As in the stock, currency and crypto markets, where there are benchmarks for evaluating the strength of assets, there are metrics you can use to assess the value 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 on their own
NFTs can be quite valuable in a couple of ways. In addition to 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 earn directly from their works without intermediaries.
As a new form of collectible, they are digital upgrades to items such as comics, art, posters, sports cards, etc., attracting many to purchase NFTs not because of the financial gain they expect from them, but because of the other values they have. . Sometimes the value can be in the form of exclusive access to events, for gaming purposes, and some buy it just for the novelty of it.
For investors, NFTs have also become a profit-making technology (although only a few people have gotten rich from engaging in NFTs!).
A question you can then ask is how to find which NFTs have the potential to offer you financial value and which ones you can skip for investment purposes.
4 ways to understand the value of an NFT
Below are four factors to consider when trying to invest in an NFT.
1. How rare NFT is
NFT rarity will determine value. For example, a rare NFT may be a first-of-its-kind 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) called “Everydays: The First 5000 Days.” It has been called an “accumulated piece” because it consists 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 one day.”
2. What can 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. For example, some NFTs give the owner rights and benefits they would not otherwise have.
Bored Ape Yacht Club started as a set of NFT photos, but now they are tickets to special events and provide rewards to their owners, such as the ability to print new NFTs. Many NFTs are also used in games and are valued differently based on the functions they play.
3. How liquid NFT is
The ease with which an NFT can be bought or sold in the network refers to its liquidity. Investors like to invest in liquid NFTs (those with significant trading volumes) as the risk of holding them is reduced. ERC-standard NFTs can be instantly traded across a wide variety of exchanges. The ease of trading increases the value of such NFTs.
4. Who owned or is behind the NFT project?
The people and projects behind an NFT can arouse 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 status or celebrities usually have a high value. In this way, we can also say that an NFT’s price can be increased by linking it to a strong brand or well-known 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. In addition, the use cases are also steadily increasing, which makes the future of NFT promising.
2. Easily accessible and transferable
Another reason why NFT investments can be a good idea is that they are accessible to everyone; it is not for any select group of people. It is also easy to transfer from one person or place to another. With this, there is an expectation that the technology will continue to become more popular.
3. Diversification
Investing in NFTs offers another way to diversify your portfolio, thereby reducing 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 on assets.
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 share the ownership between several owners, while everyone has a guaranteed irreplicable overview of their shares. Blockchain makes all records and transactions transparent, making transactions easier with less chance of fraud.
5. NFTs are easy to validate
Since all NFT transactions are recorded on a blockchain, the data cannot be changed or tampered with, making NFTs easier to authenticate than physical assets. If you buy a piece of art from an online store, you may not know whether you are getting the original or a copy. But when you buy an NFT, you can check the blockchain to validate the authenticity of the artwork before paying for it.
4 Disadvantages of Investing in NFTs
Investing in NFTs is also not without certain risks. These concerns are issues that could 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 make a single NFT, a lot of electricity is needed. Concerns have been raised that this could have a negative impact on the environment.
2. High price volatility
NFTs are highly volatile and prices change rapidly, making it somewhat challenging to predict the future value of an NFT. You can lose your money if the NFT you buy does not retain its value.
3. NFTs are not popular
NFT technology is still in its infancy and is not very fluid. Many people still don’t know what NFTs are, which makes trading difficult because there aren’t that many buyers and sellers. Furthermore, as you will read below, their association with fraudulent activities damages their image.
4. Fraudulent NFT activities
NFTs can also be used to carry out fraudulent activities. There is no doubt that the integrity of the blockchain is unquestionable. However, there have been cases of selling properties as NFTs without the consent of the beneficial owners, which violates the essence of using NFTs to sell properties. Several other NFT scams have been made and this makes it necessary to be careful when trying to buy an NFT.
Invest with caution
It cannot be emphasized enough that as much as there are benefits to investing in an NFT, there are also risks involved. You shouldn’t just invest in an NFT because it’s an NFT. Rather, you should evaluate it to see if it has the potential to become more valuable in the future.
We understand that the NFT world is growing rapidly and many things are bound to change. In this light, you should open your mind to the possibilities while being cautious in the NFT space.
