Value Assessment of NFTs- How you can win big by following simple steps? Find out now.
If there is one thing common in all of NFTs- it is uncertainty. You can never be 100% certain about what is going to happen with a particular project. It can go 10x in one week and come crashing down the next. To avoid such fast-rising and free-falling valuations, you need to properly assess NFTs. Value assessment of NFTs is entirely different from ordinary crypto tokens, so you need to follow a relatively new approach to get the most out of your ownership rights.
Unlike other assets in the physical and blockchain world, NFTs make asset valuations a lot more complex, considering their lack of liquidity, art diversity, and inconsistent market sales. In addition, the market shifts landscapes a lot faster than anything else, which makes the task of value assessment even harder. But that doesn’t mean you cannot find early golden opportunities.
This article will help you understand how NFTs are valued and what factors to consider when buying any NFT. Also, we highlighted how rarity is calculated with some great examples. I hope you like it!
Basics of NFT Investing
To make decent returns collecting digital art, you have to be aware of some basic principles of NFT investing. Some of them can help you land rare pieces of art, while others can assist in discovering fast-growing niches in the market. Here are five basic principles you should consider for Non-Fungible Tokens:
- Explore different verticals of NFTs
Many people still think NFTs are limited to digital collectibles or paintings deployed on the blockchain. In reality, the ecosystem has gotten so big that we have close to nine verticals in the NFT market. Each one is fulfilling a different user demand. The ERC-721 standard helped initiate many of these protocols in different segments such as gaming, DeFi, and marketplaces. Here are few verticals that have been on a tear in recent months:
Top collections like Cryptopunks and BAYC are making millionaires almost every day now. The generative-profile pictures have now become an online status symbol, making people go deep in their pockets and spend hundreds of thousands of dollars. The majority of collectors want to get their hands on avatars for the simple fact that it is a digital representation of their personality.
Never underestimate the potential of blockchain gaming. We have seen Axie Infinity become the best NFT-based blockchain game that works on a play-to-earn model. NBA Top Shot is still growing in popularity, and Gods Unchained is one the come up. With more active users and network growth, NFT gaming will be one of the most lucrative opportunities in all of crypto.
Digital artwork, when seen through a VR, provides a completely different experience. The details and dimensions are crystal clear, making it more special for the viewer. Now imagine you can do the same inside a metaverse. Projects like Sandbox and Decentraland are working on creating the most interactive metaverses, which creates immense value for all its plot owners.
- Find Earning Capacity of an NFT Asset
NFT valuations depend a lot on the earning capacity of a particular collection or asset. It can be in the form of cash flows or other economic benefits. If you are a creator, your revenue streams must be coming from licensing and royalty payments. It can be adjusted to the fair market value after balancing total liabilities.
Your NFTs should also provide you with passive income. Staking of NFTs is done by assigning governance and determining tokenomics. This will not only attract more buyers but also make the liquidity go higher.
- Choose projects with a high liquidity premium.
When it is difficult to convert an asset into standard currency, there will be additional compensation in the form of liquidity premiums. As NFTs are also hard to trade, you need to consider the ones which have a high liquidity premium. If the demand increases and assets mature, the premium will also go higher and higher.
Rare pieces of art are hard to sell at desired prices because it is extremely challenging to assess them from a general point of view, so instead of comparing valuations- make sure to check sales history to determine liquidity premium.
- Understand Market Sentiment
Believe it or not- most of the NFT collections are driven by either hype or community support. In both cases, you can benefit greatly if you understand the market sentiment towards a particular project. For example, generative-profile pictures and art is done by algorithms are key drivers in the NFT market. So the next time a similar project comes by, you will know how the market is going to react.
The best way to crack market sentiment analysis is to explore more NFT marketplaces and monitor how people are jumping into new projects. This method may not be suitable for long-term price movements, but it will help you identify short-term yet profitable price trends.
- Only Invest what you can afford to lose
When it comes to NFTs, you can do everything right, but there is still a chance you could lose it all. It is just how fast the market evolves. Holding NFT assets long-term is the best strategy, as it gives enough time for the market to mature and create more buying interest around NFTs.
FOMO should not be why you are buying an NFT. If a project is too complex, you do not have to invest your hard-earned money, hoping it can give you astronomical returns. I am not saying it is not possible, but it would be a bad bet to invest most of your savings.
How to eliminate guesswork and assess real value of NFTs?
Investing in assets that have no proper historical data is hard. But with current advancements in crypto and blockchain, we can verify how valuable NFTs can be and how much is the demand, considering market economics and sentiment.
While predicting the precise value of any NFT is nearly impossible, one can still consider different factors that drive high valuations. Here are four main drivers that can land you a sustainable NFT project:
If something is out of reach, then it gains more value over time. NFTs that are one-of-a-kind attract thousands of buyers who have deep pockets and want that premium value. Rare traits and characteristics add immense value to any kind of NFT collection. It is not limited to only legendary or super rare art pieces. If they find one or two unique traits that very few NFTs possess, one can get a good deal.
