NFTs are a rather diverse investment vehicle with a variety of possible use cases, some of which may not even be known to the buyer at the time of purchase. This is especially relevant for community-driven projects, which are being constantly developed by their current NFT owners, thereby expanding the use cases of the underlying NFTs. Thus, correctly valuing NFTs is no simple undertaking. Following, three main value drivers for NFTs are discussed in more detail.

Scarcity: Each NFT is a unique token on a blockchain and only exists once. But most valuable NFTs are part of a project that includes a large number of NFTs of the same type. An example are the 10,000 CryptoPunk NFTs, which all look slightly different but belong to the same CryptoPunk series.

Scarcity within a project has two aspects. Taking the CryptoPunk NFTs as an example again, we see that there is a limited number of CryptoPunks in the 2017 series and there will never be more than 10,000 CryptoPunks. The same is true for many other projects, which are also limited. Second, each CryptoPunk has a unique appearance, but all the CryptoPunks have been created from the same set of attributes, with some attributes being rarer than others. Thus, not all CryptoPunks have the same value.

Many other NFT projects have followed this idea and have created characters from a given set of attributes. When valuing such an NFT, it is not only important how many NFTs have been created by the project in total but also how valuable the individual attributes of the NFT at hand are.

More Here: Learn How to Check the Rarity of an NFT

Usability: When NFTs were first introduced to the market, they were mere ‘pictures on the blockchain.’ With the success of newer NFT projects, actual use cases for NFTs were introduced. An example is the NFT series Bored Ape Yacht Club, where members have set up a Discord channel that can only be accessed by owners of a Bored Ape NFT.

As many celebrities have publicly announced their purchases of a Bored Ape NFT, the access to this Discord channel could be of great value to some. Further, as the prices for Bored Apes have risen to over $100,000 USD, the Discord channel is guaranteed to only include persons with a net worth north of that, again making it interesting for some people to gain access to this circle.

Other use cases can include access to services and goods, entitlements to cash flows and airdrops, participation in games and communities, and many more. As mentioned above, many NFT projects are being developed further and some of these projects will introduce new use cases along the way. Thus, when valuing NFTs, their current and potential future use cases have to be taken into consideration.

Desirability: As is often the case with collectibles, many of the currently most valuable NFTs have price tags that can neither be explained with scarcity nor usability, but only on a meta level. The meta level includes, among other factors, the history of an NFT, the narrative supporting the project, and the hopes and imaginations that an individual or a collective of investors project onto an NFT collection as well as its single NFTs. It is these same factors, which are often hard to exactly determine, that drive the value of old cars, paintings, art, and the like. All these factors combined are expressed in the desirability that an object triggers in the owner and potential buyers.

With NFTs, desirability is often connected to the history of the individual NFT projects. Owning one of the first NFTs ever created on Ethereum seems to be of great value for many investors. Another factor that currently massively drives desirability for NFTs is the belief in future price surges. At the same time, this is an NFT’s main crux: While an NFT’s historical characteristics are immutable, desirability due to expected future price increases can vanish at any moment — especially, when it becomes obvious that these future prices most likely won’t be realized.

NFT projects whose valuations are mainly driven by the expected future price increases will collapse as soon as the NFT market starts to cool down. Thus, in the current market environment, investors often need to carefully investigate an NFT’s value propositions and evaluate if the current price levels are justified.