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6 Key Indicators for NFT Collectors To Evaluate NFT Projects

2021-11-10

NFTs, or non-fungible tokens are gaining momentum as new applications and use-cases appear in a wide-ranging set of industries. 

Key Takeaways:

  • NFTs are becoming an extremely popular asset on the decentralized market due to their scarcity, value and versatile use-cases.

  • When choosing to buy an NFT for speculative purposes, users should have some basic metrics in mind in order to gauge its potential value.

  • Some metrics that should be taken into account include an NFT’s Utility, Rarity, Community Size, Trading Volume, Potential and Provenance.

NFTs are one-of-a-kind digital assets that are stored on blockchains. They are immutable and entirely unique—no two NFTs are identical, making proof-of-ownership easy to establish. The fact that any real-world or digital asset can be tethered to an NFT makes these assets the perfect medium for associating real-world items into a digital environment and maintaining their uniqueness across both worlds.

NFTs have largely gained popularity for their varied use-cases. In addition to guaranteeing ownership rights and serving as digital collectibles, NFTs can be issued by anyone on the blockchain, not just projects. The accessibility of these tokens has allowed more people to become creators. At the same time, mainstream brands and platforms have entered the NFT space as well, bringing new audiences to the crypto space. 

When it comes to use cases, NFTs have found new applications in the gaming industry. The Play-to-Earn, or P2E model features in-game NFTs that allow users to earn tokens while playing, and also create, exchange and purchase various kinds of unique assets. The loot model is another popular use-case for NFTs, in which rewards are issued to users in-game in the form of boxes containing various valuable items, powerups and more.

Avatars for social networks and exclusive art collectibles are another major directions for NFTs, which has highlighted their application as a new form of digital art.

The demand of NFTs can best be described by the best-selling NFTs on Binance NFT, where gaming Mystery Boxes on the secondary market are often selling for prices up to five times higher than their original prices. The gamified mechanics of Binance NFT Mystery boxes are a classic example of the diverse and often unexpected applications for NFTs, as they contain a random NFT that differs in rarity level and can be used in a variety of games.

Given their growing use cases and popularity, NFTs are solidifying their value as they expand in terms of utility and functionality, spurring further demand.

How to Evaluate The Value Of NFTs

There are many factors that may influence an NFT’s value. To better evaluate the longevity and value of an NFT project for your collection or crypto portfolio, we have rounded up 6 key indicators in this article. Follow these tips to learn how to spot in-demand NFTs and upcoming NFT trends.  

1. Utility 

The utility of NFTs comes from their real application, between both physical and/or digital worlds. As both worlds grow ever closer together, an asset class is needed to translate the value of assets from the real world to the digital world. 

In addition to being one-of-a-kind, NFTs can be used to perform a variety of actions. For instance, in games, they can be used as power-ups or spells. They can be used up as articles of clothing for characters, or used as resources for building.

Utility lies at the heart of any digital asset. Without utility, a digital asset has no use-case and therefore, low demand. An NFT with strong utility gives it upfront value, which may accrue over time, depending on the popularity of the underlying project and how much traction it gains.

Examples of utility can be found with Play-to-Earn NFTs like Axie Infinity, MOBOX and others, where NFTs play a crucial role as in-game assets with a unique set of characteristics that NFTs derive value from. As gaming NFTs currently hold the most utility, the value of NFTs will continue to grow within the gaming ecosystem as new communities of players form. 

The strength of an NFT collection is another factor that contributes to an NFT’s value. Not all NFTs are part of a larger collection, but for those that are, the appeal of future content may influence the value of previously issued NFTs.  

Another factor to consider is the real world utility of NFTs. Some NFTs can be used to exchange for real-world prizes, while others, for example, grant access to events. For example, the Lewis Capaldi NFT Collection on Binance NFT allows users to receive special rewards with each Mystery Box collection such as tickets to a studio session, secret live show and physical merchandise.

Some also use NFTs as collateral for loans. In this scenario, NFTs are rendered inaccessible until the borrower repays the loan, plus the agreed-upon interest. Once the debt is repaid, the NFT is returned to the borrower. 

NFT staking has also been gaining popularity as an added-value feature. If users stake the native NFT of a project, they get rewarded with in-game coins that can be used to redeem premium content. Binance NFT is one of the most popular platforms for gaming NFTs, especially with the launch of IGO (Initial Game Offering) where users can discover core gaming NFT assets from top-tier gaming projects available exclusively on Binance NFT.

