NFT Valuation – Everything you need to know
In this article, we will dive deep into the subject of NFTs and understand how to calculate the value of one.
Non-fungible tokens, or NFTs, are in great demand and are making their way into a variety of crypto-related discussions. With the phenomenal expansion of NFT sales globally, career and business opportunities for a variety of vocations are expanding. However, there is no guide on how to figure out the value of an NFT. You also can’t use the same indicators you use to evaluate private corporations or traditional investments like stocks. So how do you know the worth of an NFT? In this article, we will dive deep into the subject of NFTs and understand how to calculate the value of one.
NFTs and its valuation
The non-fungible token (NFT) business generated $17.6 billion in revenue in 2021. That suggests there is wealth in the NFT sector; you simply have to find out which tokens are lucrative. And it’s not that difficult to do. Let us begin with a basic understanding of a non-fungible token before diving into NFT valuation.
What is an NFT?
An NFT is a form of crypto asset that operates on a blockchain and gives each collected object a unique identifier. Because the identifier cannot be copied, one becomes the proprietor of that digital item. NFTs are digital assets that can’t be exchanged for money, and they’re typically built with the same code that underpins cryptocurrencies. Unlike other crypto assets, they cannot be traded or exchanged for one another.
To further understand it, let’s start with something fungible- a note of one dollar. One dollar is identical to another, and they both have the same worth. As a result, they are fungible. The same is true for bitcoin, ether, and other cryptocurrencies. However, with NFTs, one token is not the same as another – each has a separate value. Hence they are considered to be non-fungible.
How do NFTs work?
Each token has its place on the blockchain; hence, NFTs are a safe mechanism to express ownership of a unique object since the blockchain cannot be modified or removed. Individual tokens contain important information and have a value determined mostly by the market and demand; they can be purchased and sold similarly to other tangible sorts of art pieces. The unique data of NFTs makes it simple to verify and authenticate their ownership as well as the transaction of tokens amongst owners.
Where can you use NFTs?
People who trade cryptocurrencies and acquire artwork often utilize NFTs. Individual NFTs can cost hundreds of thousands of dollars at upscale internet collections like OpenSea. They may be purchased on Nifty Gateway for as little as a few hundred dollars. Aside from that, it has a few more applications, which are described below:
- Content for digital platforms – The most prominent use of NFTs nowadays is on digital media as content. NFTs boost content producers’ revenues by powering a creator economy in which artists cede ownership of their property to the platforms that disseminate it.
- NFTs for gaming – NFTs have piqued the curiosity of several game creators. In most online games, you may purchase goods for your character. You may recover your investment with NFTs by selling them after you’ve done with the items. NFTs may give several advantages to players.
- Domain Name – NFTs provide your domain with a moniker that is easy to remember. This functions similarly to a website domain name that makes the IP address more identifiable and desirable, generally based on its length and relevancy.
- Collateral NFTs for DeFi – The foundation for both NFT and Decentralized Finance (DeFi) is identical. DeFi programs allow you to borrow funds using collateral. Both NFT and DeFi collaborate to investigate the use of NFTs as collateral.
Reasons behind the popularity of NFTs
NFTs have been present since 2015; however, their popularity has recently increased due to a number of causes. The popularity of NFTs is greatly influenced by the normalcy and enthusiasm around cryptocurrencies and the underlying blockchain technologies. Beyond the technology itself, NFTs have gained popularity as a result of the recent skyrocketing valuations from the mix of fanaticism, royalty economics, and scarcity rules. With NFTs, authenticity is everything. Digital collectibles include key data that distinguishes them from all other NFTs and makes them readily traceable, owing to the blockchain. It is not possible to create fakes since each asset can be verified by its original producer or seller.
Anyone purchasing an NFT gets custody of the contents, but it could still circulate on the Web. An NFT may grow appeal in this manner – the more frequently it is viewed online, the more valuable it gets. After its sale, the developer receives a 10% cut, the platform receives a tiny part, and the owner receives the remaining money. In a nutshell, as popular online commodities are acquired and traded over time, there is the possibility for recurring income.
Examples of NFTs
People are still learning about the NFT world. However, some examples include Cryptopunk digital collectibles, domain names, games like Decentraland, Zora’s Essays, and AI-designed sneakers.
You must have heard about Beeple’s NFT at Christie’s, which sold for $69 million. Twitter founder Jack Dorsey released his first Twitter post for 1,630.58 Ether, which is about $2.9 million at the time of the transaction. Amitabh Bachchan, the Bollywood superstar, fetched $1 million bids for the ‘Madhushala’ collection, signed posters, and artifacts.
NFTs are appealing because their originality and possession can be validated, can be used across programs produced by various firms, and exchanged simply via private markets. These functionalities bring up new usage and business strategies. However, there is no standard way to calculate the NFT value. The parameters you use to assess private firms or conventional financial assets like equities just don’t work for NFTs. The prior buyer’s price usually offers an idea of the value. However, it is tough to predict what the following client would pay depending on their NFT estimates.
