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Many people falsely believe that cryptocurrencies and fiat money are the same things; it’s just that crypto exists in digital form. However, if conventional advancement laws bounded the blockchain industry, it wouldn’t be as wild as it is right now, would it?
The artistic aspect of the cryptocurrency trading sector has seen significant recent growth. These innovations have rocked the fintech industry and astonished GenZ and millennials with booming investment options. As a result, NFTs have started showing their massive presence in the fintech space.
Non-Fungible Tokens (NFTs) are exclusive tokens that can only be owned by one entity. Unfortunately, due to their scarcity and smart supply-demand imbalance, they are typically overvalued, which further increases their worth.
In this blog, let’s understand why NFTs gain their value and how they get overvalued.
NFT: The concept
Non-Fungible Tokens (NFTs) use the same programming that is used for cryptocurrencies for their creation. These cryptographic assets are built on blockchain technology, to put it simply. Like other digital assets like Bitcoin or Ethereum, they cannot be traded or swapped on an equal basis.
The term NFT denotes that it cannot be altered or substituted due to its distinctive qualities. Fiat money and cryptocurrencies may be traded or swapped for one another since they are both fungible.
Key Features of NFT
- Digital Asset – NFT is a cryptocurrency that uses blockchain technology that powers cryptocurrencies to represent digital assets like music, games, and artwork with an official certificate.
- Unique – It is unique and cannot be copied or altered.
- Exchange – On specialized websites, NFT exchanges involving cryptocurrencies (like Bitcoin) take place.
Let’s jump on to the crucial reasons that provide value to the NFTs and are also responsible for their overvaluation. Keep reading!
4 Founding Pillars of NFT
- Liquidity
In simplest terms, liquidity is a metric of how simple it is for a trader to enter and exit positions.
Liquidity pools allow trading crypto assets on various decentralized exchanges and DeFi platforms.
High liquidity and the presence of an organized liquidity pool are highly valued in the field of NFT trading. Furthermore, higher liquidity minimizes the danger of the project becoming a possible rug pull by demonstrating the reliability of the NFTs.
Simple logic explains the significance of liquidity for NFTs: if no one wants to buy your owned NFT, you cannot sell it. Therefore, to trade your NFT on both primary and secondary markets in return for the same amount of ETH, your NFT must have a liquidity premium supported by the ERC standards.
Investors frequently choose to invest in NFT projects with significant trading volumes to reduce risks since this ensures that the projects have strong liquidity and can be exchanged whenever you want.
- Ownership History
The initial price of an NFT is not constrained; it is determined by creator affordability and business strategy. Because of this, despite the average floor pricing (average low price) on an NFT trading exchange, certain NFTs are found to be absurdly expensive compared to others.
However, for NFT traders, the ownership history is crucial. High ownership history values are more common among reputable artists and NFT makers, which helps to identify their work as exclusive and preserve its market worth. Even though many individuals may find it difficult to afford them, NFTs with a distinguished ownership history draw a broad spectrum of buyers who are sure they will be able to get a valuable item that is highly valued in the NFT community.
- Rarity
The foundation of NFTs is the idea that tokens should be uncommon and distinctive. Because of this, the market is always volatile, and NFT prices rise because someone else frequently wants to acquire a rare work of art at a greater price than you.
Because of this, rarity is unquestionably the fundamental attribute that underpins an NFT and determines its existence.
Nevertheless, depending on the value proposition offered to the clients, certain NFTs are valued higher than others. For example, well-known projects like World of Women or CryptoPunks, also Known as 10K projects (10,000 piece projects), are made up of 10,000 uniquely designed NFTs with various characteristics.
Since certain items may have exquisite and distinctive qualities that provide more value, their designers may charge a greater price for them to give their clients an exceptional experience when buying a high-end NFT. In cryptocurrency, these rarities are quite significant since they may distinguish the flashiness or third eyes on a profile-picture NFT from a group of thousands of other identical objects.
- Utility
Any cryptocurrency, token, or NFT project cannot survive in the current market without adequate utility. Since this enables them to assess the worth of their assets and plan future investments, large-scale investors frequently invest in initiatives with strong utility in their roadmaps.
Final thoughts
The full potential of NFTs has hardly even been scratched. Look closely at how groups of people have joined together for collectible pictures of apes with community benefits. Have you wondered – how much bigger can this get?
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
