Trading in NFTs could be profitable only if you know your way around the industry and market. A lot of factors are responsible for the success or failure of an NFT collection. As a collector or trader, arming yourself with the right information allows you to make better and more informed decisions. In this article, we share five factors, enthusiasts or NFT collectors must consider before investing in any NFT collection.
Rarity & utility
How rare is the NFT you want to buy? The rarer the NFT, the higher the value it likely holds. A limited edition NFT could be worth higher than an NFT of a 100k collection. The uniqueness of an NFT should be considered before buying. You should check the rarity score of the NFT you want to buy. Platforms like Icy.tools, Traitsniper, and Raritysniper provide a simple way to check the rarity score of an NFT.
MAYC #4849 rarity score.
What benefits are you entitled to when you buy and hold the NFT? NFTs that have achieved premium statuses offer one form of benefit to holders. NFTs represent a form of ownership of a digital estate. This estate should return value to the holder else it becomes worthless.
Excellent marketing and advertising strategy will boost awareness about the NFT, and drive community and sales. You should look at the strategies adopted by the NFT project you want to buy. If the strategies are not converting, demand will not be created for the NFT. What partnerships is the creator establishing? For example, Ali Sabet and BAYC collaborated to create hybrid NFTs which sold out quickly for $1500 per NFT.
Doodles and Hamburger restaurant chain, White Castle also collaborated to create 5000 NFTs in 2021 to celebrate White Castle’s 100 anniversary. This is a factor to consider before buying an NFT. If it is a new NFT, take a look into how it is setting up its marketing plans before making a decision. The strategy in promoting the NFT should not just focus on gathering a large community but should also center on giving value, and converting the community to long-term holders with specific benefits accruing to holders.
NFTs are by design illiquid assets, hence the ease with which they can be bought or sold goes a long way in determining the liquidity of any particular collection. You do not want to be a bag holder for something worthless. How high is the demand for a collection? If it is in the post-mint stage, then you might want to consider the trade volume and market capitalization. As an example, take a look at the chart below.
Image showing the trade volume & market cap of BAYC
The higher the trade volume of the NFT and the number of times sold, the easier it is for you to sell your NFT when you need to.
Team and brand influence
Who are members of the team who created the NFT you want to buy? If they are anonymous, that has its risk and you can use other factors to determine if the NFT is worth your while. But if not, what is their profile? Can they pull off what they have set out to do? Have they been part of a successful NFT before? How powerful is the brand power behind the NFT? For example, if Google announces a 10K ETH-based collection with no mention of utility, the Ethereum network may become congested. Why? The authority behind the Google brand commands great power and authority.
Community is the single underpinning factor for the success of any collection. An active community around a particular NFT collection would most likely mean, sizable optimists by implication, long-term holders. The more people are willing to hold their collection for a long, the more stable the floor price. So what drives the community of any collection you have eyes on? Sustainable incentives or just a quick inducement that when gone would mean massive dumping? Interestingly, the number of followers and engagement on Discord and Twitter matter for most of the successful collections out there. Are there organic conversations around the collection? How much user-generated content can you find in the collection? How many unique wallet holders are there? The community expands as more people are able to buy and hold the NFT. higher the number, the more the, and that also influences the floor price. For collections whose floor price has grown beyond the reach of retail, fractionalization platforms like Quantix can reduce the entry ticket, making it possible for many people to become holders.
There are several factors that influence a trader or collector’s choice to invest in an NFT. We have outlined five of the top reasons, which are critical to the success of an NFT project. These are some of the high-level factors that can determine the success of an NFT project. The right to use an NFT for commercial purposes (CC0 — Creative Common license) is also another factor to consider taking an NFT position. These are just guides to help traders and collectors, but ultimately, the decisions to buy or not will also be influenced by factors not listed here like pricing, risk appetite, trade volumes, and floor prices, especially for already existing collections.