How to understand the value of NFTs

Non-fungible tokens (NFTs) have been making the news for a long time now. Some people purchase them as memorable collectibles, others – for their utility. They can be resold for profit, used in video games, etc. However, this type of asset is unique in that it is extremely hard to estimate NFTs’ true value. This is the reason why scams are not rare in this sphere.

In our today’s article, we will figure out what exactly makes these tokens valuable and how we can choose them wisely.

What are the factors determining NFT’s value?

There are numerous types of NFTs, for example, digital artwork, collectibles, music, items in games, etc. Though NFTs tend to hold subjective value to particular users and can also be very unpredictable in pricing, we can still narrow down the features that generally make them valuable to 3 main ones.

1. First of all, scarcity. This means that the rarer the item is and the harder it is to get it, the more value it holds. NFTs created by famous artists or A-list celebrities can be considered unique. Also, one-of-a-kind items in video games belong in this group. The scarcity that matters to other market participants gives the digital piece a lot of perceived value.
2. Secondly, a beneficial non-fungible token has such a quality as a utility. In order to be valuable, an NFT needs to have an actual application. This is not possible for each type of them but things like virtual land or game assets can be used; also tokenized real estate and precious metals exist. Real-world items benefit from this because blockchain technologies help with ownership rights and decrease the possibility of fraud. In the future, we can expect more such cases. Another example of real-world value is the NFTs of tickets to big events.
   
   A big part of some tokens' utility is interoperability. For example, if an in-game item can be used in several different games, or at least there is a possibility that this will be the case in the future, it increases its value.
3. Finally, liquidity plays an important role in an NFT’s value. This is basically the tokens' visibility on the market and how easy it is to sell them if necessary. While there are many factors at play here, they mainly come down to a high demand for the works of the issuing brand or artist. It also helps to purchase ERC or BSC standard NFTs rather than off-chain ones, because this makes selling and buying easier.

What should we pay attention to before buying NFTs?

There are also a few less complex things we should consider when we plan to purchase NFTs.

1. Social media presence of the artist or brand. Simply put, community and social following matters when it comes to NFTs. This does not mean though that it is only safe to purchase celebrity tokens — it is not always the case. Sometimes niche artists with a strong and loyal fanbase can be a better call.
2. Previous owners of the NFT. While this information is not always available, if there is a chance to know who the previous owners were, it is worth considering if the NFT is resold and not freshly minted. 
3. Possibility of speculation. We have seen this many times in the sphere of NFTs when the price of a particular asset increases in a short period of time together with its media presence. It is necessary to be extra cautious in such circumstances because the price might fall just as quickly when the hype evaporates.

Conclusion

The trade volumes of NFTs have been decreasing lately (a 77% drop was observed between the 2nd and the 3rd quarters of 2022). However, experts say that this is a sign of market stabilization and a future boom. More and more technologically advanced applications for NFTs are bound to come which will likely bring high demand back. Still, it is vital to always do thorough research before investing in any sort of asset, including NFTs.

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.