFT.

For those wanting to get started with both NFT collecting and trading, make sure to head on to NFTrade and start browsing through their collections of NFTs & artists.

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