In 2021, the non-fungible token (NFT) sector raked in $17.6 billion in sales. That means there’s value to be found in the NFT market – you just need to figure out which tokens are valuable. And that’s actually not too complicated to do: there are three key factors that’ll help you separate the best deals from the rest.
Let’s look at something that is fungible first: a dollar. See, one dollar is exactly like another – and each has equal value. That makes them “fungible”. It’s the same with bitcoin, ether, and other cryptocurrencies. With NFTs, though, one token is not like another – each has a different value, so they’re said to be “non-fungible.”
As for the unique tokens: they exist on the blockchain. And since the blockchain can’t be changed or deleted, NFTs are a secure way to represent the ownership of a unique asset. You can break them down into two main categories:
Digital items: original jpegs, music files, collectibles, gaming items, or virtual land in the metaverse.
Physical items: paintings, rare bottles of wine, or real land in the real world.
For physical items, an NFT would represent ownership of that item on the blockchain. But since real-world items have their own valuation methods, we’ll focus on digital items. So without further ado, here are the three factors:
Rare baseball cards cost more than common ones, and it’s the same with NFTs. While each NFT is unique, some have attributes that are harder to come by than others.
Take CryptoPunks, for example: an NFT collection of 10,000 unique pixelated characters with various attributes. We’re talking beanies, bandanas, top hats, 3D glasses, and so on. Now, some of these attributes are a lot harder to find than others: 2,459 punks wear an earring, while only 44 have beanies. And, on average, punks with beanies cost almost six times more.
Rare NFTs can be even more valuable when they’re created by someone famous, or when they have historical significance. Jack Dorsey, former CEO of Twitter, sold his first tweet as an NFT for just under $3 million. And while that seems like a lot of dosh to fork out for an original online post, it’s still an extremely rare NFT: there will only ever be one Jack Dorsey, and one first Twitter tweet.
You’re probably wondering why anybody would pay that much for a rare jpeg. It actually makes sense when you look at it from an economic perspective: wealthy people quite often buy things for status alone. In economics, these are called “Veblen” goods – your luxury cars, designer watches, and diamond-encrusted jewelry – and some NFTs certainly fall into this category.
Unlike regular goods, the demand for Veblen goods actually increases with their price: the more your NFT costs, the richer you appear. And that status factor further drives up the price of NFTs.
That’s also the idea behind rare NFTs within virtual worlds like Decentraland, where you can buy or sell virtual lands in NFT form. Fashion Street Estate, for example, sold there for $2.4 million last year. It’s scarce, sought after, and conveys status in the virtual world.
It’s one thing for an NFT to be scarce. But if it has some form of utility, that can go a long way toward boosting its value. Just look at Bored Apes: they’re the most popular NFT collection on Earth, with over $3 billion worth of sales. Apes are rare, sure – there are only 10,000 in existence – but the real value boost for Ape owners is their exclusive membership to the Bored Ape Yacht Club.
What does that include, exactly? Well, aside from the Twitter following of every other Ape holder and access to exclusive events, it’s a way to generate cash. Last year, all Bored Ape Yacht Club members received two lucrative NFTs for free. First, an NFT dog worth 10.75 ether (around $35,000 at today’s ether price). Then, each member was awarded one of three mutant serums: common, rare, or rarest. Today, these sell for 34, 48, and 1500 ether, respectively.
When it comes to your digital investments, safety comes first. Of course, it’s always a bonus when safety comes wrapped in a pretty little package.
The NFT floor price is the lowest listed selling price for an item within an NFT collection – that is, the cheapest NFT that you can find of that kind. Floor prices are easy to find on NFT marketplaces like Opensea and Rarible. If you go to Opensea and search “Pudgy Penguins,” for example, you can see that the current the floor price for the collection is 2.69 ether.
If you click the floor price button, you’ll see a list of the cheapest Pudgy Penguins.
In this particular case, the cheapest few Penguins all cost the same as the floor price. That suggests the market has come to an agreement on the value of lower end Penguins. But in some cases, the floor price is an outlier: it can be much less than the price of the next cheapest item. That’s an opportunity – much like buying the cheapest house on a nice street.
It’s certainly worth investigating floor prices if you’re looking to buy – both to find bargains and to get an idea of the range that the collection you’re interested in sells for.
NFTs are a brand new asset class. But from a valuation point of view, they share some similarities with real-world items. If something is scarce, useful, or trading at a discount, it’s likely to be more valuable.
This guide was produced by Finimize in partnership with Ledger.
Check out Ledger's mini-website at finimize.com.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.