2. Rarity 

Rarity, or uniqueness, is a core quality of NFTs. Some NFTs are created by renowned artists. Others represent tokenized, real-world assets. All NFTs are one-of-a-kind, and their ownership and authenticity can be verified by anyone, but never altered (the ownership can change hands if the NFT is bought, sold, gifted or traded). Generally, in-demand NFTs have greater value. 

The law of supply and demand and the law of scarcity dictate that rare, in-demand NFTs often attract more buyers and sell for higher prices. Third party platforms like rarity.tools can help users get a more objective view of how rare an NFT really is. These platforms will access the blockchain explorer and other sources to estimate the NFT’s rarity, taking into account factors like the NFT’s popularity, trading volume and number of owners. 

3. Community Size

Community is a decisive factor for NFTs, since it impacts how many potential users and buyers it has on the open market. The larger the community, the more word-of-mouth an NFT attracts. This subsequently helps the project reach more potential buyers. For instance, Bored Ape, a popular NFT collection, has a large and active community that helps introduce the project to a wider audience. Users can easily check a project’s community size by visiting its official social network pages and checking the subscriber count to get a sense of the size of the community. Another factor to consider is the number of NFTs available on secondary marketplaces. An abundance of NFTs available combined with low bidding or buyer activity may suggest that supply outstrips demand.

Also worth keeping an eye on is the number of unique wallets that participated in the NFT market on a daily, weekly or monthly basis. This is often a strong predictor of overall market demand.  

4. Potential Of The NFTs 

Potential refers to whether the NFTs have room to grow based on their rarity and community size. Growth potential can be estimated by factoring in an NFT’s relative supply and demand. 

NFTs with long-term community support may become more valuable, as the project is more likely to maintain or gain traction over time, increasing demand and making the NFTs more rare, relatively speaking, and valuable. 

Long-term community attention implies the potential timespan that a collection will remain relevant on the market and will retain user involvement. Star Wars is a good example of long-term community attention, as the famed series has been engaging and growing its viewer-base for over 40 years. Users should evaluate the attractiveness of an NFT when it comes to its ability to generate long-term community attention, alongside other key factors mentioned above.

5. Provenance

Provenance is related to the origins of the NFT. Before even considering an NFT, users should first learn about the creator. This consists of doing research about the creator’s origin, the NFT’s backstory, the prominence of the creator on the market, among other factors. Researching a creator is relatively simple, as users can check their creative pages and community followings to evaluate the potential they have for personal growth.

The more prominent the creator, the higher the chances that their works will be considered valuable on the market.

6. Personal Taste

While there are objective criteria that users should keep in mind when deciding to purchase an NFT, subjectivity and individual preference do come into play. There is always a chance that a user may simply like an NFT for any number of reasons: outward appearance and aesthetics, personal connection, the relevance of the NFT’s application, or a relationship to the issuing project—these are just some of the factors that influence the personal value of an NFT for its collector.

There is always a chance that a collector will ask for a higher-than-market price for an NFT simply because of the value they personally ascribe to the asset. At the end of the day, collectors should buy an NFT they genuinely like and understand, especially if they would like to keep it in the long run. When collectors buy an NFT they like, they will focus more on the intrinsic value rather than the "trading price", since an NFT may eventually depreciate, but the value on a personal level will remain, providing long-term satisfaction from ownership.

Conclusion

The indicators highlighted in this article should be treated like tips to refer to rather than determining factors that are set in stone. There is no way to quantitatively predict the future value of an NFT. The value of NFTs is determined by market forces, and users should first do some in-depth research and analysis if they are purchasing any NFTs for themselves.

Although NFTs can and do attract speculators looking to make profits, users should carefully weigh extrinsic factors like an NFT’s utility or rarity with intrinsic factors like whether they value the NFT on a personal value. The value of NFTs vary depending on the eye of the beholder. Even NFTs that, on the secondary market, command little value, can be considered invaluable to the right owner. 

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DISCLAIMER: NFTs are an emerging asset class that is still evolving. The information in this article should not be construed as investment or financial advice. Always do your own research before making any decision to buy, sell or trade NFTs.