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NFTs existed since silently in the background beginning in 2014, before becoming unbearably popular in mid-to-late 2021. NFTs current lifecycle may be unprecedented, but a road map for the future of NFTs may already exist.
NFTs turned the technology adoption life cycle into an out-of-control roller coaster in its short 8 years. An NFTs function has been taken over by investors, but just like any other investment, prospective NFT owners need to understand the underlying asset.
A common method of assessing the value of investments is the market approach, i.e., assessing the value of a like for like substitute for your potential investment as a proxy.
The original NFT creator intended to merge art and blockchain. However, NFTs have significantly evolved since 2014.
If you were to perform a market approach analysis on NFTs, what do you think is a suitable like for like substitute?
Do not let perfection get in the way of an effective market approach analysis. It is unrealistic to expect to find a replica of the company or asset you are reviewing.
How does an NFT generate value? This is the first question a traditional investor wants to be answered.
Therefore focus your analysis on finding another company or asset that generates value in the same way as an NFT.
As we all know by now, an NFT is not a typical asset. NFTs do not intrinsically generate cash flows from their use or operations.
While that is not ideal, that does not mean that NFTs do not have any value.
The intrinsic value of NFTs is subjective to each user based on his or her experience. Herein lies the tricky aspect of an NFT, this value cannot be projected in dollars or cents expected to be generated per year.
Therefore, you need to find an asset that is valued in a similar subjective fashion.
As the founder of NFTs intended, the art market is an accurate comparison for trading NFTs.
The Salvator Mundi (recently sold for ~$450 Million) and Jack Dorsey’s first-ever tweet project to generate a combined $0 in cash flow.
Be wary of blind reliance and overextending the takeaways from your market approach. Do not use this approach to assess value at an individual NFT transaction level, the Salvator Mundi auction does not indicate the value of any NFT on the market.
There are significant differences between physical and digital art and the venues in which they are sold. However, there are significant takeaways from physical art that can be applied to the digital art market.
Similar to physical art, digital art is trending in a direction where few people will have a disproportionate influence on the price of NFTs.
If the NFT market is being controlled by the few, then you must become an expert before investing/trading. Physical art buyers and sellers rely on experts to project value, you either need to attain that level of expertise or rely on an expert to safely trade NFTs.
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