Topics NFT
Bybit Learn
Bybit Learn
Apr 4, 2022

10 Things to Consider Before Buying an NFT

These days, everyone is talking about NFTs, or non-fungible tokens. Irrespective of what you think about NFTs, there’s little doubt that the market for NFTs has exploded. Recent estimates suggest a market value close to $40 billion, which is a hundred times larger than four years earlier.

As with everything new, speculations abound. Some people think that NFTs have reached a tipping point, and the bubble is going to explode. Others suggest that this is only the tip of the iceberg, because the NFT phenomenon is just beginning to go mainstream. The variety of sentiments confuses investors who are already disoriented by the chaotic environment, unable to decide whether to invest in NFTs and how much value a specific NFT project holds.

In truth, such confusion results primarily from misunderstandings about NFTs. In fact, non-fungible tokens are more than just digital images floating around the internet. Similarly, it's also true that not every NFT project is worth your investment.

Here’s a look at NFTs, why they have a future, and what makes a good NFT project.

Are NFTs Just Another Speculative Bubble?

A lot has been said about NFTs since their launch. From time to time, websites tracking NFT prices suggest that their value has decreased significantly, dropping as much as 75% in the space of a few months. As a result, most people automatically assume that the NFT craze is just another bubble which will burst, sooner or later.

In reality, anything related to the crypto sphere — including NFTs — has always remained extremely volatile. A broader look at cryptos suggests countless dips and peaks. For instance, the historical Bitcoin graph reveals numerous bubbles throughout its decade-and-a-half existence. Therefore, if history is any indication, everything that’s built on a solid foundation will peak at the right time — and NFTs are no exception.

People also speculate because they see NFTs as digital art without creative use. However, there’s no reason to count NFTs out — because they offer artists much more than traditional artwork, offering them verifiable ownership rights, enhanced security, and more flexibility in buying and selling.

Optimists also point out that NFTs are worth the hype because they have value beyond aesthetics. For instance, the NFT gaming space is rife with innovation. Players can purchase in-game assets and explore new dimensions, and NFTs are also helping people create digital identities.

Perhaps the most defining feature of the NFT is its potential to make markets more efficient. This efficiency is partly manifested in a transparent environment for digital artists, who can directly connect to a global audience without involving costly agents. Instead of artists going to Christie's, for auction, it's the other way around.

NFTs can even replace passports and IDs to streamline identification and travel. Similarly, they can be used to fractionalize the ownership of physical assets, including real estate, artwork and fine jewelry.

In essence, NFTs are no joke, because they solve real-world problems. NFTs are being used as event tickets, software licenses and fan club memberships. The possibilities are endless, and there’s no reason to think of NFTs as a baseless commodity or a speculative bubble.

Should You Jump on the Bandwagon?

Now that you have some ideas as to why NFTs are useful, it's time to consider if they can bring you some luck.

If you're someone who craves aesthetics or loves to explore new products, jumping on the NFT bandwagon is a no-brainer. It means that you're buying NFTs for the sake of art and fun.

On the other hand, if you're looking at an NFT as a future investment, you need to walk a tightrope and be able to discern between a good NFT and a bad NFT project. This is precisely what this article will help you to do: Identify ten important things to consider before buying NFTs.

What Will NFTs Mean in Another Ten Years?

If you've decided to invest in NFTs, you may be in for a pleasant surprise. In the next ten years, NFT projects will likely reach a new milestone. This is evident from the large business stakes of Twitter, Reddit and Facebook, each of which is investing heavily in buying and selling NFTs.

Mark Zuckerberg has already announced his intentions to make way for NFTs in a new business model, since NFTs offer privacy, safety and interoperability. If everything goes according to plan, there’s every reason to believe that NFTs will form the cornerstone of Facebook's reinvention into Meta, as it transforms its operations to integrate the realities of the metaverse.

The in-game marketplace is another big domain for NFTs. At present, gamers can’t use their in-game credits from one game in another. Once they lost interest in a game, their credits are wasted. This may no longer be the case in a few years, as NFTs are already allowing gamers to transfer the remaining credits to other gaming platforms. With scarcity, transferability and proof of ownership, the in-game purchases can be used as investments, instead of using them for fun only.

While there are countless other uses for NFTs, one of the most remarkable claims is being made by Tether co-founder William Quigley. He suggests that every consumer product in the next ten years will have adigital twin. Considering that almost 20% of existing paintings owned by museums are non-authentic and approximately 3.5% of world trade is based on counterfeit products, digital records of ownership of physical assets may revolutionize the world and give NFT owners much more than they bargained for.

Is NFT a Real Investment?

The stock market is the first thing that comes to mind when thinking about investments. However, most people are unable to relate NFTs to the stock market and traditional investment channels because they are only perceived as digital art. Contrary to this belief, NFTs represent real-world objects like art, music, in-game items, videos, and more. Accordingly, investing in NFTs means investing in real-world objects and virtual assets that have a meaningful impact on people’s lives.

