Decoding the Value of NFTs: A Perceived Sum of (Demand, Rarity and Authenticity)
“Since the summer of 2020, the NFTs have seen a boom like no other. The NFTs are amidst a megacycle in which $2.5 Billion worth of NFT sales were made in the first half of 2021 alone. The current market cap of NFTs is around $22 Billion, a staggering rise from $100 Million at the end of 2020. Amidst this megacycle, the question arises, how is this hyped value of an NFT calculated. We are going to decode the value calculation so that a proper investment decision can be made.”
The NFTs and Their Correlation with Traditional Art
NFTs are nothing but the digitalization of art. Though anything can be converted into an NFT, its original invention was done in order to aid artists in earning money and getting a globalized reach for their art that was impossible in the traditional sense. Thus, art and NFTs are closely related and so is their value. If we talk in mathematical terms, the formula of calculating the value of an art can be as under:
Value of Art = Perceived (Demand + Rarity + Authenticity)
The same formula is applicable for the NFTs, the only difference is of the world in which they lie. The NFTs operate in the digital world and its demand, rarity and authenticity is perceived in a different manner than the traditional art which is tangible in nature. Thus, to understand the calculation of value of a NFT we must dive deep into understanding these parameters of value.
The Value of NFTs: How are they Calculated?
The value of an NFT is calculated as the sum of perceived demand, rarity and authenticity. Let us consider each parameter to get clarity.
Any art piece is termed as valuable if it is perceived to be valuable in the eyes of the buyers. Perception is the main measure of its value. If the buyers perceive that holding on to an art piece or an NFT is valuable or will generate value in the future or has a utility somewhere, he will consider buying such an art piece or an NFT.
The Demand is the major factor that determines the value of an NFT as the NFTs have a limited supply and each NFT is unique making them an asset of high demands. But, there are NFTs in the market that do not sell at all as there is low or no demand for those NFTs. The demand is created through hype around an NFT. Suppose a famous NBA player launches an NFT, the demand for such an NFT will be extremely high rather than the demand for an NFT created by an unknown artist. Higher the Demand higher will be the value.
Rarity is another parameter that determines the value of an NFT. The rarer an NFT, higher is its value. An NFT pack containing only 10 cards will be far rarer and of far more value than the NFT pack containing 1000 cards, provided these cards are from the same NFT artist or a famous company.
The beauty of blockchain is that it preserves authenticity at all costs. To check the authenticity of an NFT, you must check the blockchain as all the transactions and minting data as well as the ownership of the NFT is engraved on the blockchain never to be tampered with. An authentic NFT will obviously be of far more value than a copy of it.
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
Photo by – TheDigitalArtist on pixabay