As the “NFT market” continues to grow substantially, collectors and investors - particularly new entrants - are exceptionally worried about buying the “wrong” NFTs.
The fear of being “left holding the bag” is reflective of an ecosystem which has become hyper-financialised and the subject of wild speculation.
In this Paper, I explore the important factors to consider before buying any NFT. Next week I will provide a case-study on how I’ve applied this thinking myself.
(A) Why do you want to buy an NFT?
At the outset you need to be honest with yourself about why you want to buy an NFT.
Do you love art? Do you love the tech? Are you trying to retire ASAP?
The thought process for spending your hard-earned money on digital assets should operate no differently to when you buy IRL things: some things are out of necessity; some things for pleasure; some things as a store of value; some things might be more speculative and '“for profit”. At all times, however, what you buy is within your means.
What is important to consider is that IRL, with the benefit of experience and hindsight, we have broadly distinguished between what is considered necessary, recreational, speculative, and a store of value (with some overlap but clear distinctions).
With NFTs, however, the differences between ‘store of value’, ‘speculation’ and ‘recreation’ are far more difficult to discern. This is because no NFTs (or relatively few NFTs) have been around long enough to provide certainty that they have staying power.
For this reason, it is important to recognise that almost all NFTs right now are quite speculative - there is no guaranteed safe haven.
(B) What different types of NFTs are there?
NFTs are not homogenous. It’s useful to understand there are very different types of NFTs before we consider how to evaluate them for purchase.
(i) Art
Some of the most well-known NFT art platforms are SuperRare (the most OG), Async Art, KnownOrigin, MakersPlace, and Nifty Gateway.
There are also new(er) NFT platforms like Feral File, Institut, Blockparty and Aorist.
The Guest, by Defaced: Launched on Blockparty
(ii) Exclusive Membership / Access Token
Holders of Gary Vaynerchuk’s first NFT offering will all be granted access to VeeCon, a huge conference in May 2022, which can only be accessed by token holders.
(iii) In-game Items
Star Atlas, a next-gen gaming metaverse on Solana, sells all sorts of kit, equipment and vehicles which users can own and use in-game.
(iv) Shared Ownership
The Pixel Vault Founder’s Dao Token represents proportional ownership of the Founder's DAO Vault (approx. 600 ETH of value at the time of minting).
(v) Redeemable for Physical Items
The Adidas Originals partnership with Bored Ape Yacht Club, Punks Comic, and GMoney will allow token holders to claim 4 different physical clothing items during the course of 2022.
The most desirable of any of these types of NFTs seem to come with status and the potential of huge financial gain.
(C) What are the factors that should determine the purchase of an NFT?
These factors should be considered holistically. On different occasions you will decide that certain factors outweigh other factors.
These are just my thoughts, interwoven with the wisdom of Batsoupyum in the below tweet and Loopify’s article (two very prominent collectors/investors in this space).
(i) Price / Supply
Only buy what you can afford.
Compare price of NFTs with comparable projects/works, previous sales, and take into account supply.
(ii) Aesthetics
If you like the look of something, chances are someone else might think the same thing. (What looks good is obviously highly subjective.)
This In Search of Aesthetics article by Artnome is an illuminating read on this.
(iii) Founders / Artist (and their Community)
If you want to buy into a founder or an artist, you will want to get comfortable with those leading the project.
Pay attention to how they plan, deliver, and communicate (when things are going well + when things are going badly.) Research them on the internet. This is where we live! Observe their habits. Do you believe in them?
You can get a great sense of who they and their fans are by joining the Discord (the online chatroom where the founders, moderators, and community members hang out).
Spend some time there and figure out if you want to be a part of that particular crowd.
Separately, OG artists/teams are those who have been around in the NFT space before it was popular or lucrative to be here. These people might command higher prices.
To consider who those people might be, dive into this informative thread by @2Yeahyeah.
Finally, this article by Artnome is foundational reading.
(iv) Trading history
Check the trading history on Opensea. You can see who is buying, when they are buying, and how often.
A strong and steady volume is obviously much more encouraging than a project which is struggling to make any sales on the secondary market.
Secondary Sales: in the ‘Activity’ tab on Opensea you can monitor price history and previous sales
(v) Distribution
It is often quite important WHO is buying a particular project. Certain people are motivated by a long-term thesis, and some are motivated by trying to sell quickly for profit.
Researching who your fellow holders are can be useful to forming your plans.
Here is a very brief, non-exhaustive list of people who were helpful to follow in my first year here.
(vi) Market conditions
The broader market conditions can impact the price of NFTs.
When there is sharp volatility in cryptocurrency prices, for example, the NFT market tends to slow down for a period of time.
(vii) Future
Consider which events are taking place in the future that may impact your holdings.
There may be events like future drops, staking, burning, or collaborations which could influence your decision on holding an NFT.
Alternatively, there could be absolutely nothing on the horizon. Are you comfortable holding in that circumstance?
(viii) Utility
By providing you some tangible benefit from holding, an NFT might be useful or lucrative for you. Consider how much utility an NFT has to you.
Final thoughts
Enjoy yourself.
One of the most enjoyable things about buying NFTs is that often it puts you in touch with like-minded people.
People who like art; people interested in “digital ownership” and the implications of the blockchain; people a bit tired of “centralisation” and Web 2.0; people who dream of a more open, permissionless future; people who are happy to stick their neck out to bet on - and defend - the future.
Thanks so much for reading. Happy holidays!
See you next week.
Disclaimer: The content covered in this newsletter is not to be considered as investment advice. It is for informational and educational purposes only.
I hold some of the NFTs mentioned in these newsletters.