Perhaps the most striking parallel between investing in NFTs and the stock market is in futures trading contracts. Just as a futures trading contract is built around an underlying asset, so are NFTs, which represent real assets. If no one doubts the feasibility of futures in the financial markets, there’s likewise no reason to doubt the validity of NFTs. As a matter of fact, NFTs hold much more value than futures contracts — because NFTs solve real-world problems. Therefore, it can be argued that NFTs are real investments that will likely form the backbone of investment projects.

Things to Note When Accessing an NFT Project

There are lots of NFT projects popping up every day. Whereas new projects have increased the number of choices available, the diversity has also made it difficult to pick a profitable project. Most people looking to invest in NFTs get burned because they make their choices without due diligence. This haste leads to loss, giving NFTs a bad reputation.

Fortunately, if you're willing to do a bit of research, without falling for the usual marketing gimmicks, there are lots of golden nuggets in the NFT market. When you’re ready, here’s how to go about it:

1. Set Your Budget

Investing in NFTs can be expensive. Therefore, it's important to pick NFTs that are within your budget and risk appetite. Don't blindly invest in a "blue-chip" project just because it has given investors high returns. The best advice is to look at a project from a potential ROI (Return on Investment) perspective. If you're an early entrant in a project, you're more likely to get much better returns from smaller projects, compared to projects that have already gone mainstream.

2. Find A Suitable Project

After setting a budget, look around for a platform that can give you an overview of potential NFT projects. For instance, Moonly is an upcoming platform that ranks projects on the Solana NFT blockchain, based on 18 factors. Its objective is to filter potentially successful projects with high ROI. There are lots of other platforms built around this concept. OpenSea and Nansen are just a few more examples to consider.

3. Project Utility

Once you've shortlisted the potential list of NFT projects, the first attribute to look for is the project’s utility. NFT projects with utility offer perks that go beyond dollar value. These NFTs are more than artwork, because owning them provides added value by giving access to exclusive members-only events, ownership of special characters in a game, dividends, unlocking limited-time experiences, and other perks. There’s no doubt that project utility is the defining feature of a potentially successful NFT, because these projects continue to attract more investors by increasing their brand valuation.

4. Vibrant NFT Community

Joining an active NFT community and following top NFT collectors is another way to get insight into upcoming projects. Popular NFT groups usually have a paywall, which is reflective of the value they can provide to their members.

A vibrant community also ensures that the NFT project gets off the ground successfully. In the NFT market, community members are like customer service reps who can answer your most pressing questions and offer practical guidelines regarding useful investment strategies. Don't take numbers for granted; instead, judge an NFT by the number of active members it has, as well as its buying and selling activity.

5. Social Proof

Good NFTs never stay dormant. You can judge an NFT by viewing its social proof. Almost every new and upcoming project uses Twitter to post important news and events.

6. Seller Credibility

NFTs have just started to go mainstream. Therefore, it's imperative that you carefully look at the work experience of its founders and team. To be on the safe side, only pick projects that have a credible team that has worked on successful NFTs in the past. The more experience the team has, the more likely the project will succeed.

7. Clear Road Map

Only invest in NFTs that have a clear, transparent and detailed road map that you can understand. The road map should define specific milestones, and any changes must be communicated clearly to all stakeholders.

8. Gas Fees

Whenever you create, buy, sell and transfer NFTs, you have to deal with the gas fees. These are essentially transaction fees which are unavoidable and keep fluctuating. Many investors end up on the losing side because they never consider these transaction fees in their plans. Before venturing into a project, try to evaluate what you’ll need to pay for a gas fee. Certain tools, such as Rarible Analytics and NFT Gas Station, can help you trace such expenses.

9. Floor Price

If you're interested in investing in an existing project, look for an NFT’s floor price. The floor price is the minimum amount required to become a member of a project. If the floor price is consistently going down, it means that the project is losing its demand. Theoretically, the floor price of a project will rise during its lifetime. Floor Checker and NFT Price Floor are just a couple of the many platforms which can help track floor prices.

10. Rarity

Investors with deep pockets often look at the rarity score of a specific NFT. The NFT rarity ranking measures how rare an NFT collection is. Rare NFT collections yield greater ROI in the long run.

Indications of an Underperforming NFT

Like any other investment, an NFT is prone to fail if it doesn’t have a solid foundation. Perhaps the first indication of a doomed project is that it doesn't provide any utility or benefit to its investor. For instance, it's always risky to invest in an NFT just for its aesthetic value unless the NFT collection has already gained traction and amassed a lot of value.

Similarly, NFTs that don't provide investors tangible benefits are a telltale sign of failure. An NFT project that lacks liquidity will also underperform, because you need buyers who will buy your NFT in the future. A small community is also a risky proposition because without a robust community of users, there is usually little or no buying and selling. Consequently, such NFT projects can fail to get off the ground.

The Bottom Line

As you can see, NFTs are gearing up to become an important commodity in the near future. NFT applications are already blending online NFT ownership with offline use cases to make NFTs more valuable.

Despite these innovations, remember that purchasing NFTs also depends on personal taste and choice. Sometimes, it doesn't have anything at all to do with the money. People buy NFTs for various reasons, including personal connection and passion. At the end of the day, we recommend you buy NFTs that you enjoy owning — because their intrinsic value will never decline.