How to invest in NFT? In 2020, this direction was the last thing people thought about in the crypto space. But just two years, and the opinion about investing in NFTs is completely different.
Now is also the time for changes in the crypto market. Vitalik Buterin himself, creator of the blockchain Ethereum, indicated that the crypto winter period is now on the market. But investors with a clear idea of how they invest are sure to weather any winter in the NFT market and reap high returns in the long run. The NFTMetria team has extensive experience in short-term and long-term invest in NFT, and we are ready to share our experience and knowledge with you on the author’s course.
If you decide to learn the science of investing on your own, then in this article we have prepared for you a detailed guide on NFT investment models, assessing their value and income from such investments.
Investing or Speculating on the NFT?
One of the most important things for any investor is to clearly define the rules of the game they are playing.
The first task is to understand the difference between investing and speculating.
Buffett Warren, one of the richest men on the planet, said it best:
If you are an investor, then look at what the asset will do, and if you are a speculator, then look at what the price will do.
The difference between investing and speculating is the most important thing to understand in order to allocate capital wisely. This is where it’s easiest to go wrong. Many people think if you flip NFTs, you can get rich quick.
Some people succeed, but most don’t. Success in quick speculation depends on the shilling and luck. The price of anything can instantly go to the moon if the right people are engaged in the promotion of the project. But if you are not such a person, then success in flipping is unlikely for you.
Investing requires a long-term vision aimed at determining the intrinsic value of an asset. Therefore, you should choose your own model of behavior in the market, we talk about this in our article TOP NFT investment strategies.
NFT Investment Value Models That Influence Asset Price Growth
There are 3 games that an investor can play in the NFT space:
- Future distribution
- Cultural significance
All 3 categories create a range of investing, from purely financial investments to social currency investing.
The best projects have an idea of how to combine all 3 directions, while the value of future distribution is increased by the cultural significance and / or usefulness of the work.
Future distribution as a model for the investment value of NFTs
NFTs, which are characterized by the distribution of other assets, are closest to stocks (in terms of the flow of “dividends”).
For such projects, an understanding of how to evaluate the team and future cash flows is necessary. This is similar to any equity investment.
NFTs can create a dividend stream in the following ways:
- Income from tokens (cryptocurrency);
- Airdrops of new NFTs;
- The strength of a centralized and decentralized project team.
Income from tokens
Some projects distribute tokens to NFT holders. Some projects create tokens which can only be used in a specific environment, such as this project ‘s DAO.
In the spring of 2022, the world-famous company Yuga Labs, creator of the BAYC and MAYC collections, created ApeCoin DAO and issued the ApeCoin token. It is needed to participate in the DAO, conduct transactions within the ecosystem, and token holders can trade it on the largest exchanges.
Why are we talking about this now? And here’s why: Yuga Labs issued 1 billion tokens, of which 8% is for free distribution to NFT holders from the BAYC and MAYC collections. Each BAYC holder received 10,094 ApeCoins (about $80,000). And the owner of MAYC received 2042 ApeCoin (about $16,400). These coins are now bringing good dividends to their owners, while people have not spent a single cent on their acquisition.
The advantage of NFTs: they are based on smart contracts. And in them you can “sew” any condition. And it will forever remain as a law. Thus, you can invest in NFT, with the further sale of which you, as the owner, will receive a guaranteed royalty, a percentage of the purchase.
Investing in NFTs with a certain future income stream is similar to investing in stocks.
In such a case, the value of the NFT can be defined as a discounted cash flow.
Airdrops of other NFTs
The distribution of new NFTs, rather than fungible cryptocurrencies among holders, is probably the most original way of distribution.
Under this mechanism, projects either drop new NFTs to current holders or provide private access to a minute of new assets at a low price.
If you are investing in projects that distribute additional NFTs, you must evaluate the potential value of these future NFTs.
The value of most of these new NFTs depends on the cultural value of the projects they launch. As in the BAYC example. This creates an efficient cycle in which culturally significant projects that use the distribution of other NFTs become more valuable.
By being more valuable, the project becomes more culturally relevant.
Yuga Labs, creators of the collection Bored Ape Yacht Club (BAYC) have successfully used this strategy. They already have 2 airdrops on their account:
- Mutant Ape Yacht Club (MAYC)
- Bored Ape Kennel Club (BAKC)
Only those members of the community who hold original BAYC NFTs in their wallets have received the new free NFT.
