Introduction
NFTs have been the talk of the day in 2021. As we have briefly talked about what is an NFT and how it is generating value in the previous article, we going to dive into how an investor could evaluate different NFT projects.
Here are several key factors that we believe are important to determine an NFT’s value.
1. Utility
As mentioned in the previous article, there are myriads of NFT. In the crypto space, there are Play-to-Earn NFTs in Axie Infinity, digital real estate NFT in Sandbox to profile pic NFT, digital art NFT, and more. In reality, there are some NFTs that can be used to exchange for real-world prizes, while others, for example, grant access to events. Other types of utilities include whitelist priority, giveaway, airdrop, etc.
While Play-to-Earn NFTs or real-world related NFTs can be evaluated through the fundamental value or even calculating the breakeven point, the utility of most NFTs can hardly be quantified and benchmarked. Therefore, the bubble of NFT rises and is mainly driven by sentiment instead of utility.
2. Rarity
Each NFT has its own traits and attributes, such as accessories and facial features, and hence comes uniqueness and rarity. Rarity is another criteria for investors to pick the right NFT. Using tools like Rarity.tools and Flipsidecrypto, investors could rank NFTs based on their traits and rarity. For example, in Rarity.tools, CryptoPunk #8348 is given a rarity score of 10342.68 as of the time of writing as the NFT has the most attribute counts among the CryptoPunk collection. Being the only one with 7 attribute counts in the whole collection, this trait alone gives CryptoPunk #8348 an extra 10000 rarity points. Investors could then rank NFTs in the same collection according to the rarity score.
NFTs are generally grouped into three categories, no traits, many traits, and high rarity traits. Monkey Kingdom’s special edition is a good example of the latter. With limited special edition NFTs circulating in the market, they could be of a higher value.
3. Celebrity
While the rarity and utility of an NFT are touted as two of the most important factors, the celebrity effect should not be ignored. Having a celebrity endorsing the NFT collection, the price of the collection could skyrocket in a short period. The popularity of the endorser should also be taken into consideration when picking NFTs. Whether the endorser is a global star or a regional influential icon could help you to determine the popularity of the NFTs or which region’s investors would be interested in the collection.
4. Community & Market Reach
The next factor serves as a metric for investors to evaluate the NFT projects’ popularity or even forecast the longevity of projects. Investors should pay attention to figures like the number of followers in different media channels of an NFT’s project (such as Twitter, Discord, and Medium) and also the growth of follower number. These figures could indicate the market reach of the project and how the crypto community reacts to the specified NFT(s). A healthy market reach is often important to an NFT project’s success.
It is also worth noting that the roadmap plays an integral in the community setup. Without a roadmap, it might be difficult for the community to understand the direction of an NFT project and its underlined value. An NFT project without a good roadmap impression is prone to failure in the long run. Any successes or attention drawn may come down to market hype and could be short-lived which will be further discussed later on. Choosing an NFT project with a healthy follower count and a good roadmap impression is important to making a successful investment.
5. Development Team
Choosing a good NFT for investment is similar to analyzing crypto projects in a sense, the development team is crucial under both scenarios. While we will look into the development team’s background and its experience in both cases, NFT investors should also take the artist’s track record into account especially when it comes to digital art NFTs.
6. NFT Economics
NFT economics is related to the project’s ownership structure and how it “goes public”. Such information could highlight the liquidity of the NFT collection. The percentage owned by the development team, the percentage for the seeding round, pre-sale round, and public sales could be the data you are looking for to make a good investment. Besides that, pay attention to the trading volume in the secondary market, the number of holders, and is there any venture capital or market maker among the list of holders.
7. Originality
Before moving on from the key NFT evaluation factors, let us not forget the importance of originality. A unique narrative of the project (value, vision, goal of the project) could be an attraction for investors. Whether the collection is the first of the creator (“first punk” or “original gangster” or “OG”) or even the first of its kind could add a lot of value to the NFT as mentioned in the previous article.
Conclusion
Overall, the NFT market is not a straightforward one. The above 7 factors are starting points to evaluate and perform due diligence for an NFT project. There are many factors affecting the value of an NFT as discussed above and many new forms of utilities attached to them are being introduced. It is important to keep the liquidity issues and risks associated (such as scam/”soft rug”) with NFTs in mind. Therefore, investors and traders need to have a sophisticated investing/trading system or strategy for execution. In the next episode, we will share some NFT investing/trading strategies.
By Arthur Kwan and Ezreal Kung at Art of Trades
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Disclaimer
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