Because NFTs are a new type of asset, they have drawn the interest of many new investors worldwide. Usually, members of the art world, the collecting world, and the world of crypto have the most interest.
Still, as their popularity has grown, NFT prices have shot up, drawing the interest of more people including those interested in NFTs as a speculative asset for potential income. Because of this interest in potential investment income, the question of valuation becomes much more important. We will discuss the factors that can be used to value NFTs and how this process has been done with data science.
Factors for NFT Valuation
Being new, there are no set of rules used to assess the value of an NFT. The ways that companies and other assets, including art and other collectibles, are valued differently from NFTs and are therefore not directly applicable. One avenue that seems to be somewhat reliable is the payment of the purchase made by the last buyer of the NFT. This is not sufficient because, with NFTs, we have seen significant volatility. It’s hard to guess what the next buyer will be willing to pay just using these estimates from previous purchases.
Most buyers lack the needed skills and information to logically ascertain an NFT’s value and usually make guesses with little reason behind them. Sellers also have a challenging time determining what kind of price they might receive for the NFTs that they currently hold. In time, much like the value of art, the value of an NFT is driven by perception, and neither the buyer nor seller have any control over this.
Let’s consider the following: an NFT artwork may be in demand for a particular time with buyers believing it is rare and will produce value in the near term. They then discover that the image is available for free online, and the pool of potential buyer’s dries up.
Renowned artists’ NFTs and tokens that are associated with tangible assets are easier to define their values, but in most cases, investors and traders will have a more challenging time determining the value of the majority of NFTs.
There are, however, several factors which one can utilize to make a price prediction. And when combined, they produce a much more justifiable and hopefully accurate number.
Scarcity
An NFTs demand is directly proportional to its rarity, but what can we use to determine how rare an NFT is? Artworks from known artists or celebrities or influencers are undoubtedly good examples of rare items. Certain game items and collectible NFTs from the likes of the NBA would also fall into this category. The scarcity factor will add intrinsic value to these NFTs.
These items are numbered, with only a total of up to 99 available. The players are all top stars in the NBA, and NFTs have unique attributes, resulting in their elevated values.
The immutable nature of NFTs gives the holder a sense of value through distinction. Jack Dorsey’s first Tweet NFT would be another example of a scarce NFT giving it added value.
Use
An NFT’s use is also a critical factor in evaluating its value. An NFT must have a real application or utility to add to its value. Take, for example, an NFT that tokenizes a precious metal, security, real estate (real or virtual), or an in-game asset, which will have an intrinsic value for specific buyers.
When real-world items are tokenized, and ownership is immutable on blockchains, there is a tangible value. The NFT world is just beginning, and as it begins to mature, new innovative use cases will undoubtedly emerge.
NFTs can effectively define ownership and its rights, eliminating fraudulent activities. Their use in a project will influence its value. After it’s minted, an NFT will have value from its built-in characteristics.
As time passes, the value will accrue at a rate that depends on its utility and the related project. Metaverse tokens from Decentraland that relate to virtual real estate have grown in value due to the strength of the project’s interest.
Most NFTs with defined use are great for both short-term and long-term trading. NFT event tickets can be a great short-term bet, and those that represent real estate can accrue long-term value.
Interoperability
Like use, a key factor in valuing an NFT is its interoperability, an NFT’s ability to be utilized in more than one application and across blockchains. If a gadget is able to be used in several games, the chance of the token increasing in value also increases.
How an NFT works on different blockchains will also make it easier to transact. This is a difficult measure, but the breadth of use for tokens and their interoperability across chains is another way to build value and something that developers can strive to create.
Social Proof
One of the most decisive factors that can determine an NFT’s value is social proof of the underlying project or artist. When someone first encounters an artist or project, there is a tendency to rely on cues from those around the project. An NFT’s social proof indicates what people are thinking about the project, and the more buzz, the better.
Checking the minter and the NFT’s presence on social media platforms like Discord, Telegram, Instagram and Twitter can help to gauge the acceptability. If followers are low, it will indicate that there is a missing foundation, and the NFT’s value will be low and may never grow. Social proof of the NFT and the project or person behind are significant factors when building a valuation.
Provenance (Ownership History)
The identity of an NFTs issuer and its previous owners can affect the NFT’s value. NFTs created by well-known people, projects, or corporations can benefit from an ownership history value. This attribute can be enhanced in an NFT by working with groups or individuals with a substantial brand value when minting their NFTs.
Reselling NFTs that were held by influencers is another avenue to gain traction as well. NFT marketplaces and sellers can aid buyers in finding information about previous owners of NFTs, providing a simple user interface with tracking. By highlighting investors who have been successful with NFT trading, they help other buyers with valuable insights.
Liquidity
NFTs that have significant liquidity will carry an added value. Secondary markets that have frictionless BSC or ERC standard NFT trades give added access to buyers. Traders will flock to NFTs that have higher volume knowing their tokens can be sold when desired and profits are taken. A token with high liquidity is better able to retain its value even if the native platform is closed.
Increasing engagement is essential for token economics, and liquidity is one way to enhance engagement. In-built systems that depreciate NFTs for being idle and encourage competition can build a more substantial market. NFT systems should be created to support the liquidity of the emerging NFT market.
Price Speculation
Speculation can be a catalyst for appreciation. We have seen several NFTs, collections, and the market as a whole jump in value by thousands of percent in a short time. While some will oppose speculation as a valuation driver, the desire of humans cannot be neglected.
The conventional financial system of derivatives bases its values on speculation, and this speculation element should also be included in NFT valuations. Charts of price performance, a project’s assets, and even items beyond fan speculation can drive price speculation in NFTs.
NFT Ecosystem Changes
As the ecosystem of NFTs continues to evolve, additional factors will affect NFTs’ values, which will need to be incorporated to improve price valuation accuracy. Like art, NFTs have subjective values, and this makes valuing an NFT in the future more difficult. NFTs have nearly endless possibilities. Their use and versatility will continue to grow with additional applications and categories. These will need to be applied to future price valuations.
Valuing NFTs With Data Science
Data science advisor for the London Business School and mentor at Cambridge University’s Judge Business School, Stylianos (Stelios) Kampakis, recently worked on a paper with one of his students that undertook the process of valuing the popular CryptoPunks NFTs using hedonic regression. Here are some examples of these NFTs.
The highest price for a single NFT in this collection was $24 million, #5822.
The paper looked at what attributes could contribute most to valuation, and the author stated that it can be used for a similar system with other NFTs, and the paper showed how it could compare NFTs to more traditional investments. The paper reviewed the “physical differences” between the various artistic attributes of NFT art and found specific physical attributes (a beanie, bandana, glasses, facial hair type), or a lack of which, leading to scarcity were more important in defining value.
A similar regression could be applied to other NFTs using available price data, and then adding in the various attributes we have outlined above to improve the valuations further.
Closing Thoughts
When trying to estimate the value of NFTs, we must be mindful that not all of them will be valuable. The vast majority may have 15 minutes of fame and then crash or never even have that 15 minute of fame.
When valuing, consider all the factors to arrive at a price decision, even new ones that have not been discussed here. Conducting due diligence to make an informed decision should be part of any financial decision, including the purchase and sale of NFTs.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
One thought on “How to Value an NFT”
Comments are closed.