Making any creative work into an NFT has zero marginal impact on value.
NFTs do not automatically increase or alter the price of any digital or physical asset. If the creative work or digital asset has little to no value, adding an NFT to the mix will not change anything. The asset has to be valuable before an NFT is added to it. Otherwise, the NFT will have zero value since the asset is still undesirable.
Put another way. Adding an NFT to any digital work or asset will only yield the pre-existing value. If the work was worth $100 or $10,000 before adding an NFT, the value would remain constant even after the NFT has been minted. You might be thinking, “What?! No, additional value?! I just paid $35,000 for a cryptokitty named Dot Catmus!” Don’t worry, breathe, keep reading, we’ll get to your situation.
But there is an exception to this rule. When NFTs are added to a grouping of items (tradeable cards, digital pets, etc.), they can make the items more valuable, challenging what we explained above. This is because the NFT community has a random walk scenario where some groupings of NFTs become very popular and collectible at random. This happens much in the same way Beanie Babies took off and increased in value.
This leads us to our next topic of NFT value. When items become valuable simply because other people start to believe they are valuable even when the item associated with the NFT has absolutely no value. This is the Ecosystem Value Creation Model and what we will discuss next.
Deriving Value from Ecosystems: Followings, Tradability, and Platform
So how do NFTs become valuable for the simple fact that they are NFTs? We’re going to walk you through what we affectionately named the Ecosystem Value Creation Model. It’s a work in progress as we evaluate the NFT marketplace, but we wanted to share what we have discovered so far.
We’ve found that the most successful NFTs on major platforms all share the same attributes. There will be some NFT outliers in the future. Still, as of now, we can say that these factors are closely associated with valuable NFTs even when the associated item didn’t have anything of value to it prior. Keep in mind that the following outline only applies to digital assets. Not to physical assets that have an NFT.
If you would like a more in-depth explanation or if you would like us to walk you through NFTs in more detail, reach out to us directly.
The main elements we identified when assessing the long term value of an NFT are as follows:
1. Ecosystem – when we refer to an ecosystem, we are referring to the followers, creator(s), and tradability of the NFT.
a. Following – there should be a significant following of the creator or NFT asset you are looking to acquire. The larger the following, the more likely it is for the NFT to maintain or increase in value. Conversely, a smaller following will result in a more volatile price for the NFT, which could fall to zero at times if not permanently.
b. Tradability – in the simplest terms, we define tradability as the ability to enter and, more importantly, exist any NFT asset. The size of the following of the given NFT asset will directly impact the tradability of NFT, which is a significant factor when determining value.
If the NFT has a small following, the tradability will be very limited. This means it can take a long time to find a buyer making the NFT an illiquid asset. The more illiquid and speculative an asset is, the more volatile the value becomes.
2. Platform Risk – some NFTs can be moved between platforms and are not locked. Others can only exist on one platform. NFTs that can be moved are less risky, while NFTs that cannot be moved are riskier from a valuation standpoint.
In the cases where the NFTs are limited to one platform, the NFTs on larger, more established platforms are evaluated at a higher value, given the platform’s stability over time. At the same time, NFTs on smaller platforms are viewed as less valuable and significantly riskier given the increased uncertainty over time. If a platform fails and you cannot move your NFT, your NFT would fail.
Final thoughts on value
At the moment, we view valuing NFTs as much of an art as it is a science. There are still enormous risks that we believe most creators, buyers, and investors are overlooking. While we think the NFT ecosystem will thrive, this same optimism does not extend to all NFTs. Every creator, trader, and investor in NFTs would be wise to exercise extreme caution when buying NFTs. There are very low probabilities of a positive return on most NFTs at the time of this writing.
When NFTs meet these criteria for the Ecosystem Value Creation Model, the NFTs have the potential to significantly increase in value without any correlation to the associated digital asset. The asset can be almost anything, but as long as people want to trade them and believe the value will go, the item can increase in value for the simple fact that it is an NFT. New participants into the NFT space can easily mistake the rise in the price of any given set of NFTs as a sign of real value when it’s nothing more than a bubble.
But again, buyer beware.
What Makes NFTs Valuable?
What’s an NFT worth? NFT value has been a hot topic of debate ranging from “NFTs have no value” to the other extreme saying that “NFTs are going to be more valuable than anything we’ve ever seen.” As in most things in life, the truth lies somewhere between the extremes, which we would like to discuss in this section. Before we go any further, we want to clarify that this isn’t a guide to valuation. Instead, these are the methodologies we used to determine value in the NFT marketplace.
Numerous factors come into play when evaluating the value of any work, from the work’s creator to the subjective quality and everything in between. These are topics that we view separately from the value of any given NFT. This section strictly looks at the core pillars of what makes any given NFT valuable while controlling for the factors mentioned above.
NFTs are a form of tracking, cataloging, and instrument of authentic scarcity. Nothing more, nothing less. A great way to look at an NFT is as a highly specialized certificate of authenticity with customizations for the creators.
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