BAKC dogs are on sale starting at 3.7 ETH (~$13k) and the mutated serum is on sale starting at 4 ETH (~$14k).
Serum Mutant Mega, the rarest of the latest monkey drops, has sold for over $1,000,000, with a current low of $3.5 million.
Even if you spent 10 ETH on Monkey at the start of the NFT frenzy, you could get most of your money back by selling free drops. Such distribution also often includes an element of a lottery for holders, due to the rarity of the distributed assets.
Investing in a centralized NFT team
In addition to the value of the assets being distributed, investors using an allocation strategy must also be able to value the team associated with the project.
After all, it is the team creates value through distributed crypto assets, a stream of profits, or the rise of cultural significance of NFTs.
Centralized team structures include a specific and well-defined team responsible for adding value to NFTs for owners.
Don’t invest in NFT projects with a centralized team if you don’t believe the team is good.
- Pixel Vault is a recognizable team working to create value associated with projects Punks Comic and Metahero.
- Yuga Labs is known for its BAYC, MAYC, OtherSide projects. They have created a whole ideology around their projects, membership in which is very prestigious and elite.
- Larva Labs is familiar to many thanks to Cryptopunks and Meebits. Movement around the project is similar to Yuga Labs.
- Sky Mavis became famous thanks to the world’s most popular blockchain game Axie Infinity. Due to such a strong project, the team has literally an army of fans and dozens of investors who will invest in any project on their behalf.
To bet on any of these projects is to bet that these teams will continue to create valuable distributions for the owners.
Investing in the decentralized NFT community
The decentralized team structure is more social. That is, a certain person or team initiates the creation of a project, but in terms of further development they rely on the community. It’s a completely different approach. More like a religion than a corporation.
Don’t invest in NFT projects with a decentralized community unless you believe its religion is good.
Decentralized structures benefit enormously from the creative returns they get from diversity and community engagement.
A strong community has a good chance of creating amazing things which add cultural value and also benefit NFT holders who are looking to profit from distribution.
The disadvantage of a decentralized team: before the project goes out into the world, it can be difficult to assess the strength of the community. By the time you leave, it may already be too late.
Dom Hoffman, founder of Vine, created Loot in 2021 with the social structure in mind.
Loot is a fantasy NFT primitive. It’s basically a bag – a list of words which randomly describe “traveler’s gear”. And it can already be used by other creators to launch fantasy projects. Just any projects. Next, Hoffman offered a free mint Loot. It was only necessary to make payment for the transaction. The formation and building of the community began faster than anyone could have expected.
Extensions for Loot began to appear, such as maps, pets, generative art, and most interestingly, adventure gold (AGLD). Adventure Gold is a primitive currency which is used as a means of payment in projects based on Loot. The creator of Loot has nothing to do with the creation of this gold. In other words, some non-loot person created adventure gold and sent 10,000 AGLD free to every Loot owner. At current prices, it’s about $26,000 for being minted a couple of weeks ago, probably for just a couple of hundred dollars. Not to mention that Loot itself is priced at 7 ETH (~$25k).
P.S. No matter what type of future distributions you are interested in, when the discounted expected dividend is well below the NFT’s current value, then a good investor needs to exercise restraint. Perhaps you should sell the asset, or you should not acquire it.
Utility as a model for the investment value of NFTs
Utility means that the NFT offers some tangible benefit to token holders. It is easier to evaluate than cultural significance, but not as easy as future distributions.
The usefulness of NFTs manifests itself in the real or digital world.
The digital utility of an NFT allows the owner to gain certain benefits which they can take advantage of in the digital world. Digital utility spans a wide range of uses, from game resources and memberships to ENS usernames.
With NFTs, gaming assets can easily be transferred to the wider Internet ecosystem while retaining the benefits of provenance and tradability.
Investing in NFTs with digital utility is essentially a bet that the crypto industry, and in many ways the metaverses, will continue to become an ever larger part of human life.
A successful investment in digital utility is an investment in something that provides value which cannot be found elsewhere.
The best assets should be scarce and irreplaceable, not much different from domain names and land in the real world.
Examples from the world of games and metaverses
Some new developers are creating games and metaverses around the NFT:
- Crypto Raiders is an RPG game where players need to buy a character to play and this character can actually die. When a character dies, the player needs to buy another player, represented by a unique token on the blockchain. This creates real consequences for the actions in the game.