Understanding NFT value
An NFT has a price because the purchaser and their communities feel it is valuable, typical of all artwork and antiques. Over time, an NFT develops its personality depending on aspects such as who owns it and how they utilize it. The value of NFT is weighted variably among four components depending on the asset that the NFT represents. They are utility, history of its ownership, value in the future, and liquidity premium. We will discuss these factors and more that play a part in the valuation of an NFT ahead. First, let’s understand the necessity of valuing NFTs.
Why should you value NFTs?
NFTs are non-fungible, which implies that the item’s ownership is complete with the bearer. They validate the legitimacy of a non-fungible property, making these commodities novel. NFTs should be valuable since their possession and individuality can be proven via an underlying, immutable blockchain database. Once smart contracts are protected, market considerations like rarity, liquidity, distribution network, usefulness, buyer opinion, and anticipation add to their value.
Valuation matrix of NFTs
The price paid by the previous owner of an NFT usually provides some sense of its worth. However, it is difficult to predict what the following purchaser would pay based on their projections for NFTs.The valuation of an NFT can depend on its creator’s popularity and integrity, the quality of the piece, the work put into the production of the NFT, the narrative behind it, and the artist’s social currency.
Because the asset class is in the nascent stage, figuring out the exact value of an NFT is tricky. NFTs of artworks that also have a physical existence are typically priced up to 10% of the actual art item. Therefore, NFTs of physical masterpieces such as the Mona Lisa and tangible collections such as NBA player cards have established prices; however, investors considering NFTs may struggle to determine if a certain asset is worth their money and whether they really want or need it.
The price is mainly determined by the NFT’s designers. Some platforms have included a new functionality that allows a prospective collector to give a different price for an NFT than the NFT producer. As NFTs enter a variety of sectors in less than a year and attain significant valuations, the factors listed below have evolved to help determine their value.
Factors to consider in NFT valuation
NFT valuation is a hazy idea with no hard and fast guidelines. However, let’s take a look at several indicators that might help you determine an NFT’s worth.
- Utility – The applicability or usefulness of an NFT is determined by how it is implemented, be it in physical or virtual spaces. Some NFTs are considerably more than just collectibles since they can be used in games as virtual locations or avatars.
- Liquidity – factors such as usefulness, previous ownership, branding, and value appreciation determine the liquidity of NFTs. These components promote customer awareness of NFTs. NFTs that can be easily sold are worth more value.
- Tangibility – NFTs connected with reality provide tangibility. When combined with the infallibility of possession on blockchains, it offers instant value with tangibility. NFTs with tangible value are ideal for both short-term and long-term trading.
- Rarity – Finding out how rare and difficult it is to possess a given NFT is one technique to determine its worth.
- Interoperability – The flexibility to deploy NFT tokens in diverse applications is a significant value proposition. Using the same weapon in many games increases the token’s worth.
- Ownership History – An NFT’s worth depends on its issuer and prior owners. Tokens developed by notable people or companies have high ownership historical value. Influential people’s NFTs may be resold to build traction.
- Social proof – Social validation linked with an NFT’s project determines its worth. Twitter and Instagram accounts might assist measure their acceptance.
- Speculation – NFT price performance charts, fluctuations in the resources lying behind projects, and events outside our direct control can fuel speculation and influence NFT pricing.
- Change in the NFTs ecosystem – NFTs are a part of evolving ecology. To be accurate, you must consider all of the elements affecting the NFTs’ ecosystem for accurate NFT valuation.
Methods to value NFT
Digital assets are difficult to value using traditional approaches. However, exit price, market price, and underlying asset value form the basis for any valuation research. In the event of an unevaluated asset, assessing its worth involves estimating the value to sell or transferring its liability in normal transactions involving buyers and sellers. Therefore, the method to value crypto assets coincides with common valuation models:
- Asset approach – The asset approach derives an asset’s worth on the fair value of its underlying assets minus its current obligations.
- Market approach – The market method considers the value of similar NFTs, with the assumption that similar assets would sell for comparable prices.
- Cost Approach – When secondary transaction pricing is absent, or liquidity is inadequate to depend on the price, opportunity costs might provide an observable proxy for value.
- The quality theory of money – All else being equal, if the quantity of money in an economy increases, the price levels of NFT sold at that moment will likewise increase. Assume that the amount of real production and the velocity of the money stay constant. In such an instance, the total price level of the asset is proportionate to an economy’s money supply.
- Discounted cash flow model – This valuation is a prediction of an asset’s unhedged free cash flow discounted to today’s value.
NFT valuation challenges you may face while valuing them
Most purchasers lack the logical abilities required to determine the worth of NFTs and base their estimates on guessing. It is also difficult for sellers to predict what they will get in exchange for their tokens. NFT valuation is influenced over time by a reputation over which neither buyers or sellers may have any control.
An NFT art piece may be in high demand for a certain period, with potential purchasers believing it is uncommon and expected to gain value shortly. Then they may realize that the digital picture is freely accessible on the Internet, and there may be no customers left for the NFT.
Get expert help valuing your digital assets with Eqvista!
NFT valuation is difficult due to a lack of guidelines, regulations, and structure. If you want to know how much your NFT is worth, you would need to consult an expert. With business valuation for assessing the economic worth of any asset, you can determine the worth of your digital assets. Eqvista’s highly qualified valuation team can help you in assessing the worth of your NFTs. Please contact us to learn more about our valuation services.