Photo courtesy of Monstero at pexels.com
Unless you have been living in a cave for the past nine months, the explosion of the NFT space will likely have caught your attention. Assets such as CryptoPunks (which were given away for free to anyone with an ETH wallet way back in 2017) are now selling for over $7m USD. Earlier this year, the most expensive NFT ever was sold at auction by Christie’s for close to $70m USD.
With NFT sales totaling almost $1.25B USD in Q2 2021, it’s safe to say this asset class is here to stay. It’s also clear that while there is incredible value to be found within the NFT marketplace, it’s less obvious what makes one NFT valuable, and another simply digital inventory.
While the NFTs selling for millions of dollars may have whetted your appetite, the average price of an NFT is sitting at a mere $120 USD. Let’s look at some of the core areas where NFT's perceived value can be uncovered when looking for your next purchase.
The Four Pillars of NFT Value
1. Utility
Utility is one of the most hotly discussed topics within the wider crypto space within the context of NFTs. Does it do anything beyond its expected future value? Some really interesting applications of NFTs have begun to appear over the last six months. Be that enhancing video games by adding scarcity/provability to in-game loot or power-ups, through to creating a wrapper for many other token types within one NFT, the utility of an NFT (or its expected future utility) plays a part in its value.
Some NFTs are yield-bearing, giving them value beyond a simple resale. Owning an asset that provides returns will create demand for that asset. Gamifying the yield given raises the value even more because it inserts user interaction and attention into the asset. Synesis One gamifies data farming for AI language learning, for example. A word game on the project website lets players earn their native token, SNS, in exchange for playing the game and building the information database. AI companies can then tap into this data to help teach their AIs. NFTs of individual words give the holder yield every time their word is used by the AI to learn the language data.
2. Ownership History
Value depends on the identity of the initial issuer, or the previous owners of the NFT. Those with high ownership history value are often created by famous artists, globally recognized celebrities, or brands. Examples of these are digital artist Beeple, who has three of the top 10 NFT sales of all time, or Sir Tim Berners-Lee who recently sold an NFT of the code for the World Wide Web for over $5M USD.
Judging value can often be difficult if only looking at ownership history. Unless the artist or celebrity is set to be even more famous in the months and years to come, is your asset realistically going to see a 10X increase in value? However, if celebrities and notable individuals have owned the NFT at some point in time, it does increase in value. For example, an NFT of a collectible card that was used by a top player to win a large competition will have sentimental value over a similar card without that history.
3. Rarity
Rarity is inherent within NFTs as they are, by nature, unique. What is becoming clear, however, is that some are more unique than others. And this is what we mean when we say rarity. Let’s say that a collection has 10,000 totally unique characters such as CryptoPunks. Some will have different traits, features, or characteristics which make them rarer than others from the same collection. It’s these rarities that drive massive increases in value. Jack Dorsey’s first tweet, “Top Shots” of popular NBA clips, and Beeple’s NFT are very rare, unique, and visible, which is what gives them value.
4. Liquidity
High liquidity means a higher value NFT. The liquidity premium is the essential justification for why tokens that are made on ETH have a higher value than off-chain resources. ERC standard NFTs can be exchanged easily across secondary markets, by anyone holding ETH. That being said, if the market for your specific NFT, or NFT collection is not purchased, then you may run into liquidity problems. In other words, if no one wants to buy your asset, you can’t sell it. At least not for the price you may want.
Investors prefer to invest in NFT assets that have a high trading volume because liquidity lowers the risk of holding the NFTs you no longer want.
Conclusion
There are millions upon millions of NFTs out there in the marketplace. Selecting those which have strong provenance/history is one way of selecting your next NFT purchase, but it may not be the most valuable. By measuring your next purchase against one or all of these pillars, you will stand a much higher chance of picking up something which increases in value.
Disclaimer: The author holds tokens in the above-mentioned companies. The opinions in this article belong to the author alone and should not be considered investment advice.