- Virtual lands in projects like Decentraland and Sandbox are another class of digital utility. Some NFT collectors buy land to build galleries where they will display their NFTs, while others may use it to build a business. Sotheby’s has a gallery in Decentraland that does both. Also, for example, Gucci and Adidas are represented in Sandbox, and Decentraland has such brands as Samsung, Coca-Cola, Domino’s.
An example from the world of ENS
ENS domains are an example of pure digital utility. The ENS name is the domain name of your crypto wallet address.
Instead of this address “0xc4779fAFAeaA2c16a70DcE53B68DD5E171f0a281” you get an ENS domain that looks like nftmetria.eth.
The utility of a memorable wallet address where people receive crypto payments is as valuable, if not more so, than any .com name.
The peculiarity of ENS domains: they are also NFTs. This means that the movement history of ENS domains can be tracked, which can make them collectible beyond their functionality.
How valuable do you think the first few dozen web addresses in the world can be historically? The ENS domains will give us the answer.
NFTs with real world utility give special benefits to the owner in the physical world. Such tokens tend to work best with issuers that already have an existing brand.
Investing in real world utility is harder than investing in digital utility because real world utility tends to be collector oriented.
Resellers can make a lot of money, as they did with sneakers, but such a game requires a deep understanding of the niche community, not a broad understanding of something tangibly useful, like a domain name.
As NFTs develop more and more real-world applications, this category may become more attractive in terms of investment.
Influencer and entrepreneur Gary Vaynerchuk created VeeFriends with three kinds of utility:
- Access (tokens provide the owner with access to Gary, for example, you can have lunch or play tennis with him);
- Gifts (tokens mean that Gary will send the holders things which he finds cool);
- Login (Tokens provide access to participate in the VeeCon NFT conference).
Nike–owned studio RTFKT collaborates with artists and designers to deliver unique streetwear-focused products. The company has previously made shoes for Cryptopunk wearers and collaborated with popular streetwear designers such as Jeff Staple.
Cultural significance as a model for the investment value of NFTs
Owning something that has cultural significance has always been a status symbol. The usefulness of a culturally significant asset lies in the expression of an identity.
Identity is a valuable thing. In a sense, it is priceless because it is intangible. There are no specific cash flows that come from any particular person. Because cultural relevance is intangible, the price someone might be willing to pay for NFTs may have nothing to do with the rational realities of future distributions.
In fact, culturally significant things become more culturally significant, as their value increases, and therefore their value.
The reason Cryptopunks are trading for over $300,000 is because they have become culturally significant in part because of their price. The more the price rises, the more people talk about them. Investing in Cryptopunks now requires the belief that they will become more important over time.
Money makes things more meaningful, whether you like it or not.
If you are playing the Cultural Relevance game, then you are betting that the importance of the NFT will increase. As the cultural significance of any asset rises, the demand for ownership of that asset also rises, and assuming the asset is scarce, prices will rise accordingly.
Cultural significance is fueled by 4 factors:
These 4 factors can manifest themselves separately. However, enduring cultural relevance is often the result of a combination of all four.
These factors are inextricably linked with each other. All great artists have their own unique aesthetics, and communities that embrace aesthetics as a beautiful form and promote it.
History can stand alone. After all, it cannot be changed.
The artist is the brand. The brand makes the work valuable.
Buying a piece of art from a respected artist is like buying a handbag Louis Vuitton. The name matters. Over time, artists become culturally relevant. Many popular NFT artists are early experimenters.
Those who created the work in the digital world made a reputation with the early crypto users, who, not coincidentally, had a lot of cryptocurrency on their hands to spend on NFTs.
After early NFT artists sold their work, some of it for record-breaking prices, it became culturally significant and will always be desired.
When investing in artists, you are either investing in someone famous or in artists who have yet to be discovered. The first is similar to investing in blue chip stocks. The latter is similar to venture capital.
When you invest in a famous artist, you are betting that the value of their work will increase. There is nothing difficult in this. According to the Lindy effect, the longer an artist is relevant, the more likely they are to remain relevant. In the NFT space, where weeks feel like years, relevance can be confirmed in a short amount of time.
When you invest in an unknown artist, you are betting that he will somehow break through. In this case, you need to find artists using new techniques that create meaningful art. Investing in the 1,000th generative artist might work if their work becomes attractive, but investing in an artist on a new platform or using new technology might be better.
