If you could travel back in time to the 1990s, you would hear a lot of people insist that new fads like email and text messages were never going to last. But today, these technological advancements are embedded in our day-to-day lives. Our digital world is constantly inventing and reinventing systems of communication and commerce, which we can see in the latest trend: the NFT.
NFTs might seem alien to us now, but every technological innovation felt improbable at first. Understanding what NFTs are and how they're valued can only benefit us. So, let's see what an NFT is worth.
NFTs, or non-fungible tokens, are unique digital assets. When you purchase an NFT, the record of your ownership is recorded on a blockchain. Blockchains are like digital ledgers. If you buy a house, the deed of ownership will be stored in the County Records Office. But for a digital asset, we need a digital records office - and that's what a blockchain can do for NFTs.
NFTs do have a real-world footprint. There's an operation cost, called a gas fee, which is the cost of the energy needed to run the blockchain where NFTs are housed. Kind of like how the property taxes people pay fund the public services that maintain their home ownership.
One reason people find NFTs confusing is that they often look like simple pictures. NFTs can be digital art, music, videos, or GIFs, among other formats. And even though other people can screengrab or download copies of the same digital art that someone has purchased as an NFT, the ownership of the original is still recorded on the blockchain. It's like buying physical art, actually. Many people can have a print of the Mona Lisa in their house, on a T-shirt, or even on their socks. But only one original copy of the painting exists and only one buyer can own it at a time.
Just like the Mona Lisa and other great works of art, NFTs can be worth quite a bit. The value of NFTs is connected to supply and demand. There are also a few other factors that influence their value. Here are three factors that determine the value of NFTs:
- Vintage: An NFT can appreciate over time, like a fine wine. Many early projects are worth impressive amounts now.
- Rarity: While some projects release hundreds of digital art pieces for purchase, others may only put out dozens. And the rarest of projects will release only one unique piece of art. Which do you think will be worth the most? It's like Toyota manufacturing hundreds of thousands of cars each year, compared to the few hundred made by Bugatti in the same time period. Obviously, the Bugatti cars are valued much more highly per unit because of their scarcity.
- Reputation: NFTs released or promoted by well-known creators and popular communities are worth more than those from obscure artists. A song by Beyonce, for example, is going to be far more popular and valuable than my new single.
Now you know a bit about why NFTs are valuable, so let's look at how NFT valuations work. There are two ways you can value an NFT.
One way to value an NFT is based on the income it generates. If your NFT has cashflow, like through rental or royalty payments, calculate the total lifetime income you can expect from that NFT. Then, multiply that number by 0.10 and then again by 0.15. The value of your NFT is between these two products.
The second way to value an NFT is by sales comparison. Find out what similar NFTs are selling for, or look for records of recent transactions for NFTs like yours. You can use these transactions to reason that your NFT is worth at least the same amount.
Digital assets are vital to the changing landscape of our world. We're always going to need physical valuables, like homes, electronics, and transportation. However, as the virtual world advances towards us, digital ownership and cryptocurrency become more and more real.
Just like previous generations struggled to picture the extent to which digital communication would change the way we interact and function, many people today can't imagine NFTs will matter or last. But people said the same about domain names back in the day. It seemed silly to spend money on a dot-com for your business or yourself. But today, domains are a common household item. The same could soon be true for NFTs. For more on valuing digital and physical objects, see Veristrat.