When it comes to new technologies, the cryptocurrency market is a breeding ground for scams. However, this hasn’t discouraged you from making your first investment in non-fungible tokens (NFTs).
There’s just one problem — aside from not knowing the difference between digital kittens and doge with a top hat, you’re not really sure what NFTs are and why they can be worth money in the future.
Let me give you some background information on NFTs so that your future decisions will be justified and well-considered.
Blockchain is a digital ledger that verifies transactions. When you purchase an NFT, your ownership is recorded on a blockchain so no one else can claim to own it. Ethereum’s blockchain is the technology most used in this regard.
If you’re thinking about investing in NFTs, there are a few things to keep in mind. First and foremost, understand that there is no built-in valuation method for an NFT.
Unlike stocks or bonds, you can’t look at an NFT and determine its underlying value by looking at a balance sheet or income statement.
Even if the NFT is backed by a physical asset, like real estate, or commodities like gold or silver, determining the value of that asset as related to the token is a subjective process.
The second thing to keep in mind is that history tells us that most early-stage technologies don’t work out very well as investments.
Until it’s proven otherwise—and even then—be skeptical of new technologies, remember that most fail or underperform, and be prepared for losses if you invest in them.
What are the factors that make one NFT more valuable than another?
When considering whether or not to invest in an NFT (or any digital asset), you should look for certain qualities that might add value to the asset.
There are four basic factors that determine how much an NFT is worth: its scarcity, its collectability, the amount of liquidity in its market, and its utility.
- Scarcity
The reason people want to own something unique is that it gives them a sense of exclusivity or specialness; they want everyone else to know that there’s only one of this thing and they have it.
That’s why, if you’re looking at an NFT, you want to know what makes it scarce.
For example, if you’re looking at a collectible trading card, you might want to consider who made it and whether its rarity makes it valuable—is it a limited edition or one-of-a-kind? Was it made by a notable artist? Is it part of a limited series?
What about the platform itself—is there a limit on how many times any given person can use the platform to create an NFT (and thus how many NFTs can actually be created)?
Maybe this asset has been used by celebrities or sold for millions at an auction before being resold on the market.
- Collectibility
Some things are just more desirable than others—but why? That’s where your own judgment comes in.
To decide whether something has collectibility, you’ll need to consider your personal taste as well as prospective buyers’ tastes.
Are there other works from this artist on sale for similar prices?
As the market for non-fungible tokens (NFTs) continues to grow, investors may be wondering what they should look for when picking their next investment.
NFTs are rapidly evolving and becoming more complex, so it’s important to understand the different types of NFTs available and to know what qualities make them valuable. All these things are factors that could potentially make an NFT more valuable.
You also need to understand that NFTs aren’t all alike—there are different types, including collectibles, art, games, and virtual worlds.
Each has its own unique characteristics that determine its value and how you can use it. For example, collectible NFTs are digital items that represent physical objects or real-world events.
They can be used in games or on social media platforms to enhance user experiences. Some examples of these NFTs include stickers and memes that users can buy and sell on platforms like Twitter or Discord.
A good way to think about these types of NFTs is as a virtual item or experience that has some monetary value attached to it—like a limited-edition Pokémon card or trading card game booster pack.
Artwork is another type of NFT that’s gaining in popularity thanks to high-profile sales by well-known artists like Beeple, Edward Snowden, and Mad Dog Jones.
- Liquidity
The third factor is liquidity, and this is similar to the concept of liquidity in stocks—the ability to turn an asset into cash easily and without significant loss.
If your market for a given kind of NFT is highly liquid (meaning there are many people interested in buying or selling it), then it’s easier for people to trade their NFTs with each other and get cash for them quickly without having to sacrifice a lot of their value.
- Utility
Your NFT may be adorable—it could even be rare—but does your NFT do something useful?
This may seem like an obvious question – if it doesn’t do anything useful why would you want it? – but what I’m really saying here is that utility may not be apparent at first glance.
For example, let’s say you have a virtual pet on Polygon in a blockchain game (an adorable little kitten with a bonnet) that plays the Tamagotchi game with you and earns tokens for it.
In this example, the cat might be cute, but the real use case of the token is the ability to interact with the cat within the Decentralized Applications (dApps).
Key Takeaway
It’s important to have a firm grasp on the underlying value of an NFT in order to determine if its asking price is fair. To do that, you need to consider all of the factors that determine its value.
While NFTs will differ wildly in scarcity, collectability, liquidity, and utility, we encourage everyone to use these factors as a starting point when making their decision.
If you’re considering buying an NFT then this outline can help you ensure that the expense is well worth the cost.
Although it is possible for an NFT to appreciate and become worth more than its face value, there are plenty of factors that can contribute to the overall value decline.
Additionally, as new tokens enter the market more frequently, developers will have to work hard to keep their tokens relevant and valuable.
When you purchase an NFT, it is important to determine if the cost of your item can decline in addition to potentially rising and maintaining a successful long-term investment.
Disclaimer: This is not financial advice. Always do your own due diligence before making any financial decisions.
Writer on Demand PH 