3 metrics I'm using to evaluate the investment potential of an NFT project
Over the last few weeks I've been thinking a lot about different ways to identify NFT projects that could have real long-term investment potential. While there's no doubt NFTs are incredibly risky, and yes, it could just be one giant bubble that goes to zero and is remembered as the beanie babies of 2021, I think there's something special going on.
So for the sake of this post, and really this blog in general, let's say that NFTs do become meaningful investments and continue to grow in value like art and other collectables. If this happens then, just like any other investment, you need metrics to track and study over time to determine the potential value of an investment.
Currently there's a lot of conversations about rarity of NFTs within a specific properties - aliens in CryptoPunks, single-trait laser eyes in Bored Ape, etc. And while these are important to pay attention to in the context of understanding how valuable your NFT might be within a given project space, it doesn't benchmark the asset compared to the ecosystem as a whole.
Some of the top minds in NFT have talked about how few NFT projects are actually going to be successful long-term and I think Whale Shark says it best:
The Whale shares some good news and bad news for would-be NFT collectors. The bad news: He thinks that “99.99%” of the current NFT projects are going to fail. So maybe don’t take out a line of credit to spend $73,000 on a pixelated photo of your nose.
The good news? “I definitely don’t think it’s too late,” he says, believing there are still investment opportunities aplenty – even for complete newbs. The Whale gives some ruthlessly pragmatic advice – including detailed Twitter lists – on how aspiring NFT moguls can quickly get up to speed, frame their investing decisions and secure their digital treasures without getting fleeced. (Source - CoinDesk)
So...if the vast majority of NFT projects are going to fail, how can you identify the 0.01% that are going to become good investments? While I don't know the correct answer and honestly, I don't think anyone does, I have started tracking some metrics that I think could be helpful in identifying projects with some real potential, or at least some velocity that's moving things in the right direction.
- Number of users + growth of Discord servers - this seems like one of the clearest metrics right now. Popular projects like NBA Top Shot, Zed Run, and Bored Ape Yacht Club have very active Discords with tons of channels and new people joining constantly. I also watched the Ghxsts Discord go from nothing to a buzzing bazaar of fanatical investors in a very short period of time. How these communities continue to grow, and how active they are over time, can probably tell you quite a bit about how a project is doing.
- Floor price - this is a metric that I think just about every NFT investor already tracks and for good reason - it's important. If the floor price of an NFT continues to rise, the project as a whole is becoming an increasingly better investment. Tracking floor price over time (years in many cases) will be very important when it comes to evaluating if you've made a good investment and deciding on when to sell if you're trying to lock in a profit.
- Twitter activity - last but not least is Twitter activity. While looking at a Discord server can give you a feel for one side of a project's momentum, the more buzz there is about a project on Twitter, the more likely people are to discover it. Currently I can't look at my Twitter feed without seeing a zillion tweets about NBA Top Shot, Zed Run, and BAYC. If two years from now nobody is talking about Zed Run on Twitter, that's probably a bad sign for investors.
As a quick reminder, I'm not some NFT guru or expert, I'm still trying to figure things out and in the process share what I'm thinking with all of you. I haven't made millions or even thousands of dollars off of NFTs yet, I hope to someday, but for now I'm still just deploying capital and trying to learn as much as a I can.
I'm starting to put together spreadsheets to track metrics like the ones I mentioned above, if anyone wants to take an early look at how I'm analyzing these feel free to shoot me an email at email@example.com and I'll send you what I have so far.
Thanks for reading, and here's to finding some NFT projects that stand the test of time...
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.