Like in the stock, forex, and crypto markets, where there are yardsticks to evaluate the strength of assets, there are metrics you can use to rate the worth and potential value of an NFT before investing in it. Four of these metrics will be explained in this article, along with some benefits and risks you should be aware of before investing in an NFT.
NFTs Do Not Offer Financial Value Alone
NFTs can be pretty valuable in a couple of ways. Apart from being investment instruments with high-profit potential, they are also used to establish identity, community, and ownership. Some people buy NFTs to support artists, and often, the artists earn more from this since they profit directly from their works without any intermediary.
As a new form of collectible, they are digital upgrades to items like comic books, arts, posters, sports cards, etc., attracting many to buy NFTs not because of any monetary gain they expect from them but because of the other values they have. Sometimes the value could be in the form of exclusive access to events, for gaming purposes, and some just buy it for the novelty of it.
For investors, NFTs have also become a profit-making technology (even though only a few people have become rich by getting involved in NFTs!).
One question you might then ask is how to spot which NFTs have the potential to offer you financial value and the ones to skip for investment purposes.
4 Ways to Understand the Worth of an NFT
Below are four factors you should consider when trying to invest in an NFT.
1. How Rare the NFT Is
NFT rarity will determine its value. For example, a rare NFT can be a first-of-its-kind piece of digital art by an illustrator; some NFTs made by celebrities also fall into the category of a rare NFT.
An example of an NFT that falls into this category is a project by Mike Winkelmann (aka Beeple) named "Everydays: The First 5000 Days." It's been called an "accumulative piece" because it's made up of 5,000 images, one for each day since May 2007, a total of 13 years. Speaking to Artnet, Metakovan and Twobadour, NFT collectors from Singapore, said they bought the piece because they believe it "is going to be a billion-dollar piece someday."
2. What Can the NFT Be Used For?
This covers how an NFT is used in the physical or digital world. In addition to being unique digital assets, certain non-fungible tokens also serve other purposes. Some NFTs, for example, give the owner rights and benefits they otherwise wouldn't have.
The Bored Ape Yacht Club started as a set of NFT images, but now they are tickets to special events and give rewards to their owners, such as the ability to print new NFTs. Many NFTs are also used in games, and they are valued differently based on the functions they play.
3. How Liquid the NFT Is
The ease with which an NFT can be bought or sold within its network refers to its liquidity. Investors like to invest in liquid NFTs (those with significant trading volumes) since the risk of holding them is reduced. ERC-standard NFTs are instantly tradable across a wide variety of exchanges. The ease of trade adds to the value of such NFTs.
4. Who Has Owned or Is Behind the NFT Project?
The people and projects behind an NFT can stir up speculation, which can affect the growth and price of the NFT. In addition to who the creator is, the caliber of the people who have owned a certain NFT also affects its value. For example, NFTs owned by people of high social standing or celebrities usually have a high value. This way, we can also say that an NFT's price can be increased by affiliating it with a strong brand or famous figure.
5 Benefits of Investing in NFTs
If you choose to invest in NFTs, you should also be aware of some of the benefits of investing in them.
1. Many Possibilities
There are endless possibilities in the NFT space as they can be used for almost any project. Moreover, the use cases are also increasing steadily, making the future of NFT promising.
2. Easily Accessible and Transferable
Another reason NFT investment might be a good idea is that they are accessible to everyone; it is not for any selected group of people. It is also easily transferable from one person or place to another. With this, there is an expectation that the technology will continue to grow more popular.
3. Diversification
Investing in NFTs offers another way to diversify your portfolio, thereby reducing your overall risk. Even within the NFT space, there are different categories of assets you can invest in. Just make sure you do your research well before settling for any asset.
4. Secured Ownership and Transparency
Ownership of NFT is secured through blockchain technology. This feature also helps to fractionalize ownership of assets. It is easier to divide ownership among several owners while everyone has a secured irreplicable record of their shares. Blockchain makes all records and transactions transparent, making trades more straightforward with less chance of fraudulence.
5. NFTs Are Easy To Validate
Since all NFT transactions are recorded in a blockchain, the data cannot be changed or tampered with, making NFTs easier to authenticate than physical assets. If you are buying a piece of art from an online store, you might not be able to know if you are getting the original or a copy. However, when buying an NFT, you can check the blockchain to validate the authenticity of the piece of art before paying for it.
4 Drawbacks of Investing in NFTs
Investing in NFTs is also not without certain risks. These concerns are issues that may hinder the growth of NFTs in the future.
1. NFTs Are Not Environmentally Friendly
Most NFTs are supported by the Ethereum network, which uses the proof of work (PoW) consensus method (although Ethereum is set to switch to proof of stake). The PoW consensus process takes a lot of energy to record and confirm transactions. To mint a single NFT, heaps of electricity is needed. Concerns have been raised that this could negatively affect the environment.
2. High Price Volatility
NFTs are very volatile, and the prices change rapidly, making it a little challenging to predict the future value of an NFT. You can lose your money if the NFT you buy doesn't retain its value.
3. NFTs Aren't Popular
NFT tech is still in its infant state and isn't very liquid. Many people still don't know what NFTs are, which makes it hard to trade because there aren't as many buyers and sellers. Furthermore, as you'll read below, their association with fraudulent activities harms their image.
4. Fraudulent NFT Activities
NFTs can also be used to carry out fraudulent activities. There is no doubt that the integrity of blockchain is unquestionable. However, there have been cases of the sale of properties as NFTs without the consent of the real owners, violating the essence of using NFTs to sell properties. Several other NFT scams have been done, and this makes it necessary to be careful when trying to buy an NFT.
Invest With Caution
It cannot be overemphasized that, as much as there are advantages to investing in an NFT, there are also risks to it. You should not just invest in an NFT because it is an NFT. Rather, you should assess it to see if it has the potential to be more valuable in the future.
We understand that the NFT world is rapidly growing, and many things are bound to change. In this light, you should open your mind up to the possibilities while also being careful in the NFT space.
