NFTs are becoming more mainstream every day. People are buying NFTs because of the experiences they provide. But what are the factors that make NFTs valuable?
NFTs look quite intriguing. Their uniqueness, ownership and transaction history can be easily verified thanks to the underlying blockchain technology. They can be used in applications developed by different companies and can be easily traded on secondary markets. All these features open up possibilities for new use cases and business models. There are four components that make NFTs valuable.
Value of an NFT = Utility + Ownership History + Future Value + Liquidity Premium
The value of an NFT is distributed differently among these four components depending on the asset it represents. It is within this framework that investors measure whether an NFT is worth investing in. In turn, NFT developers use these four components to attract investors.
Utility value depends on how the NFT can be used. Two main categories with high utility value are game assets and tickets. Another aspect of utility is the ability to use the NFT in a different app. Another way to increase utility value is for the NFT to form partnerships with other businesses to provide utility to its investors.
Ownership Value (Ownership History)
Value depends on the identity of the NFT’s launcher or the previous owners of the NFT. NFTs with a high ownership history value are often released by famous artists or companies with a strong brand equity.
There are two ways to increase value. The first is to collaborate with companies or individuals with a strong brand to launch NFTs. This way, high traffic and users are attracted to the ecosystem. The second way is to resell NFTs previously owned by influential people.
The future value of an NFT is derived from both its current value and its future cash flow. Demand creates speculation. Speculation, in turn, affects valuation and can sometimes be the main driver behind a price increase. In the right balance, developers can increase the value of their NFTs and attract new users.
Valuation is driven by supply scarcity and speculation. On the other hand, NFTs are digital assets that can be rented out to generate additional cash flow. For example, in a game, there may be demand from players who want a certain game asset for a day to complete a task.
High liquidity is another factor that increases NFT value. The liquidity premium is the primary reason why on-chain created tokens have a higher value than off-chain assets. Investors prefer to invest in NFTs with high trading volume because liquidity lowers the risk of holding NFTs.
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