What is an NFT floor price? How do you value a non-fungible token in today’s blockchain economy? Where do floor prices come from?
It’s something that a lot of people ask themselves as they start learning about NFTs and their place in cryptocurrency and blockchain markets. Floor prices are set by NFT creators and show the minimum price or initial cost to acquire said NFT.
By understanding what a floor price is, you’ll have a better idea of when it pays off to invest in a particular NFT or a group of these types of digital assets.
Before we go further, I need to disclose that I am not a financial adviser, and this is not financial advice. If you need financial advice, seek a professional.
First of all, it’s essential to understand that the floor price for an NFT is set by a creator. As they input information about the NFT, such as intellectual property rights designations, copyright restrictions, and a name, they’re also putting in that initial pricing based on what they want to get for their effort.
In some ways, it’s like a company that performs a public listing and has an IPO price that will change over time. They’re doing the initial price assessment but not predicting what the item will sell for in the future.
Another thing to understand is that NFT floor prices are comparative in some ways. They show you the minimum price you would pay to get involved with an NFT asset.
Some people like to compare this to Amazon, where you have a range of prices for a given object on sale. Now, of course, because your asset is an NFT, it is not interchangeable with any other asset.
So you’re not going to compare various offers. The floor price, on the other hand, is going to be the set amount at which the asset starts trading, and its price likely won’t stay there for very long.
When comparing NFT floor prices, you’re probably looking at different parts of an NFT collection or two similar collections. There’s quite a bit of “horse-trading” that happens with NFTs and more complexities (as we will get into.)
NFT Floor Prices Not Set in Stone
Here’s another major thing to understand about NFT floor prices. They are likely to change and change quickly.
Why is this? Well, for one thing, NFTs are a transitional market built on top of another transitional market.
In other words, when you look at the floor price of an NFT, you’re probably not looking at dollars. You’re looking at an amount in a given cryptocurrency. That’s determined by how the NFT was minted and what blockchain was used.
But we know that those individual cryptocurrencies on their blockchains are volatile in price, and they swing wildly from one day to another. Just take a Bitcoin chart and look at it. Notwithstanding a few sideways crawls, the chart is gyrating all over the place!
So you’re dealing with those underlying values changing, and you’re also dealing with NFT prices changing because of genuine interest in a collection or its brand or creator.
It’s like ‘volatility squared’ – so any number of things can cause prices to change. Also, don’t count out larger market trends where all of the cryptocurrency markets can go down in one day, and your NFT price may fluctuate accordingly.
The above is why one great piece of advice for NFT floor prices is always to research any price changes that occur. Perhaps instead of panic selling the underlying asset, do some basic market research and answer the questions –
- Is this happening because of volatility in the underlying cryptocurrency price?
- Is it happening to the whole collection?
- Is it happening to the whole market?
Diamondhands and Paperhands Investors
Sometimes you’ll see people offloading NFTs lower than the floor price. Why would they do that?
The answer is all about opportunity cost.
As with some types of traditional assets, some investors may actually gain from unloading digital assets quickly and getting into other types of projects. In other words, they might cut losses to make more money later.
Some deride these fickle investors as ‘paperhands’ and suggest that a longer-term buy-in strategy makes the contrasting diamondhands approach more appealing.
That debate happens in the equity community, too – it’s not unique to NFTs. But the NFT as a bright shiny thing has its own controversy in fintech markets.
You’ll figure out what works for you as you navigate this market.
The general sense that pervades this market is that everything is a trade-off – and everything is brand-new, and people are still learning about how these assets work.
That includes regulation and taxes in a big way. More than a few investors have more significant concerns about tax compliance than they do about the price at which they’re buying their NFTs – but they still have to be mindful of price.
There’s no substitute for that kind of research. And going into it without knowing a bit about the industry is really not advisable.
With that in mind, some people feel that their early adopter brands have gotten in on the ground floor of a growing and thriving market. Other people think that NFTs are eventually destined for the scrap heap of history. There is a big concern for a bubble which we discuss here.
Basically, watching market trends can help inform your strategy.
What Is a Floor Sweep?
If the floor prices are the lowest available pricing for NFTs, the floor sweep is when an enterprising investor comes in and buys the whole set, assumedly hoping to make a profit later.
In some ways, it’s like the traditional fire sale in the stock market. Big investors might come in and buy massive amounts of penny stock to see if they will eventually rise in value.
With the floor sweep, some investors think this makes a lot of sense because instead of having just one item in an NFT collection, they’ll have the whole thing.
Take a look at how this works and research your NFTs, including NFT floor price analysis, to get a better handle on blockchain investment.
In some cases, people might look back at an NFT floor price after just a few months and consider it a steal. Others might say to them that means you should have bought in early.
On the other hand, some companies crater after an IPO, and NFT collections aren’t immune to these kinds of downward pressures either.
Of course, an NFT sale is not like an IPO in some ways. Instead of putting a value to equity in a company, people are assigning a value to a creator and brand and something they have produced for an audience.
One way to look at it is that a celebrity might be the focus of an NFT, and then that celebrity gets in trouble or doesn’t have a good year or doesn’t end up as much in the limelight, and the NFT collection starts to suffer. So relevance is another key to volatility here.
How do people deal with volatility? One way is to diversify. So many professionals would tell you not to have all of your money in one basket. An NFT plan might be a smaller component of a bigger portfolio.
At the same time, you might get growth in NFTs that you wouldn’t get from an equity or commodity. In market cycles where people are investing in common equity, there’s only so much they can gain along with everyone else. NFTs represent part of the frontier of digital IP assets that are able to soar in value and enrich one particular person.
That’s different than the cryptocurrency market, where a certain coin has a market that grows sort of like company stock.
Keep in mind, too, that as you look at the volatility of a coin or the cryptocurrency market as a whole, you’re trying to understand why things are going in a particular direction.
Was there a regulatory setback? Did some sort of hacking convince people that a blockchain asset is less safe as an investment?
Sticking to bitcoin as the front running cryptocurrency, you can assess things like trade volume as well as market dominance which is another metric that investors use.
You can also track bitcoin relative to either gold or to the stock market Index activity that shows where the equities market is going in general. There’s been a lot of ink spilled in the financial press about whether bitcoin tracks with gold or tracks with stocks or doesn’t track with either one of them.
As if all of that wasn’t enough, cryptocurrencies also fork, which creates two different blockchains and then gets value accordingly. So you might have some complex event that suddenly changes your cryptocurrency landscape in terms of value, and chances are your NFTs will also be affected.
In conclusion, the NFT floor price is just one part of the due diligence you should be involved in when buying. It’s basically an indicator of what you could buy the asset for in current market conditions. And it has ramifications for the NFT’s future pricing.
If you are new to buying and playing the NFT game, I recommend increasing your knowledge by reading some of our most popular articles like:
- How to Spot a Fake NFT: The Complete Guide
- How To Understand The NFT Bubble & Collapse
- Are NFT Marketplaces Profitable? The Surprising Answer
Those articles should get you pointed in the right direction!