I want to start off this post by saying that I personally find it hard to follow everything I've listed here due to a variety of reasons including FOMO and my brain masking practicality with optimism. This happens because you keep hearing about big gains in crypto all the time. Winners are very vocal about their fortune whereas losers quietly hideout in shame creating an echo chamber that perpetuates the myth that everyone in crypto is making money. If you've spent any amount of time on OpenSea it is painfully obvious that a lot of people are consistently losing a lot of money. My aim here isn't to "preach" but to present a sensible set of instructions to follow and provide some ideas that could help reduce risk in crypto's wild west.
Quick note - Even though I might criticize a few things about the current state of affairs in the NFT space, I firmly believe that NFTs are a revolutionary technology and will exist/thrive in one form or the other in the future. I plan to write another post explaining my bullish outlook and a more technical explanation on the topic later.
This one is fairly obvious and anyone who has any advice on NFT investing should always begin with it. Crypto as an investment is extremely speculative and NFTs are even more so with the additional problem of low liquidity. 99% of NFT projects today would essentially go down to 0. What separates the 1% is extremely hard to gauge so only invest money that you are willing to lose.
To add to that, the NFT space is rife with scam and rug pulls. A lot of projects have anonymous founders with no intention of ever delivering any value to the minters. There are also cases where the team loses interest in the project and the floor drops close to 0. The best way to go about this is to invest as a collector -- you'll only ever buy art that you can afford and you won't be disappointed if you are never able to sell it.
A lot of times, there is an urgency to mint or buy an NFT because the collection is very hyped up and poised to shoot up in value. You find out from a tweet or a random message in some Discord server and need to act quickly - Don't! In rare cases, it does work out but then it just becomes gambling.
There should always be due diligence behind why you chose to buy into a certain project and it should meet all (or most) requirements from your checklist (more on this below).
This isn't a problem I've personally faced as much but I've seen this quite a bit in a lot of Discord servers that I've been a part of. People think that if they mint a lot of NFTs from the same collection, they are bound to get a rare one. Rares often sell for a price much higher than the floor price and if you do mint one of those, you are bound to make a decent return. The thing is, a lot of times, the brain masks practicality with optimism. One example that shows this very clearly is RTFKT's CloneX Mintvial and the actual Clone X NFT.
The price of the Mintvial shot up as much as 12 ETH when Nike announced its acquisition of RTFKT. After you burn the vial, you get the actual Clone X NFT which has all the utility. The floor price of that at the same point was ~4.7 ETH. Most people buying the vial would have likely lost close to 1/3 of their investment right away yet the traded volume on the vials was sky high. Does that make any sense? No!
In a 10,000 profile picture collection, the top 100 would be considered rare enough to fetch a premium price. Top 10 would be even better. The probability of that happening is 1% and 0.1% respectively. If you mint a lot hoping to get a rare one, you are setting yourself up for disappointment.
Make a robust checklist and for each project you are considering, make sure all of those points are satisfied before you throw your money at it. This can be very subjective and could depend on a lot of factors. I've attempted to jot down a checklist with my requirements. If a project doesn't meet any one of them, that is a red flag.
☑️ Founder/Team is doxxed.
Some people won't necessarily feel very strongly about this, especially given the fact that there are blue-chip projects with anonymous founders -- Bored Ape Yacht Club being the prime example. For one BAYC, there are at least a 100 if not more projects with anonymous founders that have failed.
When the founders are doxxed, it provides some accountability to the project. I am not saying that doxxed projects always succeed but it is a good check to have.
☑️ The project aims to deliver something new and exciting.
One look at NFTCalendar's upcoming projects makes the lack of creativity in the majority of them crystal clear. 2021 has been a gold rush for NFTs and everyone is running to the mines. Every so often, a unique project would come along and bring something new to the space. The excitement and the hope that these projects are bound to make it big, makes the price shoot up. The people who miss out on these because they got priced out of the market would happily invest in a similar project out of FOMO thus creating a demand for copycats.
In most cases, these copycat projects do not have the vision or the ability to sustain the project long term and when the hype of the original project's idea dies down because of an absurd number of copies, the copycats fail spectacularly. The originals still have a decent shot at keeping their place because the NFT space certainly applauds getting there first.
☑️ Founder/Team is competent enough to deliver on their promises.
Following up on the last point, a lot of projects promise the stars and the moon. A lot of them want to build their own "metaverse", or a video game, TV show, comic book, and other lofty goals. These are really hard to achieve even for professionals with years of experience in the industry. A team of a CS major who picked up some Solidity/frontend and a graphic designer hired on Fiverr with a mediocre PFP collection are very unlikely to deliver on these ridiculous claims.
What would you say if your friend who doesn't have any experience with video game design asks you to give them a bunch of cash and promises to deliver a game in a near impossible timeframe? How does it become so different when it is an anonymous person on the internet asking you money in crypto form? It should be even more alarming!
A good way to gauge competency is to observe the quality of the project's website and even the smart contract if you understand it. You can also tell a lot by how the founders/team interact with the community and address questions and concerns. All this is still not enough but you'd be surprised how many projects get ruled out just based on this.
☑️ The community is strong and excited about the project.
While I am certainly not in the "right-click, save" crowd, I do believe that most NFT projects command the value that they do because people believe they have that value. Sure, the provided utility needs to be factored in as well but for a majority of the projects, the utility doesn't come close to their inflated value. I strongly believe that the current market is priced in at a higher multiplier than what its actual worth should be but that is a conversation for another time.
It is important to see the interactions of the community in the Discord server and gauge their sentiments about the project. Do they seem excited about it? Do they get involved? Would you like hanging out with them? All of these are important questions to ask as part of the project's due diligence.
☑️ The art is cool.
This one is highly subjective and from purely an investment standpoint, it doesn't really matter. Like I mentioned however, treating this market like a collector helps keep your invested amount in check and would make you genuinely excited about the project.
The NFT space is extremely volatile and a project can have wild swings from +300% today to -600% tomorrow and to +500% the day after that. It is important to come up with a number you are comfortable selling at based on your assessment of the project. It shouldn't matter if the project goes to the moon after you sell because you made the best decision based on the information you had.
Another strategy is to mint/buy at least 3 NFTs from each project you believe in. The first one, you can use to cover the initial investment cost. The second one can be used to capture the profits based on a realistic number you came up with and the last one you can hold long term based on your belief in the project.
I also think that if the team is working hard, you enjoy the community and you see promise, selling at a loss just because the floor is down isn't the best strategy. This is still very early stage and we don't know where the market is going to go. As long as you think that the project is making progress, selling at a loss should be avoided.
That concludes my baseline guide for investing in NFTs. This list is not exhaustive by any means and a lot of points are very subjective so think about what works best for you -- DYOR. WAGMI.