NFTs. What are they?
The world is continuously reinventing new ways of commerce making our lives more and more virtual. Think how folks in the nineties must have felt when they heard the term email or PDF or text messages for the first time.
But today such mediums are a part of our day-to-day lives. Despite NFTs being alien to us today, they are here to stay. It will be to our benefit to understand them, especially how they are valued.
Let’s see what an NFT is worth…
NFTs stand for non-fungible tokens. Simply put, they are unique digital assets, which can be traded, and their ownership is recorded on the Etherium blockchain. Similar to the deed to a house being recorded on the blockchain instead of the local County Recorders Office.
NFTs are art, music, video, in the form of JPG, MP3s, GIFs, and more. Because they hold value, they can be bought and sold just like other types of art – and like physical art, the value is largely set by supply and demand.
With that basic understanding of NFTs, there are the 5 factors that determine their value. Think of these factors similar to square footage, location, age, and other parameters that affect the value of a house….
- Age. NFTs can gain value according to their age. The earliest NFT projects are already commanding impressive valuations. Just as 17th-century paintings are generally worth more than 19th-century paintings.…
- Creator and community. A valuable NFT should be published by a major artist or creator. A song by Beyonce is far more popular than one I might compose…
- Scarcity. Creators release NFTs as 1 of 1s or multi-editions like 1 of 10s, 1 of 100s, etc. the 1 of 1s is hyper-scarce. Similar to cars. Toyota makes hundreds of thousands of cars a year, versus Bugatti which makes a few hundred…no wonder on a per car basis Bugatti is much more expensive.
- Release Pace. Prominent artists that only release a select few pieces every year tend to sell for higher than similar-caliber artists that release pieces multiple times a week. The human need of attaining the unattainable.
- Richness. Sensually additive features, such as Audio can boost an NFT’s value. We all want things with the most bells and whistles.
Now let’s see how NFT valuations work. There are two ways you can value an NFT…
- Based on income. Does your NFT have a cashflow? Or could you license it to someone for a royalty payment? If so, what would that cash flow look like? If you have a cash flow associated with an NFT, calculate the total cash flow you expect from the NFT over its lifetime. Then take that number and multiply it by 0.10 and 0.15x. The value of your NFT is between these data points.
- Sales Comparison. What are other similar NFTs selling for? If you can find a recent similar NFT transaction, you can make a case that your NFT is worth at least that much. Similar to how an appraiser checks for comps when appraising your house.
Think of NFTs like domain names. If you were to buy or sell a domain name how would you value it? Like domain names, when they were originally launched in the nineties, people couldn’t fathom why someone would pay millions for a particular name. But domain names are a household asset now. Most of us own at least one.
Electronic assets are the future. We will of course always need tangible assets like a house or a car or jewelry. But electronic assets require less upkeep than tangible assets.
NFTs have an operating cost called a gas fee, which is the cost of the energy it takes to run the blockchain on which they reside. How our property taxes pay for the county and assessors office which maintain our deeds and titles.