NFTs mainly derive value from rarity, but it can go higher if it comes with high utility. For example, if you bought a battleship from a famous artist and he or she is also creating a game revolving around space combat. If you are allowed to use the same NFT inside the game, the price or value of that battleship would definitely go higher. So look for NFT collections that have interoperability and allow collectors to participate in exclusive events.
If companies issue NFT tokens created by famous artists or with someone who has a strong brand, they will drive more traffic and sales. Previous owners of any NFT are hard to track, even with the help of on-chain data, but they add a lot of future value. Celebrities and athletes are bringing on so many people into the NFT world, so you need to make sure NFTs have decent backing from influencers.
Nothing beats a strong community. In the world of NFTs, almost everything depends on communities, and they will be the ones to receive huge rewards. There is no better way to asset NFT’s value than joining a discord server and talking to folks who were there from the start of the project. By understanding the journey of any project, you can see how it’s going to play out in the future.
A community grows when the leader is well-known and constantly drops value for members. So when you are looking to buy your first NFT, make sure to deep dive into the artist’s background. If he or she works with top brands and has a good influence on social media, then it is a good sign and adds more value to the NFT sell-out framework. For example, a recent NFT collection called Gauntlets was released, and they sold out in a few days. Their discord community also reached 7000 members. What caused this? The creator behind it is BossLogic, a legendary digital artist who worked with Marvel and DC comics on multiple projects. His following on Instagram and the work he has done for so many years helped him build an incredible community.
Top NFT Marketplaces in 2021
It is undeniable how far the Open Sea platform has come in the last year. They recorded 3 billion dollars in sales in August alone, and we haven’t even scratched the surface yet in the NFT ecosystem. The interface is phenomenal, and the process involved is super simple. Anyone who isn’t accustomed to NFT marketplaces will effortlessly explore the digital world and purchase their first-ever NFT.
Rarible is a decentralized NFT marketplace, making buying/selling digital collectibles a unique experience. The intuitive design and interface are steadily attracting more active participants. As Rarible is also an Ethereum-based NFT marketplace, the gas fees are unpredictable. It can go pretty high on the day of minting. Apart from that, the platform is user-friendly and keeps everyone engaged. The live auctions are exciting and one-of-a-kind. Creators also receive high royalties, even up to 30%.
A creators-only P2P NFT marketplace is Foundation. Artists can create their profiles and connect their accounts, and start auctioning their items. The main goal behind Foundation is to give back control to the creators who constantly add value to the audience. As a community, it is one of the best. As a platform, it is interactive and responsive. If you are a creator wanting to tokenize your art, you should get started with Foundation. It can give you more exposure to a wider base community and global reach.
Value Assessment- BAYC & Gauntlets
Value assessment of any NFT is done by checking its rarity. We have some incredible tools nowadays that accurately give us rankings and more about each NFT collection. Rarity.Tools is one such platform you can use that is easy to understand and gives you an overall idea of rare traits, floor price, and uniqueness pairs.
The rankings of NFTs are tricky. When looked at individually, it is easy to conclude, but upon comparison with others, it gets complicated. Trait rarity ranking, average trait rarity, and statistical trait ranking are the three main methods used to rank any NFT collection. However, not all of them give accurate rankings based on rare traits.
For example, the Trait rarity ranking method uses individual traits that are superior to others, ignoring remaining traits. As a result, it doesn’t look at the overall rarity. In the second method, average rarity ranking considers all traits and then compares them with other NFTs in the collection. The problem with this is that super rare traits are not given superiority over others. Overall rarity overshadows the superior properties of an NFT.
The third method used for calculating rarity score is Statistical rarity ranking. Rankings are given based on overall rarity, which is generated by multiplying all rare traits together. However, this is also not the correct solution. We are overlooking one-of-a-kind traits by calculating overall rarity.
Credits- Rarity Tools
The second collection we will be looking at is a relatively new one called Gauntlets. As mentioned above, the creator and architect behind this is the legendary graphic design Artist Kode, Bosslogic. The value assessment for such a collection begins with finding out all the main traits that stand out.
Weapon Included- Blade
With gauntlets, it is weapons, accessories, and finger styles. Some notable traits are background color and special combos. When buying a gauntlet, these are the main things you should look for. As the project matures more, people will start looking for gauntlets with weapons.
Few Legendary Ones
It is true when people say 99% of NFTs will go to zero. That is certain because most collections do not focus on building a community, and they never add value by providing unique digital experiences for their holders. A sustainable NFT project constantly engages with its community members and has a clear roadmap for the future. Many companies are planning to launch metaverses and their NFT issued tokens, so that is also something you could look into when buying in-game items or any digital collectible. Value assessment only helps you understand demand/supply dynamics after considering different factors, but in the end, you should buy what you like and hold on to it for a very long time.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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