Over the past year, the NFT market experienced some explosive growth. According to Reuters, NFT sales in 2021 rose 262 times to a total transaction volume of $24.9 billion compared to 2020. Looking at these figures, it seems like a sound investment decision to invest in the NFT market as soon as possible, but there still remain many risks and scams in the market. Let’s take a look at some basic factors to judge what projects are worth considering investment and what you should avoid looking at.
The first feature of a legitimate NFT project is the activity of its community. Here, community refers to a space where various stakeholders with common interest gather and share information. Let’s think of it like an exhibition. First, if you look at the attendees of the exhibition, you are likely to see the artist, their colleagues, and their family. Some fans and collectors gathered to appreciate the paintings. They appreciate the work, build friendships, and talk about the works. Those who find value in a collection’s work open their wallets and make a purchase.
The larger the audience of an exhibition, the faster news spreads about who turned up the exhibition, and the what works were sold for how much. The community’s size and interest grows bigger and stronger, and the value of the works will also increase due to increased demand. This same idea goes for NFT works. In the case of NFT projects, the difference from existing exhibitions is that the interaction between community members takes place online. The audience retweets each other’s thoughts through Twitter and leads the trend with hashtags. In the community’s Discord server, writers and fans communicate and exchange ideas.
So, the project’s NFTs are directly correlated with the strength of its community. This can be determined by the following characteristics:
- How many total members are there in the community?
- How long does an NFT project capture the interest of its community?
- How many followers are there on social media channels, such as Twitter, Discord and Instagram?
- What is the total transaction volume since the start of a project?
- What is the profile of the buyer? Are there any celebrities/high profile members who boost the profile of the project?
Digital sources of an NFT can be quite easily duplicated, but communities are not. This is why the value of an NFT increases.
The second feature of a legitimate NFT project is the value of the original content itself. Even if NFTs give us the ability to differentiate between the original piece and a copy, the value of the original NFT itself does not increase easily, especially if the value of the original piece is not very high to start with. It is essential to examine whether the original content has a special historical or cultural meaning, and whether it has excellent workability or scarcity. In fact, Cryptopunk, called the Mona Lisa of NFT projects, is traded at a high price as it has the historical value of the earliest NFT project.
The third feature is additional utility. NFTs basically give users ownership of digital assets. However, in addition, we need to see what additional perks and activities the NFT holders can participate in. For example, NFT projects can create a venue for social media communication such as meeting with writers or chatting, and it can be linked to tickets for exhibitions or performances.
A fourth feature is to find out the members of the project and its roadmap. Any team with a successful history of planning and succeeding in creating NFT projects is likely to be successful in the creation and future development schedule of the project.
Finally, it is necessary to check which blockchain-based technology the project is based on. When minting or trading NFTs on a blockchain ecosystem, users pay an extra gas fee, so users have to make sure that the transaction cost of minting or buying a NFT they are interested in is not a significant portion of the overall cost.
Currently, the NFT market is rapidly diversifying as virtual asset exchanges and game companies jump into the space, making concerns about price bubbles even more important. In order to make a wise investment in an NFT, rather than just a speculation in such a volatile market, efforts to examine various factors before investing will be needed.
