By Vijay Pravin Maharajan
Despite the fundamental differences between traditional fiat currencies and cryptocurrencies, much of the present cryptocurrency market has dominant similarities to financial stock trading. With the advent of new technology, cryptocurrency exchanges naturally borrowed terminologies from the traditional markets for the ease of traders and investors.
NFT marketplaces, platforms where people can buy and sell Non-Fungible Tokens (NFTs), took a similar approach when they embraced some of the terms from commodity markets and auction houses, such as Floor Price and Price Ceiling.
However, unlike the traditional commodities market where a government or another group imposes the floor price on products, the floor price in NFTs is determined by the person who owns that particular item of a project. Presently, floor price and price ceiling have become some of the most important metrics used in determining the value of an NFT collection or project.
In a centralized economy, the floor price is the minimum value of certain commodities or services levied by governments or certain groups, mostly in a bid to prevent prices from falling too low. However, in NFT marketplaces, the floor price is the lowest price of a digital item associated with an NFT project.
Floor price becomes an important metric if a project starts to gain traction from the community. The more an NFT project garners demand from the community, the higher its floor price. Since NFT marketplaces operate 24/7, floor prices of NFT collectibles are updated in real-time. The lowest price of a Bored Ape Yacht Club, the most popular NFT collection right now, is 85.0 ETH or $169,589.22 at the time of writing.
OpenSea, the largest NFT marketplace by trading volume, launched the price floor feature in July last year citing increased demand. In February 2022, another NFT marketplace LooksRare launched a feature that displayed the floor price for each individual trait of an NFT in a particular project.
The price ceiling of NFTs, on the other hand, is the opposite of the floor price. While a price ceiling is imposed by traditional economists to make regular products more affordable for users, the term’s meaning has been altered to define the maximum price an NFT of a project is sold for.
Some of the top NFT collections, such as Bored Ape Yacht Club (BAYC) and CryptoPunks, have seen their NFTs sold for millions of dollars as the hype around the projects refuses to fade away. As per the latest data available, Bored Ape #8817 became the most expensive BAYC NFT after it was purchased by popular BAYC collector ‘Jimmy’ for $3.4 million in a Sotheby’s auction.
Like floor price, the price ceiling is claimed to be one of the critical metrics to determine the fair market value of an NFT collection. Usually, the NFT with the most distinctive features or rare traits has a higher value which, in turn, contributes to the price ceiling of a collection.
Floor price and price ceiling are some of the core metrics to estimate the value of an NFT collection. However, they may not be the most accurate. For a fair value assessment, it is necessary to factor in other determinants such as the rarity ranking, market reaction, utility, volume, ownership history, and more.
Given the volatile nature of the ecosystem, estimating the fair value of NFTs may truly seem like a hurdle. Nonetheless, as development in the space continues to accelerate, more firms and startups are looking to offer solutions that allow users to make informed decisions on their potential purchases. For now, maybe DYOR before buying NFTs and you might be good to go.
The author is Founder & CEO of bitsCrunch. Views expressed above are those of the author and not necessarily of financialexpress.com)
(The above article is for educational purposes only. Cryptos and NFTs are unregulated in India. Investing in them could lead to losses. Please consult your financial advisor before making any investment decision)
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Explained: Why do NFT collections have floor prices and price ceilings? – The Financial Express
By Vijay Pravin Maharajan