- The most famous NTF-era artist is probably Beeple. He sold the most expensive NFT piece Everydays: The First 5000 Days for $69 million at Christie’s.
- Crypto artists, such as XCOPY and Hackatao, regularly sell unique works for hundreds of thousands of dollars.
- Early relevance may also depend on the platform. You can choose Ethereum and create on it, but artists can also create on blockchains Solana or Tezos. jjjjjjjjjohn is a popular artist on the Tezos network who regularly sells art for tens of thousands of dollars.
- Recently, generative art has become popular. It is created by artists who use a program to generate digital art thanks to an algorithm, rather than drawing it by hand. Some call it “drawing with code”. Tyler Hobbs‘ generative series “Fidenza” on Artblocks has become one of the most successful.
Beauty may be in the eye of the beholder, but the value of beauty is a universal constant. Beauty evokes an emotional response from the viewer. This reaction carries an intangible value.
Sustainable and growing value is the result of a mixture of history, brand and beauty.
Conversely, it can be difficult for an artist with a strong brand to succeed if their art is ugly. The thing is, beauty matters, but it’s completely subjective. All you have is your inner sense of beauty. Follow him.
One of the unique features of the blockchain that adds to the power of NFTs is the full record of the movement of an asset from inception to current ownership. This is called origin.
Since most of the blockchains that support NFTs are relatively new (Ethereum, Solana, Tezos), even recent history may seem ancient. Strong communities of collectors have formed around assets that are associated with certain events in the history of these networks or in the NFT market in general.
- Cryptopunks are considered OG NFTs, but there are a few more projects that have historical value.
- Curio Cards is a set of 30 digital trading cards released in 2017 just before the Cryptopunks. The rarest Curio Cards sell for hundreds of thousands of dollars.
- PixelMap, a project that allowed you to own pixels on a map, recently resurfaced. The creator launched it in 2016, long before Curio Cards or Cryptopunks. PixelMap is currently selling for around $10,000.
Both of these projects will remain significant, but it will be difficult for them to compete with the Cryptopunks or BAYC in terms of cultural influence. The artworks, like the artists, don’t seem to be compelling, which means the communities aren’t as strong.
Community is the most powerful element of cultural significance.
Artists, aesthetics, and history can all form the basis for building a community, but no NFT can remain culturally significant for long without a community to support it. After all, the main way to promote any NFT is communication and the formation of a confident community. This is what we talk about in the articles How to Become a Successful NFT Artist and Ways to Promote NFT.
Communities can be organized or unorganized.
Almost every new NFT project is launched with an organized community on Discord, where the creators try to captivate a group of people. The best projects have communities that have a life of their own. The worst projects have dead communities where no one cares.
When investing in cultural significance, an important indicator of the sustainability of the project is the activity of the community in Discord, Twitter, Telegram.
An organized community gives rise to cultural significance, while an unorganized one reinforces it. When a community goes public beyond its own comfortable walls, it’s a test of importance.
Projects that handle this transition well are resilient. Those projects that do not succeed will remain niche.
- Organized communities – at projects The Pixel Vault or Loot communities are very active in discussing various development directions in Discord.
- Unorganized communities – for example, Cryptopunks who do not have an official community in Discord. But there is a certain camaraderie among the Cryptopunks on Twitter. Punks communicate with other punks and pay attention to each other. BAYC also stick together in the social world in a disorganized manner.
Prospects for invest in NFTs
NFTs will be critical to the next phase of the Internet. Investors who ignore them will miss out on the emerging market, which is much less efficient in terms of valuation than the stock market. We have also prepared useful material for you in the article How to invest in NFTs. It is with the basic concepts described in the article that you should start as an investor.
According to the principles above, there are several NFTs in the market that objectively offer good returns in terms of the first distribution category. We, the NFTMetria team, regularly update our author’s course so that you have the most up-to-date knowledge and news from the crypto world and act thoughtfully, making a profit from your investments.
The reason for investing in NFTs now, despite all the risks, is the scarcity. Unlike stocks, NFT projects have strict limits on the amount. Even if more are created in the future, the new ones will not be the same as the earlier versions, and we can check this on the blockchain.
The best NFT projects may not trade actively, even during a bear market. These are the kind of projects that are likely to become the equivalent of FAANG (Facebook, Amazon, Apple, Netflix and Google) shares in the NFT space.
Restraint is opposed to risk.
Decide which game you want to play and have fun playing it.