How to value NFTs – Bitcoin Market Journal

by James · October 11, 2022

after

Summary: NFTs are like digital collectibles; here are some simple questions to help you invest in the 1% most valuable NFTs. Subscribe here and follow me for more crypto investing tips and tricks.

The NFT market has crashed.

I predicted this a year ago, when everyone was going ape over Bored Apes. (I will always try to tell you the truth, not what is popular.)

Today, with the NFT market down 60% over the past quarter, and people liquidating their collections, I will once again say the unpopular: this is a great time for NFT buying.

While I saw the crash coming, I also predicted that the NFT technology is incredibly valuable. And I am particularly excited about the possibility of NFTs that will earn income in the long term (through royalties, rent and so on).

If you’re new to NFTs, or non-fungable tokens, they’re like crypto collectibles. I have a few mental models that I use to think about NFT investors:

The guy who collects rare baseball cards and keeps selling them at flea markets.
The couple who buy homes in repair, restore them and flip them for a profit.
The guy who collects valuable domain names then sits on them until he finds a buyer.
The bookseller who deals in rare book sales next door.
People who collect and resell classic cars, vintage wines or art.

IN theory, NFTs are like these unique assets. IN practiceMost NFTs are created by computer algorithms or Photoshop amateurs. It is why i predicted the crash: most NFTs are just bad art.

That said, mostly art is bad, which is what makes great art so highly valued. Similar to some NFTs really are valuable – perhaps 1%.

So how do smart investors find that valuable 1%?

Our latest project is a NFT Investor Scorecard. Similar to our famous Blockchain Investor Scorecard, this will guide NFT investors through a few simple questions that they can use to rate an NFT on a scale of 1 to 5.

We have looked through several years of NFT data and price history to come up with the following list of questions; we’d love your feedback on our ideas below.

rare coin collection

Table of Contents

Rarity

The primary value of a collectible is its rarity: a misprinted stamp, a unique work of art, or the first of its kind.

In the NFT world, we define two types of rarity:

Artificial rarity, which is algorithmically driven. With CryptoKitties, for example, a computer algorithm randomly assigns traits, with some traits generated less frequently (like purple eye color).
True rarity, which makes an NFT unique. Consider a Bored Ape owned by Eminem: that kind of rarity cannot be manufactured.

To determine rarity, NFT collectors can ask:

How unique is this NFT?

Is this NFT the first of its kind, the first in a series, 1 of 1 produced? Does it have a unique story or outstanding history? (Beware of computer-generated “rare traits.”)

What is the creator’s reputation?

Are they a household name? Do they have significant online influence or following? Do they have several years of success, or are they relatively unknown?

How big is the offer?

If part of a series, is there a reliable, fixed limit? Or can more in the series be created ad infinitum?

How much human effort was involved?

Is it a unique painting, a film or a song that took hundreds of hours and talent to produce? Or are there slight variations on a Photoshop template?

What is the aesthetic value?

Perhaps the hardest question to answer: does something about it speak to your soul? Will you still be happy owning this if the price goes to zero?

art gallery — Before buying digital art, spend some time in real art galleries first.

Benefit

Let’s call them NFWBs: Non-Fungibles With Benefits.

Look for NFTs that can generate income: either through licensing and royalties (as with WOW), or construction and development (as with LAND). These NFTs can become mini-businesses, with their own revenue streams.

Or, look for NFTs with IRL benefits: If you can use them in the real world, it can bring you more joy than a JPG sitting on a blockchain.

To determine utility, investors can ask:

Does NFT come with more benefits?

Does it get you into high value events? Want to enable a better gaming experience? Give you access to exclusive properties, clubs or communities?

Does NFT give you IP rights?

Can you legally license it for T-shirts or a Netflix series? Are all rights fully transferred to you? (See Galaxy Digital’s NFT Licenses: Facts and Fictions.)

Does NFT allow you to build on it?

Like property, can you enhance the property to increase its value, or is it fixed as a JPG?

Is it conveniently located?

The three most important factors for real estate: location, location, location. Is it in a favorable ecosystem, in a favorable neighborhood, near other favorable properties? (Metaverse or real estate NFTs only.)

the urban area — Even in the Metaverse, location matters.

Future value

Any investment in collectibles must consider future resale: is it a passing fad like Beanie Babies, or does it stand up to fine wines?

This is particularly difficult with NFTs, as the market is so new. But smart NFT investors can still ask questions like:

Does it have a strong ownership history?

Does it have a history of reputable owners, each paying increasingly higher prices over several years?

Does NFT have good liquidity?

Will it be easy to resell on OpenSea or SuperRare ie is it part of a popular collection, creator or community? How many active users does it have?

Is it built on a leading blockchain platform?

Is it built on Ethereum (the industry standard), or another chain? Is it stored 100% on chain, or is it sitting on a server somewhere?

What is the scope of the NFT project?

Is it part of a larger creative vision, like Decentraland? Do they have a credible, long-term roadmap?

What is the long-term potential of the market?

NFTs come in many different flavors, from art to real estate to gaming. View analyst forecasts for your market, and examples of best-selling NFTs to date.