NFTs have exploded in 2021. Although quite popular, the concepts behind them can be confusing. Together with being a new format, it can be difficult for the average user to understand why they are valuable.
First of all, NFT is short for non-fungible tokens. This means that they are digital representations (tokens) of unique assets, and they are secured on a blockchain.
NFTs can be used to represent items such as photos, videos, audio, and other types of digital files.
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SEE ALSO: OpenSea Sees Over 800% Growth in NFT Sales, Blows Past $3 Billion in August 2021
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Here are three key factors that one can look at when valuing non fungible tokens (NFTs).
Rarity
How rare or hard to get is a NFT? Just like traditional art, NFTs draw value based on:
- The artist who made it
- The technique involved in making it
- The impact it may have for the user
The first tweet ever posted was transformed into a NFT and sold for $2.9 million by the person who posted it, Jack Dorsey, CEO, Twitter.
This graphical piece below is a collage of 5,000 different images and was made by a digital artist called Beeple. It sold for $69 million, and is the most valuable NFT so far, and also among the most valuable pieces in all of art.
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“Everydays: The First 5000 Days” by digital artist Beeple.
People are drawn to such NFTs because of their intrinsic value where the owner of the NFT holds the blockchain proof of ownership. This gives a sense of distinction and determines the premium value of an NFT.
Utility
Some NFTs are pursued because they can be useful in other applications.
Such NFTs are more than just collectibles, and can, for example, be used as tokens in games. Owning a given NFT in this case may help a gamer gain a key advantage in a virtual land. They can be used to power up characters or introduce new skills.
Such NFTs can be traded in secondary markets too.
Tangibility
Some NFTs are tethered to real-world objects, which gives value in terms of tangibility backed by ownership immutability.
In essence, anything can be backed by an NFT to solidify ownership rights, but that does not make the object unique or high-demand.
The underlying value of such an object will be determined by its practicality, scarcity, and the personal satisfaction it gives users.
One example in this case is the NBA NFT Marketplace, NBA TopShots, where NFT collectibles of highlights from NBA games can be traded. The value of such depend on the players involved, the stage of a game, whether it is a finals game etc.
Not all NFTs will be valued highly, but some could depending on some of these factors.
In terms of market practicality, NFTs with tangible value are best suitable for short-term trading on the marketplace. This is because such NFTs may have expiry dates, like tickets.
Meanwhile, other collectibles like NFT-tethered limited edition sneakers can accrue value over time as the number of items in circulation dwindles.
While NFTs have become increasingly popular in 2021, the sector continues to develop, and more applications of the technology are introduced. This means that creators and developers will continue to establish different ways to transfer and protect value digitally.
However, these three principles will remain important.
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RECOMMENDED READING: Visa Acquires a CryptoPunk NFT as NFT Sales Hit $1 Billion in August 2021
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