Investing in an NFT: What you must Know
“.NFT sold for xx millions of dollars”
“NFT bought at xx thousands of dollars”
You must have been seeing news like this starting from 2020.
And with the money involved, you might be tempted to throw your heart in the ring, acquire some pixelated asset, hope for a massive ROI in the future.
But, hold on:
That’s not always the case.
Some succumb to blows from the economy and dip so low until they have no value whatsoever.
So, with the thousands of NFTs flying around, it’s fair to ask:
How do you choose the right one to buy?
Truth be told, it’s a wide wide west out there. And it’s every NFT for itself, with the creator of each, sometimes overstating their value.
But there are metrics you should look out for, to guide your decision.
Let’s dive into them.
Before you buy an NFT, it should tick your fancy. It should fit with your personality and personal preference. This is a fundamental factor to consider before you spend on an NFT.
Also, you could invest in an NFT simply because of the idea behind the project. If it aligns with yours, then investing in it could be a good idea.
With the money flowing into the NFT space, everyone wants to get a piece of the pie. And that paves the way for fraud and all sorts of shenanigans that could disappear your investment before you know it.
Some creators, simply mint NFTs for a quick profit. In such cases, any NFT you buy from them would tank in value pretty soon.
Hence, look for NFTs created by artists of high repute.
The best ways to judge the reputation of creators are:
- They should be fully doxed on whatever marketplace their NFT is hosted on.
Although a major incentive for operating in the crypto sphere is complete anonymity, parting with huge amounts for an asset without knowing the creators is a huge risk.
A risk that is unwise to take.
- Involvement in other NFT projects
- Reputation among the NFT creator community
- The expertise of the founding team
Quality of the artwork
The aesthetics associated with an NFT is an indication of its value. It also shows just how much the creators are invested in the project.
If it’s simply a tokenized cheap 2D artwork, then it’s probably not worth it.
Moreover, if an NFT is really as valuable as the creator claims, it makes sense that they should ensure that the artwork is of high quality, right?
Floor price history
The floor price is the lowest price, at which one can buy an NFT.
Before parting with your money, analyze the historical price action. If it’s trending upwards, then it’s more likely to increase in value. If the reverse is the case, then there’s no need to spend on it.
But if it’s a new project, with no historical floor price data to analyze, you can rely on other metrics that have been outlined in this article.
Long term potential
Not all NFTs will increase in value over time.
In fact, it’s predicted that most NFTs will either go into extinction or dip in value in a few years' time. In an interview with coin desk, prominent NFT investor, whale shark, asserted that 99.99% of NFT projects are going to fail!
That’s because most are simply created as speculative assets, to piggyback on the NFT trend. Others can’t survive the bull and bear cycles, typical of crypto-based assets.
So how do you measure the long-term potential of an NFT project?
This question cues in my next points…
If an NFT has no use case, then it’s definitely tanking in value.
But utility NFTs increase in value over time.
NFTs with utility, have real-world use-cases such as access to events, backstage passes, and others. Also, they can be used in games for power-ups, clothing your game characters, and many more.
Another aspect of utility is the correlation between a digital asset and its physical counterpart.
If the physical form of a blockchain-based digital asset is trending upwards, then the possibility of it increasing in value over time is very high.
A good example is an NBA top shot NFT.
Physical sports cards tend to increase in value. A card that was bought 20 years ago, is most likely currently 20x its original price.
It means that digitalized sport card collectibles, like NBA top shots, are more likely to gain value in the future than common pixelated assets, whose value is based on speculation.
Demand versus supply
The textbook definition of demand and supplies, states that when the demand for an asset exceeds the supply, the asset rises in value.
And NFTs are no different.
When an NFT is rare, the value increases. But when it’s common, it dips. This is why you must invest in NFT projects, that have a rarity.
So, how do you determine rarity?
One way to do this is to use a platform like rarity.tools.
They scour the blockchain and crunch in numbers such as the owners, trading volume, and popularity. Also, other additional features such as unique skin tone, clothing, and the likes, are factored in — depending on the project.
After all that is done, each NFT is ranked on a rarity scale
Popularity has a huge bearing on the value of an NFT.
The greater the buzz, the higher the value.
This is not rocket science: the more people believe in a project, the more people are willing to invest in it, thereby increasing its value.
Additionally, a large community following can easily spread the word on the NFT.
Hence, it’s no surprise that the pricey NFT collections such as the bored Ape club, tend to have a strong community backing them.
The best way to judge the strength of the community backing a project is to keep an eye on all social platforms associated with the project. That includes Twitter accounts, discord communities, subreddits, etc.
When you visit a community linked to the asset, ensure it’s not just one person driving the entire conversation. It’s a good sign, if everyone is equally ecstatic about the project, as the founders.