Seven Ways to Understand NFT Valuation
Evaluate NFTs from multiple perspectives, such as security, age, creator, and scarcity.This article is from Babbit, authored by William M. Peaster.
There is no doubt that NFTs have reached a moment of explosion. Beeple sold his work for $69 million at a Christie's auction, an Alien CryptoPunk collectible was successfully sold for $7.2 million, and Fewocious broke the sales record on SuperRare.
All of this happened last week, and it was indeed very crazy.
You might ask, "How are these NFTs getting such high valuations?"
That's a great question. Unlike DeFi tokens, NFTs (currently) do not have on-chain cash flows, nor do they have price-to-earnings ratios or cash flow models that can be applied to them.
However, there are some ways to reference, and in this article, author William M. Peaster will tell us about seven factors that add value to NFTs.
How to Value NFTs?
More and more people are starting to learn about and collect NFTs, but is there a way to accurately assess these unique digital assets so that you can build and manage your NFT collection like a professional?
This article will help you answer that exact question, as we will outline a series of different methods to help you evaluate the value of NFTs.
Let's get started.
Objective: Learn how to measure the value of NFTs
Skill Level: Basic / Intermediate
Learning Time: 10 minutes - 1 hour
Evaluating the value of NFTs has both subjective and objective dimensions.
Some may believe that the CryptoPunk they acquired for free in 2017 is priceless; however, collectors on NFT marketplaces like OpenSea and Rarible frequently trade these base Punk collectibles, thereby pricing these NFTs.
This fluctuating price floor can objectively tell us that a specific set of NFTs is currently worth at least this much.
For example, at the time of writing, the price floor for CryptoPunks is about 19 ETH, so if you list a CryptoPunk at this price, it is very likely that you will sell it quickly, as many buyers are tracking the cheapest collectibles.
In terms of objective valuation, you also have to consider factors like rarity attributes.
Examples here include EulerBeats' joint curves or Common Avastar, which initially priced at 0.07 ETH, while an Uncommon Avastar typically sells for 0.14 ETH, and so on.
Additionally, the time dimension is also a key factor to consider seriously.
In other words, how much was this NFT worth in the past? How much is it worth today, and how much will it be worth in the coming years? How has its value changed over time—has it changed rapidly or suddenly, will it grow or will it stagnate? Delving into these questions can help you better assess NFTs.
Finally, there is an analytical dimension to evaluate NFTs that combines subjectivity, objectivity, and time. What I mean is being able to consider these dimensions simultaneously and then analyze and estimate conservative, neutral, and aggressive valuations for NFTs on a rolling basis.
This provides you with a framework to handle and understand all the implications of "what if," such as what to do if the market for that asset heats up, cools down, or remains stable.
Suppose you have a CryptoKitties founder cat (one of the first 100 CryptoKitties), and you want to infer its performance over the next year.
If the NFT bull market can last a few more months, your optimistic analysis might be that your CryptoKitty could easily sell for dozens of ETH, while your conservative analysis would be what the lowest price you could sell your founder cat for if an NFT bear market breaks out.
Source: cryptokitties.co/kitty/2#
However, this is just a bird's-eye view of how people understand NFT valuation.
The best way to accurately assess the value of NFTs is to weigh the current market conditions against the underlying, objective factors of the NFTs. What are its components? How was it built? What can it do?
Let’s go through some of the most important value-adding factors one by one.
7 Characteristics that Add Value to NFTs
Security of the Blockchain
The core point of NFTs is that as long as their underlying blockchain infrastructure remains unchanged, they are immutable and guaranteed digital assets.
Therefore, Ethereum is largely the most important NFT network, thanks to it being the most secure smart contract platform currently in operation, and it will continue to dominate in the foreseeable future.
In other words, the blockchain on which an NFT is minted is tied to the value of the NFT itself, which is why NFTs minted on Ethereum are currently more valuable than those minted elsewhere, as they are more secure.
Key questions regarding blockchain security:
- Is the main chain secure?
- Is it decentralized?
On-Chain vs. Off-Chain
NFTs like Avastars, Aavegotchis, and Art Blocks drops are minted on-chain, relying solely on their respective Ethereum smart contracts for existence, meaning they can exist as long as Ethereum exists, allowing NFTs to persist for a long time.
On the other hand, some NFT projects provide convenience and flexibility by relying on external off-chain providers like AWS, which introduces a dimension of trust, so you have to believe that the project can sustain itself and keep its servers running.
Otherwise, your NFT may only be valid for a few years.
