Understanding how NFTs are valued

Understanding how NFTs are valued

The entire NFT market soared by over 1,785% in the first quarter of 2021. With a recorded transaction volume of over $2 billion. To understand the scale of this growth, consider that the art market values at $67 billion. It is a market that has been around for quite some time now. Instead, the entire NFT market which is approximately 3 years old, has grown to almost 3% of the entire art market.

There have been overwhelming sales like Beeple’s. The Everyday-The First 5000 days collage, selling for $69.3 million. Jack Dorsey’s NFT tweet which had its bid reaching over $2.5 million was similar. There are many NFTs out there selling at irrational and expansive levels.

Before we pass this judgment and understand how they value, let’s go through in detail what NFTs are.

What are NFTs

NFTs are Non-Fungible Tokens. Doesn’t make sense? Let me explain…

For an item to be fungible, it means they are interchangeable. You can change them with another item of similar properties. For example, you can buy 5kg of pet feed as a single 5kg bag or two 2.5kg bags. The value of the single bag is worth that of the two 2.5kg bags regardless. Now, that’s fungibility.

But, for an item to be‘Non-fungible,’ it means it is distinct, rare, and most times indivisible. For example, diamonds are non-fungible. Since they come in different cuts, grades, and sizes. You cannot exchange a round brilliant cut of diamond for an emerald cut diamond. It’s because they are both diamonds. Another example is art pieces, two art pieces may look the same but there is a difference.

NFTs are cryptographic representations of Non-fungible assets. These assets include; arts, collectibles, gaming skins, domain names. They can also be physical non-fungible items.The tokenization of these artworks is what makes NFTs assets. They can include, virtual assets, and collectibles. So it’s a blockchain that gives every NFT representation of ownership.

Viewing NFTs from the subjective and objective lenses of value

The Objective Value

The objective value of an asset is its functional or core value. It is about how much effort went into its creation. This is the value we notice from our direct use of valuables and is relative to how rare it is in the market. It’s like the direct value we get from clothing for instance. Like the protection from the elements or the value, you perceive from water to quench your thirst.

The market forces of demand and supply reflect the objective value of any asset. In other words, the shortage or excess of an asset or service, with proven levels of demand says a lot. In the market, they are both great indicators of how much something values in the market.

This can also reflect in NFTs and digital arts as demand for some NFTs. Which shows in rising auction prices. It keeps growing for NFTs or NFT collections with limited supply. Also, another example is the market cap of NFTs. It rose 10 times its 2018 value, following the rising demand for NFTs.

Supply and demand

The Subjective Value

The subjective theory of value is a behavioral economic concept. It explains why some items value through our emotions, preferences, and thought processes. You may consider breaking your pocket for a piece of digital artwork. A friend may consider it ridiculous. According to them spending such an amount on a mere splash of random colors called “an art piece” is insane.

Subjective value is different. It explains all the preferences that are beyond our objective perception of value. The subjective value indicates personal to individual preference. It may include and mean many things. While the objective outlook has a more clear and uniform basis for its valuation. Also, these two lenses of value perception, although different, often overlay themselves. It is usually on the valuation of an asset.

A good example is Christian tourists, who buy tiny jars of water from the Jordan River for as high as $56. This is only because people believe it to be the site of Jesus’ baptism. The river is dirty and polluted with sewage spills. Even then the Kensington Palace had some flown in for Princess Charlotte’s baptism.

This explains our rational and irrational tendency in our perception. It is what underpins our natural desire to collect works of art. Like old coins, antiques, baseball cards, vintage cars, balls, and so on for millions.

We collect them for their rarity, personal significance, status symbol, and nostalgic appeals. This distinction between the objective and subjective value is what supports fungibility.

Value in light of the rarity and scarcity

Like it or not, people will always want to buy an item that is rare and unique. For example, the Rüdesheimer Apostelwein wine dates back as far as 1727.  With only a barrel available, a bottle values at $200,000. NFTs are also seen with the same correspondence. Digital arts will gain more value if they in a limited number, take Cryptopunks as an example.

Taking the Renaissance investment’s definition of the Law of Scarcity-
“If what we desire appears to be in limited supply, the perception of its value increases significantly.”

This explains why limited-edition arts are increasing in worth. The rarer an NFT collection is the more significance it has in value.

When the value is shaped by context (story), popularity, and identity

One of the reasons Jack Dorsey was able to make an enormous sale from his first tweet is due to his personality. Everyone wanted to “own” Jack’s tweet even as it was only words. For some, it was the story behind the tweet. It was knowing that was the first-ever tweet on a platform of over 192 million users, where we all meet.

Another example is of the renowned artist, Vincent Van Gogh. For Vincent, his fame came after his death. His sister-in-law who was from a rich home was the brain behind his popularity. But, for some art lovers, it was the story behind the life of Van Gogh and for others, it was his Sister-in-law’s affluence.

In the same way, NFTs with known stories get accepted. For example, in Beeple’s work. It was the idea of owning a painting that took 13 years of Beeple’s life. Whatever your view on the value of NFTs, there are reasons why this new market should be of importance to you. 

Investing in NFTs

Investing in NFTs
Photo by Gabby K from Pexels

Whether you are an artist or a collector interested in NFTs, there are rules you need to be aware of. This is to prevent you from scam.

There is a lot involved in the sale and buy of NFTs. For the artist, there is the logistics of figuring out where to mint it. There are also considerations on minting fees and using a friendlier platform. Minting fees can be very high with Ethereum networks. For the collector looking to invest in already created NFTs, you need to be careful. Ensure you are buying verified and legitimate NFTs. With the rate of NFT theft, there are a lot of grey areas with NFTs that aids theft. This is especially true for inexperienced collectors.

This is why in Orica, there is the Proof of Art standard verification process. It ensures scrutiny of every artist before they minting and publishing for sale. Finally, as a collector, based on all the aspects listed above you want to be on the lookout for NFTs. It doesn’t matter if it’s for persona, use, or something with scarcity and rarity.

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