NFTs have been making waves recently and rightfully so. Collections have been selling for upwards of $60 million and they have been plastered on billboards across the country.
But you are probably wondering, how the heck do I value them?
Don’t worry. In this article, I will be going over 12 ways of assessing the value of NFTs. So without further ado, let’s jump right in.
Simply put, utility is the practical application of NFTs that extends past their basic form. NFT creators can grant exclusive perks and rewards to their community.
For instance, they can be used as digital passports to gain access to exclusive events. Moreover, they can be used as proof of purchase for cool merchandise.
Overall, this changes the dynamic between creators and holders while fostering a more active community.
At the end of the day, humans are drawn to rare objects. We value exclusivity and they ultimately act as status symbols.
Thanks to NFT technology rarity can easily be tracked. There are countless tools on the internet that rank each NFT in the collection based on rarity. Moreover, you can examine the smart contract or check the marketplace for the total supply.
Overall, a lower supply leads to less dilution and in most cases a higher floor price. However, if it is too low then the community will also be small.
3. The team’s reputation
It is important to understand the team before investing in a project. Ultimately, this helps determine the longevity of the NFT collection.
At the end of the day, the team is responsible for the development of the project and the execution of its goals. There are several signs that indicate a good team.
For instance, a team that is completely transparent with strong credentials is a great sign. Moreover, if they are reinvesting earnings in the project this indicates that they are committed to development rather than being a cash grab.
Conversely, a red flag would be an anonymous team as they are rarely held accountable if something goes wrong.
Lastly, all this information is easily accessible either through the project’s website or social media.
Community is the new currency. Ultimately, it indicates the demand and hype of a project. The greater the community size the greater the network effects and as a result the greater the word of mouth a collection attracts.
Thanks to social media the community size can easily be checked. For instance, most NFT projects have a Twitter account with a corresponding follower count. However, it is best to avoid projects with a large bot following as it can be indicative of a scam.
Lastly, you can also check the projects’ community channels such as discord to see how active they are. If there is active discussion with some collaboration this is a great indication of a loyal fanbase and therefore longevity.
5. Floor price
Essentially, the floor price is the lowest price you can pay for an NFT. Therefore, this is a great way of assessing the overall price trend of the project.
Most marketplaces offer a chart displaying this information whereby you can use technical analysis to determine if the asset is worth buying.
For instance, if the chart is showing higher highs and higher lows for the floor price it indicates that there is strong demand and the trend is up.
6. Personal preference
Although this is subjective it is important to pick NFTs that you genuinely like and understand. Picking art that resonates with you and has great aesthetics can provide personal satisfaction in the long run.
Moreover, in the early stages of a project, it is important to trust your taste as the other metrics are less relevant.
There is no denying that most projects in the space come and go in a blink of an eye. That is why it is important to assess their history as it indicates staying power.
Some of the biggest collections such as Bored Ape Yacht Club and CryptoPunks have been around since 2017. Moreover, they have historical significance. For example, CryptoPunks was the first major profile pick collection.
In the end, if an NFT collection has a rich history and has maintained its price it will likely stay that way. As they say, the trend is your friend until the end.
8. Trading volume
Trading volume is a great metric for determining revenue. In most cases, the greater the number of trades the more income is generated from royalties and trading fees.
Therefore, this provides more funding to projects for further development. Additionally, it is a great indication of how much hype and attention there is toward a project.
However, it is important to use reputable marketplaces for this information as wash trading can skew the results.
Interoperability allows NFTs the ability to interact across several different applications and blockchains. This is great for facilitating network effects and usability.
Moreover, it breaks down the walled garden that is especially prominent in the space. For instance, if a collectible can be used across different games then it will likely accrue more value.
Therefore, it is important to check the specifications on the NFT project’s website for details on interoperability.
Liquidity refers to how easy it is to trade tokens. The higher the liquidity the lower the slippage. As a result, there is less likelihood of buyers and sellers being left with unwanted positions as the spread is lower.
Additionally, if you are looking to sell in the future then it is important to have higher liquidity as it is an indication of demand.
For instance, a 1-of-1 collection by an obscure artist might take weeks to sell, whereas a Bored Ape will likely sell in a few hours.
11. Holder distribution
The distribution of tokens can be accessed by examining the smart contracts. For example, EtherScan is a blockchain explorer that shows the NFT distribution by wallets.
In most cases, the more even the distribution the better. This shows that the creators care about a more democratic system that fosters community involvement.
On the other hand, if few entities hold the majority of the collection then they will likely dump on the community damaging the price and the confidence in the collection.
Moreover, the price can be more heavily manipulated and development can be skewed in their favor often to the detriment of the wider community.
Lastly, It could also indicate that the team has a large holding. They will also sell as a means to fund development or as a simple cash crab.
There is no denying that the space is rampant with unoriginal work and outright plagiarized pieces. The vast majority of derivate NFTs are cash grabs.
They are unoriginal and they are fraught with rug pulls. Oftentimes, these projects promise similar utility to the original collections but fail to deliver while taking users’ funds.
That is why it is important to research the project heavily. If the artist has a strong portfolio with original work then the project will be more sustainable.
If you want to view this article in a more visual format then please check out my video below:
Overall, there are several ways of assessing the price of NFTs. From checking the community to examining the holder distribution of the collection.
Moreover, as the space continues to develop there will be plenty of opportunities that arise, and hopefully if you use the tips in this article you can profit by finding a desirable NFT.
I hope you found this article useful and thanks for reading it.
Want to learn about NFT metadata? Click here to read my previous article.