Thus, the value of whether an NFT is on-chain is quite clear, and the key questions regarding on-chain versus off-chain are:
- Where is this NFT hosted?
- Is this NFT completely on-chain (which means can it exist for a long time)?
Age
NFTs can also gain value based on their minting time; for example, NFTs indeed began to heat up in 2020/2021, so NFTs minted before this period began to take on the status of digital artifacts, being among the earliest works in this digital cultural revolution.
However, the development of NFTs is still early enough that I believe the "age" factor has not yet played a significant role. In the end, any NFT or anything created before 2030 may have special significance, so we shall see.
Meanwhile, the earliest NFT projects have already achieved impressive valuations (e.g., CryptoPunks), which were born in 2017, and this fact has attracted the attention of many collectors.
So, like wine, always consider the age of the NFT!
Key questions regarding age:
- When was this NFT minted?
- Is there any historical significance regarding this NFT?
Creator and Community
If a person without fans and without a history of creating NFTs puts an NFT on OpenSea without any promotion, will that piece sell? Of course, it won't sell without further effort.
This is why NFTs minted by major artists or creators have value. Importantly, involving the community can create demand.
Naturally, the more popular the creator and the larger the community, the more valuable the NFT becomes; this dynamic essentially applies to any market.
Key questions regarding creator and community:
- Does the creator have many followers on social media platforms like Twitter and Instagram?
- Do they frequently interact with their fans?
- Do you think the creator can develop their brand in the future?
Scarcity
In the NFT ecosystem, we see that NFTs released by creators come in both unique and multiple quantities (like 10, 50, 100, etc.).
Clearly, unique NFTs are very scarce, making them more valuable than multiple quantity works. However, this does not mean that multiple quantity versions of NFTs have no value; we often see some multiple quantity NFTs selling for thousands of dollars!
Platforms like SuperRare only support unique versions of NFTs, ensuring that only one genuine piece by the artist circulates in the market.
Key questions regarding NFT scarcity:
- How many were minted?
- Will the artist mint more of such NFTs?
Release Rate
How many NFTs does a creator release in a year—1000 or just 12?
What I mean is that figuring out the production speed of a specific NFT is key to understanding its value.
A project that mints unlimited NFTs at a price of 0.01 typically has less appeal than something created by an artist who only makes 25 NFTs. Of course, those outstanding artists who only release a few selected pieces each year often have their works priced higher than those of their peers who release several pieces weekly.
Of course, there will be some exceptional cases, like Beeple selling 5,000 pieces, having created a piece every day for 13 years, which collectively sold for about $70 million, built on over a decade of relentless effort!
Key questions regarding release speed:
- At what speed is this artist creating new works (daily, weekly, monthly, yearly, etc.)?
- How many works have they minted?
Richness (e.g., audio)
We are starting to see more visual NFT works accompanied by audio, which provides users with a richer artistic experience than ordinary NFTs. Who doesn't love to hear music while playing their NFTs?
With this in mind, audio can enhance the sensory added value of NFTs, especially when the audio is created in collaboration with the main artist.
We expect to see audiovisual fusion become an artistic norm through NFTs.
Key questions regarding audio:
- Does the NFT have audio?
- Who produced the audio for this piece?
Additional: Project-Specific Rarity
Some NFT projects, such as CryptoPunks and Axie Infinity, have NFTs with various characteristics. For CryptoPunks, alien and ape punks are the most valuable, while Mystic Axies are the rarest (and usually the most valuable) in the Axie Infinity market.
The rarer the characteristics of an NFT, the greater the likelihood of achieving considerable profits in the NFT market.
So, if you see an NFT selling for a sky-high price and feel confused, dig deeper into its potential characteristics; their rarity may help you better understand the reasons behind its high price.
Conclusion
When evaluating NFTs, there may not be a right or wrong answer, but if you try to do so, you will certainly consider many dynamic factors.
The best approach is to take a holistic view to understand all aspects of a piece before making a decision.
For example, the NFT ecosystem has just rediscovered the MoonCats project, which was released after CryptoPunks but fell silent after 2017. Now, hundreds of people have minted MoonCats NFTs and are trying to price them on OpenSea.
What is the answer?
We are all still exploring, and of course, there is no correct answer yet. We now evaluate them in different ways, such as is this on-chain? Is it reputable? Does the artist have a community? What unique characteristics do they have?
These are fundamental questions you need to ask yourself when buying NFTs. Use everything you know about NFTs; that’s the trick.
You must evaluate NFTs from multiple angles, and if you can do that, you are ahead of the game.
