How to assess NFT valuation?

When assessing the value of non-fungible tokens, what metrics play a role? We explore how we began our valuation of the $WHALE NFT vault and how to proceed into the future. What are the challenges? What are the next steps? How can we improve in the future?

zoup2020-06-09

Assessing NFTs is not an easy task. We had the occasion to face the complexity of this when we performed valuation the assets of one of the most important wallets of the ecosystem: WhaleShark’s VAULT, on the occasion of the launch of the social currency $WHALE.

Discover the $WHALE NFT vault valuation report now:

Click to access to the first $Whale Wallet Valuation Audit

This article has 3 objectives:

  • Highlight the hurdles in NFT valuation assessment
  • Provide first inputs about the valuation approaches that appear to be relevant to date
  • Detail the position of NonFungible.com towards NFT Valuation

Why is NFT valuation complex?

Basically, an NFT is nothing more than an asset like any other, with metadata that defines it, buyers, sellers, name, color…, and ultimately: a market. So what makes the task of evaluating an NFT so complex?

1. A market still highly speculative

We have often been asked if we take into account the price of comparable currently for sale assets to define the value of an NFT.

No, current list-price of NFTs are not taken into account and must, in no case, be taken into account. Although the ecosystem is becoming more and more mature every day, it remains highly speculative to this day. Thus, many buyers (more or less aware of real market trends) buy assets to try to resell them 10 times more expensive. It is for this reason that there are less desirable $LAND listed for more than 10 million MANA on Decentraland marketplace.

Click to access to Decentraland $LAND Marketplace

2. Lack of liquidity

The lack of liquidity in a market represents the first major difficulty in the valuation of an asset. If no comparable asset has ever been sold or if the last sale was more than 6 months ago, the estimate of the current market price for this asset will likely be less precise.

Note that the more rare the asset (ie: Gods Unchained Mythic Cards) or even unique (work of art published in 1 copy, which is not part of a series), the more difficult it will be to find a point of relevant comparison to estimate its market value.

Suffice to say that the NFT art segment is extremely difficult to assess.

3. NFT diversity

There is not one type of NFT, but several hundred. Each project publishes its NFT(s), each composed of its own metadata, which define its characteristics in the context of the project and therefore its value, based on sometimes objective criteria and sometimes on the appreciation of the community.

Evaluating an NFT correctly would therefore require identifying for EACH type of NFT which metadata are involved in defining its value.

Some examples of criteria defining the asset value:

  • Decentraland – $LAND
    • Being close to the center, roadside, close to a promising district, close to already developed or promising estates, …
  • Gods Unchained – $CARD
    • The name of the card, its Rarity and its Quality …
  • CryptoVoxels – $CVPA
    • The location of the plot, the suburb of which it is a part, the volume of the plot, …

Of course, as projects and markets evolve rapidly, these criteria are to be considered and weighted over time!

4. Whales & Market Makers

Certain players in the NFT market do not have the same means as others. Those we call Market Makers are able to buy any asset at the price it is currently listed for, even if the asset is likely to be above market price compared to previous sales.

These sales create precedents / exceptions which cannot be ignored in the assessment of assets, but which should not be viewed as the norm either.

If tomorrow Elon Musk decides to buy a Nintendo Switch listed on eBay for $500,000 (let’s say there is one), does that mean that all Nintendo Switch are worth this price instantly? Or maybe only the one bought by Elon Musk now worth this price? Has he overpaid? Or has he defined a new era regarding the price of this object?

If the global market follows, he will have defined a new trend, otherwise he will just have overpaid. This type of scenario is more frequent than it appears in the NFT ecosystem.

5. Market size and consistency

Finally, the last point which makes the evaluation of NFTs a sometimes complex exercise: the NFT ecosystem and the market associated with it remain very small.

This is all the more true, and problematic, when we look at one of the sub-segments of the industry: art, trading card games, wearables, …

Thus, extreme, suspicious, or in any case non-standard sales which are normally masked by the volume of “classic” sales find themselves weighing heavily in the balance.

How to correctly assess NFTs?

Our experience in the NFT markets, and in the valuation of these assets has led us to consider several principles that reliably define assets:

  • Base the valuation on previous sales, not assets currently for sale
  • Identify the metadata that define the value of the asset, and distinguish it from the “noise” (additional characteristics uncorrelated from the market value)
  • Weight sales based on their date from the latest to the oldest
  • Identify on a case-by-case basis the criteria, comparable sales or methodologies which make it possible to value very rare or unique assets.
  • Accept that the criteria for the assessment of each asset by the market evolve, and that the criteria that were relevant two months ago may not be as relevant tomorrow.

NonFungible.com & NFT Valuation

Our role has always been to bring the most transparency to the ecosystem and to the NFT markets.

Evaluating assets based on neutral, objective and reliable criteria is obviously part of our mission. Our team is currently working on developing systems to automatically and reliably assess any NFT, regardless of origin and market history.

You will have understood that the principles described above must be thought for the future. They must be engineered to be just as effective when the NFT ecosystem no longer has only a few hundred but, thousands or tens of thousands of projects – we need to scale.

We have heard the strong need to valuate NFTs and we will soon be offering you solutions for professionals, gamers and collectors. We will tell you more as soon as possible… 😉

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