In the previous article, we highlighted the underlying psychological motivations for purchasing NFTs and how it is the same driver for luxury goods and art pieces for significant amounts of money. (Read it first!) These motivations are now prevalent in the digital scene, where they affect the types of NFT being bought and the prices people are willing to pay for them.
You might still be wondering why NFTs are such a big deal. An easy way to think about it is to refer to familiar items such as memberships, backstage access passes, and in-game virtual items. The reason you want these things is because they have utility in an area that you care about. Well, it’s that, or you want to show off to your friends. These same reasons are brought over to NFTs.
If you are a collector, investor, or artist thinking about getting into the NFT scene, this article is for you. This framework can be used when you are evaluating if an NFT is worth investing in or if you are designing your own NFT collection.
How to identify NFT projects that are likely to succeed
Let’s run through three factors that make an NFT valuable.
1) The NFT Community
When you own a community club membership, you are automatically welcomed into its exclusive community with access to all its perks. This is similar to owning an NFT, as it has its community of people who also own a part of the NFT series.
This community can be made up of celebrities and the most influential people. Regardless, you are granted access to that community by owning the NFT. This ownership and access can then be transferred when the NFT is sold. An example of this would be JJ Lin, who is now an owner of a Bored App NFT.
Community chats are usually hosted on Discord. This is where owners and followers discuss NFTs, investing, and other random topics under the sun. It is also the best place to interact with the team behind the NFT collection and get important updates. The activity rate of the community will show you the health of the project.
You can also learn more about an NFT project through its social media accounts. Most NFT communities are particularly active on Twitter. By seeing how many followers a project has and observing its engagement levels, you would be able to gauge the activity surrounding its development.
2) An NFT’s Reputation (aka look at its Backers)
The names and the brands behind an NFT are incredibly important. This is why you should take note of those with a huge support base. Pay special attention to those with backers who put their money where their mouth is by purchasing and clamouring for the latest releases.
Some examples of prominent support bases would be sports clubs like NBA or watch hobbyists like Rolex enthusiasts. Why does this matter? Well, if NBA Top Shots were not backed by the NBA, they would not be as valuable as they are now. The fact that they are recognized and supported by a large, well-known company gives these NFTs additional value.
3) An NFT’s Utility
Utility refers to the additional value you can get from owning a particular NFT, besides just owning it. Additional value can come in the form of airdrops, invitations to exclusive digital or real-life events, and interoperability.
You may be wondering, what is an airdrop? An airdrop is when a project gives free tokens to users as a reward for being early supporters. It is also done as a marketing stunt. This means when you purchase an NFT, there is a chance that you will get more NFTs. These free NFTs have value on their own and can be traded on the open market.
NFTs can also be used in online games or in the metaverse, a digital representation of the physical world where the possibilities are endless. When used in compatible games, NFTs can give you unique skills. In a way, they can be compared to Pokémon cards, where the cards are not just for show. Sure, they have cosmetic usage, but they also have special abilities that can help you win a game.
How to flip NFTs – 5 factors to choose the best
NFTs are one of the riskiest investments in the cryptocurrency space, so you must not put in any money that you are not willing to lose. If you don’t know the signs to look for and are motivated by hype or the fear of missing out (FOMO), you will lose money.
With that aside, let’s take a look at factors you should consider when deciding if a NFT is worth flipping.
i) Floor Price
One key factor to keep an eye on is the floor price. This is the lowest price (not the average price) for an NFT in a given collection. The cost of an NFT would rarely go below the floor price.
NFT prices that are closer to the floor price are usually sold easier. This is because people typically list NFTs from the lowest to the highest price. If a buyer would like to hold the NFT just for its utility value, the cheapest ones are the ones they would buy.
ii) The starting price of a project
When starting an NFT project, the creators will use their reach to pump the price up. They aim to make the starting price as high as possible since 100% of the profits from the initial sale go to them.
Meanwhile, to make a gain from the purchase, the new owners would have to sell their NFTs at a higher price. If no one manages to do so, the price crashes. Hence, projects need to start small before gaining trading traction and momentum. Starting small helps ensure that the project is not a rug-pull, where the creators get a massive pay-out and then disappear.
Starting at a low price would also mean that the project still has plenty of space to grow in value. Lower prices can even help increase an NFT’s community following, as they allow more people to access and participate in the project.
iii) The NFT Roadmap
You have to look into the future developments of the NFT project you are interested in. To be more specific, you must pay attention to the upcoming features of the project and analyse if the team can deliver on their promises.
Some utilize features such as breeding, which enables you to generate more NFTs using your existing ones. This, in turn, will increase the value of your original NFT.
Depending on the type of NFT it is, a NFT’s roadmap can consist of various milestones, including online events, new releases, and game development.
iv) The media attention towards an NFT
Media attention is usually the catalyst of prices being pumped. Perhaps, there is a big occasion coming up for the project or the artist, like an important interview or getting listed at an auction house.
The media also loves to report on new and unique projects. However, these are hard to come by as most mediums and methods have already been utilized. And so, you must use your research skills and make an effort to uncover and support under-the-radar artists before they become big.
v) The rarity of an NFT
NFTs in the same collection may have similarities, but each piece has different traits that make it unique. Some NFTs have different hair colours, while others use props like sunglasses.
These details differentiate the NFTs, and they also affect the price. NFTs with rarer traits are worth more than those with common traits. If you own an NFT with rare traits, you would be able to command a higher selling price compared to other NFTs in the same collection.
Conclusion
NFT has already made a huge run in recent months, with NFTs exchanging hands for crazy prices becoming a common sight. However, it is important to remember that this only happens to 0.01% of NFT projects.
Most NFTs are still being sold close to the floor price. In the end, NFTs are digital collections, so remember to enjoy looking at them and buy what you like!
P.S. If you’re new to cryptocurrencies, learn the key concepts of cryptocurrency and basics of NFTs you need to get started safely at our free masterclass.
Disclaimer: This is not financial advice. Any action you take is solely your own responsibility. Cryptocurrencies are extremely volatile, so only invest with what you can afford to lose.