There used to be a time when you could mint any upcoming NFT project and expect to do quite well short-term. With a brief look at their website, roadmap, relevant socials, you were good to go if it didn’t look low effort. Nowadays, there are new projects every day, with multiple drops happening at once.
The space has gotten a bit saturated, which isn’t an issue if you’re solely in it for the art and community. If you’re approaching it from an investment perspective, you’ll need to be more selective.
Broadly speaking, I consider there to be two types of NFTs in the current market.
Collections that people value for purely their historical or artistic value. See Cryptopunks, XCOPY and other digital artists.
Collections that people expect some sort of value or utility aside from access to an online community. Aside from owning the “art”, these may also give you access to live events, products, services, etc.
The buyers, whether they say it or not, generally expect these projects to continually innovate and push the space forward. This article mostly applies to the second group.
One thing to keep in mind is that you should assume 99% of projects will eventually go to zero, or become incredibly illiquid. This market is speculative and risky. If you’re coming from traditional investing, in this sense, they are similar to trading penny stocks. I’d consider NFT’s a step riskier, but easier to determine market sentiment if you know where and what metrics to look out for.
I approach investing (using this term loosely here…) in NFT projects using a similar mental model as approaching speculative stocks. In a traditional company you’ll have a founder/CEO, management, product, marketing teams that are aiming to deliver a service to consumers to provide profit for shareholders.
Conceptually at a basic level, it looks something like this (see NathanCRoth’s tweet for a more detailed breakdown):
Company: NFT Project
CEO/Founders: Creators of the project
Executives/employees: Other team members, usually with elevated roles on Discord
Shares: owning an NFT of the project
The interesting thing is that when you buy an NFT, you become both a shareholder and consumer, as you only receive benefits from holding onto the token.
What sort of utility could you possibly get from holding onto an NFT? Access to a private discord, so what? That’s where a lot of speculation and innovation is happening as projects try to blend them into the real world.
The best example is the Bored Ape Yacht Club. Owning one of these apes would have given you access to
Free airdrops of derivative projects worth 10 ETH (~38k USD) at the time of writing. Who doesn’t love free money?
Entry into a treasure hunt/puzzle game with a grand prize of 10 ETH. See a detailed write up of the puzzle solution and how much effort was involved here.
An actual yacht party in NYC that featured performances from the likes of Chris Rock and The Strokes.
Oh, and they’re in the process of creating an IRL club house in Miami?!
I digress, but you can see how certain NFT projects are becoming or can become mainstream brands. Of course, most projects won’t come anywhere close.
When comparing NFT projects to traditional businesses, NFT’s inherently have the “scarcity” aspect as most projects will have under 10,000 tokens. For an exaggerated comparison, Apple has a total of ~16.41 billion shares outstanding. In a hype driven market, the prices can quickly rise if there are only 10,000 available. But if you pick a dud, you’ll have a hard time selling at fair value as money shifts trying to find the next big project.
Don’t be fooled by the scarcity. There are new projects popping up everyday, and in that sense there will always be the next hot project and opportunity. Unfortunately, there are also a lot of bad actors in this space. Be wary of rugpulls or cash-grab projects that have generated hype, only to disappear with millions.
You can think of minting as similar to angel investing, where you’re helping to fund the development of the project. For example, with a project of 9999 tokens to be minted at a cost of 1 SOL, that’s roughly ~2 million USD of runway for the team. Once minted out, they’ll usually go on a secondary market. For each sale on secondary, the team will receive a percentage of each sale to continue to fund the project.
Should you mint or wait for the secondary market?
Minting
When I’m looking at minting a project, unless I’m looking for a quick flip, I want to be sure that I’m putting my money with a team that can deliver and execute at a high level and are playing the long game. Lots of speculative businesses fail, and lots of NFT projects will fail or become complacent.
Because at the end of the day, NFTs are a technical project. First, I’ll have a look at their website, roadmap and team. Is the site well designed? If not, it’s already a red flag and shows lack of care and technical expertise. Is the roadmap well thought out and not generic? Is the team doxxed and been a part of other reputable projects? How does the team communicate? Communication is probably one of the largest factors for me.
In a traditional business, if you wanted to ask questions, you’d have to email or phone them up. With NFTs, it’s so much easier to just ask a question in Discord and see if the team can answer hard questions in a thoughtful and articulate manner. In this sense, you can quickly gather general community sentiment within the discord and also search twitter to see the strength/hype of the community. If there’s a lot of chatter, that’s a good sign for a hype driven market. If hard questions, criticisms or “FUD” are moderated, that’s a sign for me to move on.
Buying on secondary
One of the advantages of buying on secondary, is that you have a lot more information to play with. Again, with the idea that the majority of these projects will ultimately fail, how has the team has handled events post launch? The NFT space moves fast, projects that fail to keep up tend to see a reduction in floor price as liquidity shifts to the next big thing.
With that in mind, I tend to look for projects with people that have shown that they can continually deliver and execute at a high level. Bet on these people.
How do you find these people? In a hype driven market, is the founding team still communicating and participating within the community? Essentially, “can the devs do something?” The best way is to really just hop on their discords, browse previous announcements, search previous questions and answers and gauge your conviction from their responses and actions.
Successful projects tend to have excellent communication and passion from the top down which flows down to the rest of the community, keeping them engaged and excited. Other great examples are Solana Monkey Business and Thugbirdz on Solana. On Ethereum, my current favourite for an emerging “bluechip” and biggest bag is Bubblegum Kids.
Other metrics to be aware of that I think are useful are:
Listing percentages over time (total listed/total collection) — how many people have the intent to sell? Generally, the lower the better, for reference BAYC has ~15%.
Unique holders and how many the average holder owns. Most of the time, you only need one piece of the collection to participate in the community. High unique holders is a bullish sign as it’s more decentralised. However, if the average holder owns a lot, I’d be a bit weary as they can quickly increase the sell pressure and undercut the floor price dramatically.
Floor price over time — I’d say most of the liquidity tends to happen at the floor. A steady floor price, paired with an increase in unique ownership is a good sign of a healthy organic growing project, even more so if people are willing to pay prices above floor for rarer traits.