What Drives the Price of NFTs?

Unless you live under a rock, you have likely observed how non-fungible tokens (NFTs) have taken the internet by storm. Whether you spend your time scrolling Twitter or browsing through Facebook, it’s not uncommon to see a news article or a random comment mentioning NFT at least once a week.

But there are many reasons behind this popularity. For starters, these digital assets can represent any property, allow the easy transfer of ownership, and give you bragging rights for owning creations on the web.

Due to these factors, it’s not difficult to determine why NFTs have become such a powerhouse phenomenon across the web. But what still remains a mystery to many people is exactly how do you value an NFT after its creation.

It is a very good question and requires some explanation for you to understand the answer. To help you understand the concept in a detailed manner, here’s a lowdown on who decides the price of NFTs and what allows these digital assets to retain their value.

What Are NFTs Anyway?

Before you dive into analyzing the value-related factors for NFTs, it is important to determine exactly what NFTs are in the first place.

Simply put, NFTs are digital tokens that are created via blockchain technology. Unlike cryptocurrencies where each token can be replaced or exchanged by another identical token, NFTs cannot be replaced by a duplicate token. This makes each NFT one of a kind, and also gives these tokens the descriptor of being non-fungible.

Apart from being different from cryptocurrencies in their replacement, NFTs also differ from their counterparts in terms of functionality. It’s because cryptocurrencies represent a certain value in fiat currency over the blockchain; while NFTs are associated with specific assets that exist on or off the blockchain.

This means that NFTs are not your regular cryptocurrency that can be liquidated for quick cash. Instead, they are a digital representation of certain assets. Typically, selling your NFT not only asks you to transfer the token to the buyer, but also needs you to provide them with the proof of ownership for the related asset.

This proof of ownership can be integrated within the NFT itself in the form of attributes. In many cases, transferring the asset to the buyer off the blockchain is also part of the transaction process. With that being said, this is not a necessity and depends upon the type of asset that you are selling through the NFT.

What Type of Assets Can Be Turned Into an NFT?

Once you have learned what exactly is an NFT, you can get one step closer to knowing how do you value an NFT and who decides the price of NFTs. But in order to fully grasp the information, you need to go through an overview about the different assets that can be turned into an NFT.

The current, simplest, and most popular usage of NFTs is turning digital assets or online properties into these non-fungible tokens. But many off-the-internet assets also have the potential to be represented on the blockchain in the form of an NFT.

Some of the most widely used iterations of NFTs include the following.

  • Digital art such as virtual paintings and 3D models.
  • Online content such as social media posts, articles, and memes.
  • Media properties such as music and videos.

It’s important to note that these assets are popular in the NFT space due to the current fervor around NFTs. But as mentioned above, you can also turn the following non-digital assets into NFTs.

  • Paintings.
  • Statues.
  • Real estate.
  • Antiques.
  • Collectibles.

It is also crucial to learn that even though these assets can be turned into an NFT, this use case is currently rare. That is why, the focus on deciding the value of an NFT gets so difficult. It’s because when there is no physical property involved, determining the value of an NFT can sometimes seem baffling.

But the actual value-deciding mechanism is simpler than you might think at first. With that being said, it is also highly interesting in terms of its overall functionality.

How Do You Value an NFT?

Simply put, the answer to who decides the price of NFTs is not based on a central authority. Instead, it relates to the speculative value of an asset. As mentioned above, this value mechanism mainly applies to digital content such as art and tweets. For tangible assets, the price directly relates to the physical property’s market value that has its own pricing factors working for it.

Coming back to deciding the value of an NFT, it is very similar to selling art in the real world. While your manufacturing or production price for a painting might be in tens of dollars, it can be sold for hundreds or thousands of dollars after a proper valuation of the artistry. The market demand can either maintain this price, drive it further, or bring it down after a while.

In a similar mechanism, the main price of digital NFTs stems from the popularity of the respective asset. While there is no valuation involved, the initial price can come from market research and the average cost of similar assets. From there, market demand acts as the primary factor behind deciding the value of these NFTs. That is where the interest of potential buyers plays a major part in driving the value of an NFT.

For instance, if you create a piece of digital painting that uses abstract art techniques in it, you can decide its initial price by looking at similar pieces of art in different NFT marketplaces. By considering the technique and price of other pieces in the same class, you can set a specific cost to your own piece.

You can then keep the set cost as a retail price for anyone interested in the piece. Otherwise, you can put that as a starter bid to drive the price further through multiple buyers.

This is the most straightforward answer to how do you value an NFT with a non-tangible asset. But in order to drive the price further, you have to depend on hype, demand, and popularity. That’s where it gets a bit complicated to determine who decides the price of NFTs. With that being said, the overall phenomenon is still not difficult to comprehend once you learn how it works.

What Type of Factors Drive the Price of Your NFT?

There are several factors that can drive the price of an NFT. From market conditions to buyer demand, these aspects range across a wide spectrum.

