Picking a winner with NFTs – What to watch for and what to avoid

2021 has been the year for NFTs. In January, it was uncommon to hear conversations about NFTs floating through the mainstream; now, Collins Dictionary has dubbed the acronym the word of the year for 2021.

Non-dairy milk brand, Inside Out, recently minted a series of NFTs that championed Australian artists in a way that was easily accessible to everyday users. Their vision was to stand out in their own industry by realising the value of the digital marketplace: “As we move into a world run on Web 3.0, digital economies in human-built digital worlds will emerge, and in those worlds, NFTs will be the building blocks… The authentication and immutability of ownership contained within NFTs is something that will be extremely desirable to many people,” Inside Out CEO, Anthony Tuong, said.

Digital art creator for the Inside Out NFT project, Eryn Leggatt, also expressed her excitement towards the philanthropic and social potential of NFTs. “NFTs augmented by physical products or usage rights will make them more appealing in the long term, beyond the hype bubble,” she said.

We have seen pixelated avatars by Cryptopunks sell for upwards of US$11 million after initially selling for $8,000, and large e-galleries of digital art by Beeple selling for US$69.3 million. Music and sports industries have also spotted potential in the NFT sector with performers such as Grimes and Shawn Mendes creating virtual art and music paraphernalia, and the NBA selling key ‘Moments’ in games for fans to own.

If anything has been made clear this year it is that there is no ceiling when it comes to the potential monetary value of NFTs, which begs the question: how do you spot a winner?

A common mistake among new NFT adopters is investing in a random token without understanding what makes these assets valuable. Often buyers will lose the money they were hoping to appreciate due to the lack of liquidity within the NFT market.

There are few considerations that need to be taken before diving into the deep end of an NFT purchase and we are here to walk you through them.

What are NFTs?

NFT stands for non-fungible tokens: digital assets (be them pieces of art, music, film, gaming tools, etc) that are minted on a blockchain to secure verified ownership. The non-fungibility of the tokens means they are one-of-a-kind: a small unique digital artifact with its monetary value determined by market demand.

Where does their value come from?

The short answer: the rarer an NFT, the more the price will be.

The demand for NFTs has diversified from its origins as digital art ownership with its nature of rarity being celebrated across online sectors, most notably seen within the gaming community. Due to the unique nature of an NFT, creators can program individualised characteristics and gaming utilities into a token that no other player possesses. These distinctive features drive up the value of the NFT and can make it appreciate over time depending on its scarcity.

Gaming Youtuber and NFT enthusiast Zueljun Gaming said that it is important to understand how rare your NFT is before you try to buy, sell or accept an offer. “NFTs are not always liquid, meaning that they need to have a buyer on a market to be able to sell. If you have an NFT there is no guarantee you will be able to sell it,” he said in a recent video.

Rarity Tools is a website that rates NFTs in terms of their ‘rare value’, often giving a relative indication of how scarce a token is based on its embedded properties. NFT marketplaces such as OpenSea and Binance detail all the statistics and features of each minted NFT as well as the percentage of the collection which shares the same features.

Keeping an eye on NFT communities

NFTs follow a similar rate of volatility to that of other cryptocurrencies, and as such it is important to stay up to date on where people are drifting to in the market.

Rarity Tools allows potential NFT investors to view upcoming sales and provides access to each creator’s social media accounts. Comparing the social media following to the amount of NFTs up for sale may give a good indication of the demand/scarcity of the NFTs available.

What to avoid

Celebrities are among the many who have jumped on the NFT creation bandwagon, using their fame and fanbase as a sure way to sell their creations for a significant dollar value.

Unfortunately for some, such as Ellen DeGeneres, Quentin Tarantino and John Cena, their celebrity hype was not enough to carry any significant value in their NFT sales. As a result, those who did purchase these ‘celeb tokens’ are likely to have little profit success in their resale due to the lack of market demand.

The potential for the NFT space

The potential of NFTs in the mainstream has been given momentum by the prospect of a new phase in the Internet’s evolution: Web 3.0. This new evolution of the Internet is built on decentralised technology through public blockchains where users would have individual ownership within the online space, rather than passing through intermediaries such as Google or Facebook.

DISCLOSURE: CryptoVista is not a financial advisor and is not held responsible for the decisions made by people investing in cryptocurrency