Know Four Reasons Why Some NFTs Are Overvalued

• Avinandan Banerjee
• September 27, 2022

Many people equate cryptocurrencies to fiat currencies, believing that they are the same thing but in digital form. However, if the blockchain space stuck within conventional advancement rules, it wouldn’t be as crazy as it is today, would it?

Significant developments on the artistic side of the cryptocurrency trading industry have occurred in recent years. These developments have stormed the fintech world and awestruck millennials and GenZ with blooming investment opportunities. 

Soon, the fintech domain witnessed the emergence of NFTs. Non-Fungible Tokens are unique tokens that a sole entity can only own. Unfortunately, they are frequently overpriced because of their rarity and crafty supply-demand imbalance and only surge their value. 

NFT: The Concept

Non-Fungible Tokens are virtual tokens that represent the ownership of unique collectables. For example, digitizing artworks, collectables and even real estate can be tokenized into NFTs. 

So, what compels people to join the best NFT frenzy, investing anywhere from hundreds to millions of dollars in some instances? Crypto art investors believe it is the result of a combination of factors, including the epidemic and the rise in bitcoin values.

Crypto art has been existing for over a decade. Still, these digital assets, known as non-fungible tokens, appear out of nowhere to many people outside the crypto industry.

With spellbinding sales in recent months, crypto artists have drawn more attention than ever to top NFT platforms. Mike Winkelmann, also known as Beeple, a digital artist, made history when selling a crypto art piece for roughly $70 million.

But what makes these so-called Non-Fungible Tokens so expensive? What factors drive staggering NFT values? Let us try to understand it. 

The Building Blocks of Gigantic NFT Value

Four crucial building blocks manage and control the value of assets that the NFT represents. Investors use this framework to evaluate whether an NFT is worth investing in. Developers, on the other hand, utilise it to plan strategies to boost the value of NFTs in order to get traction and traffic. The significant factor is that NFTs provide a plethora of new value-creation opportunities for both developers and asset owners.

Let us explore the foundational blocks of NFT value:

History of Possession

• Value relies significantly upon the identity of the guarantor and past proprietors of the NFT.
• NFTs with a significant history of high possession frequently belong to renowned artists or organizations with solid brands. 
• There are, however, two ways to raise the NFT value.The first strategy is to collaborate with individuals or organizations with a strong identity for issuing NFT tokens. This strategy automatically drives more traffic and investors to the ecosystem. For instance, the first approved NFT that addresses a Formula 1 vehicle was sold for $113,124. 
• The second strategy is to exchange NFTs that initially belonged to influential people. But, it is pretty challenging to determine the former owners, despite that it is valuable on-data information. 
• To boost the value of NFTs, marketplaces and sellers can provide an easy-to-use tracking interface. OpenSea, for example, can highlight the addresses of investors who make the most significant money from trading NFTs and identify additional NFTs they own.

Utility

• The utility value of an NFT is determined by the ways it is used.
• Game assets and tickets are two primary categories with significant utility value. A rare and potent Crypto Space Commander battleship, for example, was sold in 2019 for $45,250, and the value of an NFT ticket equals the price of an event ticket. 
•  Another characteristic of utility is the NFT’s potential to be used in various applications. Imagine if you could deploy the same battleship in a different game; the value would undoubtedly increase.
• However, achieving compatibility is quite tricky. Currently, 90% of NFT gamers stick around a single game only. This is because the developers must first create a vast ecosystem of games and give appealing use cases. Both Dapper Labs and Engin are working in this direction.
• Although many unresolved questions will require a significant amount of time and labour, this is a fantastic opportunity for businesses. 
• Another simple strategy to improve utility value is to develop agreements with other firms to provide benefits to individuals who possess your NFT. Dapper Labs, for example, can work with NFT event organizers to negotiate a discount for CryptoKitties owners.
• It is very convenient to validate the issuer and owner of NFTs using technologies such as AlphaWallet’s token script, such that event organizers that desire additional participants don’t need to do anything to execute the collaboration. It’s a definite plus for everyone. 

Liquidity Premium

• A higher liquidity premium corresponds to a higher NFT value.
• The liquidity premium is the key reason why on-chain assets should have a higher value than those off-chain assets. 
• Anyone who owns ETH (Ethereum) can trade ERC standard NFTs on secondary markets without friction, increasing the number of possible buyers.
• Because liquidity reduces the risk of keeping NFTs, investors choose to invest in NFT categories with a high trading volume. 
• Even if the NFT loses its utility value when the linked platform closes, a highly liquid NFT retains its value as long as people are ready to purchase and sell it.

Future Value

• Calculating the future value of an NFT using both valuation revisions and future liquidity.
• Speculation drives valuation and is sometimes the primary driver of price appreciation. In December 2017, for example, the price of CryptoKitty #18 surged from 9ETH to 253ETH in just three days.
• However, some investors claim that price movement based on valuation is harmful to NFTs; however, speculating is a natural aspect of human nature and an essential part of the existing financial system. 
• Developers can boost NFT value and attract new users by striking the correct balance. 
• Scarcity of supply and speculation drive valuation. 
• Price-performance charts of NFT products can be used to guide speculation, as can highlighting NFTs that rise in value.

The driving force behind purchasing NFTs now

The key designer of the digital art ecosystem with the worldwide recognition of his digital art “RF collection,” Rodriguez-Fraile believes that the dissatisfaction in the US dollar and impact of the pandemic are the reasons for pushing the Bitcoin worth. 

Since the pandemic outbreak, more people have begun to believe in savings and have searched for various investment options. NFTs could be one of the appealing options for people to invest in. 

“Art has been used to store value for a long time,” Rodriguez-Fraile told Insider. “Crypto lends itself well to digital art,” thus contributing a simple and a more modern way of investing in art and using it in the same way as that of the gold or bitcoin.

Multi-million dollar purchases by 3LAU and Grimes have captivated the attention and prompted a gold rush for many artists, especially in the music industry, but the motive for buyers is less obvious.

NFTs Value Holding

NFTs, according to an investor and VaynerMedia CEO Gary Vaynerchuk, are in a bubble, but that doesn’t mean they won’t last.” A lot of people felt the internet was a craze,” said Vaynerchuk. 

Technically the internet was a revolutionary technological advancement; however, many of the early ventures were merely sold on the sheer joy of the moment. 

“NFTs are likely overvalued; if it isn’t a bubble today, I believe it will be some time,” according to Winkelmann.

Final Thoughts

It is pretty evident that NFTs and the use of art in crypto exchange are runners of the long run. Investors must use their expertise and strategize trading techniques to outwit other players and remain in touch with the never-ending saga of developments in the crypto sector and lead the curve in the trading market. 

With the creation of NFTs, metaverses, and other crypto-related technologies, it’s past time for people to accept that the world is heading towards a more digital place — we’ll just have to wait and see what else crypto enthusiasts come up with.

If you want to dive into the more detailed crypto realm, you can probably lookout for some cryptocurrency learning courses. Such courses will help you to have a better understanding of the whole concept. Moreover, if you are particularly interested in knowing more about Non-Fungible Tokens, you can check out some learning programs. 

However, seeking professional advice is always the best idea!