Some of these components include but are not limited to:

  • Market demand.
  • Buyer emotion.
  • Investment potential.
  • Creator’s popularity.
  • Asset’s uniqueness.

Other factors such as an asset’s usage potential and its cultural significance also contribute to the overall value of an NFT. Some NFTs also stand out due to their proposed return on investment (ROI), where the idea of a possible increase in future value actually drives the current value.

To put it simply, you can summarize all commonly associated factors with one single word: hype. You may relate this word to the conversations around an NFT, the interest shown through bids, or the existing popularity of a piece that’s being sold. In the end, the more hype that surrounds a piece, the more its value hikes on an upwards trajectory. This focus on creating, maintaining, and driving positive buzz answers the question of how do you value an NFT.

When you decide to create an NFT, it has to have significant traction behind it. If you have a large following over the web, this distinction can come from your personal association or stamp of approval. In case you have a popular piece of content such as a viral tweet, the number of likes can act as driving the demand for it. In turn, it’s not as much about who decides the price of NFTs as it is regarding “what” drives the value of such a non-fungible asset.

One of the best examples that combine all of these factors refers to Twitter CEO and co-founder Jack Dorsey’s tweet on the platform. As Twitter’s very first post, the tweet has an iconic status behind it. Combined with Dorsey’s public profile and the fervor around NFTs, turning the tweet into an NFT creates the ideal conditions behind its value.

That is why, when the tweet debuted as an NFT on December 25, 2020, it held a starting bid of $1. But fast forward to three months later, and the tweet’s NFT reached the final bid of $2.9 million on March 22, 2021. That is when it was sold to the highest bidder, with the overall transaction being valued in Ether (ETH) at the time.

In addition to the factors mentioned above, the tweet also had the factor of Dorsey’s digital signature working behind it. This made the tweet valuable as a commodity that was being sold with the creator’s autograph. You can compare that to a book by a famous author with their signature on it.

Exclusive Use is Not Required to Drive the Value of an NFT

Continuing from the example of Dorsey’s tweet, you should bear in mind that exclusive use of an NFT is not required to drive an NFT’s value. For instance, while Dorsey’s tweet has been sold as an NFT, the tweet itself has not been removed from the platform. It continues to live on Twitter as the platform’s first ever tweet. This means that the buyer who purchased the tweet does not get access to Dorsey’s Twitter account or makes the decision to remove the tweet from the eyes of the world.

This shows that in order to drive the value of an NFT, you don’t necessarily have to give out the asset’s ownership rights. While transferring ownership rights or the asset itself can be a great perk for buyers, it is not a necessity or a significant value-driving feature for NFTs.

Similar to new NFT sellers, buyers are also interested in learning how do you value an NFT and how do you pay the right price for one. According to popular cryptocurrency exchange Binance, there are three factors that drive the price of NFTs. These factors are rarity, utility, and tangibility. The exchange suggests that buyers look out for how hard-to-get an asset might be, what use case it brings to the table, and whether it has a real-world association with an asset.

But in the end, the decisions that buyers take are mostly based on emotion and the buzz around an NFT. This is most probably seen in the case of Tesla CEO Elon Musk’s tweet.

On March 15, 2021, Musk created a special tweet to sell as an NFT. But after he put up the tweet for sale and the offers went up to a bold $1.1 million within a day, the Tesla leader decided not to sell the NFT.

While the tweet still stands on Twitter without being sold as an NFT, it is a reminder that rarity, utility, or tangibility may not always work together as the factors that decide an NFT’s overall value. Sometimes, even one of these factors is enough to drive the value of an NFT.

By covering all of these factors, it becomes easy for you to determine who decides the price of NFTs or rather what drives the value of these digital assets. From there, you can take certain steps to ensure that you are selling your NFTs the right way or buying NFTs that serve a purpose to you as a buyer.

How to Approach Value While Buying or Selling NFTs?

Whenever you are buying or selling NFTs, you are working with a highly speculative asset that has its value depending on a variety of factors. That is why, it is important that you know how to approach the digital asset’s value from either end of the spectrum.

As a buyer, you should remember the points mentioned above that relate to the asset’s uniqueness, utilization, and association with real-world assets. You can also determine whether your ROI is going to be worth the wait. Analyzing whether selling or holding the asset may give you more overtime profit is yet another point to consider before you complete your purchase.

As a seller, you should look into raising your overall profile and the general hype of the piece you are about to sell as an NFT. No matter if it’s a tweet, a Facebook post, or a digital painting, the ability to create general buzz can give you the boost in value that you need – especially when compared to other general assets in the same class. In some cases, adding digital signatures or transferring proof of ownership can also help you with driving the token’s value.

By keeping these factors in mind, you can determine how to value your NFT for maximum benefit as a buyer or seller. This allows you to not only navigate the tricky world of these popular assets, but also lets you make the most out of different opportunities that they bring to the table.

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