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Article by Marc Bisbal Arias [Photo by Artificial Photography]
In my last article, I talked about my experience actively buying NFTs. Let’s expand on the topic with more structured ideas about how to analyze NFT collections and projects with the aim of providing some guidance for those starting out.
Not all NFTs are created equal, so we shouldn’t use the same criteria for evaluating them. Although most great projects or collections have common characteristics, we need to think differently if we’re judging a purely artistic NFT compared to one that has additional utility.
Similarly, different blockchains (i.e. Ethereum, Solana, Tezos, etc.) are used by different types of artists and teams. This means that each ecosystem is unique.
The first step when evaluating an NFT project is to understand the general markets and agents in the space. For instance, NFTs as PFPs (profile pictures) and 10,000-item collections were popularized on Ethereum. Solana is also flooded with these. However, there haven’t been many large collections on Tezos, apart from some recent notable exceptions.
CryptoPunks are 10k unique collectible characters stored on the Ethereum blockchain. CryptoPunk #4130 was recently sold for 86 ETH ($400,642). Image source: Larvalabs.
A characteristic in Tezos is that artists launch multiple copies (known as editions) of the same artwork. On the other hand, Ethereum and Solana NFTs are typically collections of unique but similar items (see above), which sometimes have a strong focus on roadmaps and deliverables.
Lucrece’s “The Soulmaster” has 15 editions. It last sold for
1,850 ꜩ (over $6,600 at the time of writing these lines). Source: Objkt.com
Collectors Kevin Rose and Chris Wallace recently said that NFTs on Tezos are much cheaper than on other blockchains, with Chris stating that those on Tezos can trade for 5 or 10 times less than on Ethereum. In my experience this rings true, and NFTs on Tezos are also cheaper than on Solana. There’s no other place where I’ve been able to collect works for amounts as little as 60¢ or $3. Excluding free-to-mint NFTs, some of the cheapest ones I’ve seen on Solana and Ethereum cost somewhere from 0.1 SOL to 0.5 SOL or 0.04 ETH to 0.08 ETH (in USD, these are $10 — $50 and $120 — $240 respectively, at today’s prices). Often, they trade for much more.
Another difference is that I haven’t yet seen teams developing roadmaps on Tezos. Mostly, this blockchain is used by artists selling unique artwork rather than teams working on deliverables.
Now that we’ve seen some differences in NFT projects based upon their native blockchain, let’s talk a bit more about assessing NFTs that are purely artistic versus those projects that have a defined roadmap.
I am definitely not an art expert, so there are only four methods I use to assess purely artistic NFTs:
Relying on those who know more than I do. Do other artists or collectors think this is a good piece or artist? The more people think it’s good, the more likely this is to be true. There are some artists and collectors I trust more than others, because I may see value where they also see it, or because they’ve also created art I like, or because they’ve worked on relevant projects. I follow these people on Twitter to improve and support or disprove my judgement. Tyler Cowen recently wrote an article about how to start art collecting, which I think can be useful for NFT collectors. Once I find which are the key artists in a space, I study them to figure out why they stand out and why their work is important.
Learning. We may look at a painting and not appreciate its artistic quality. But if we learn its meaning, the work that went into its creation, the innovative mechanism or technique that was used to produce it, that painting can gain value before our eyes. My go-to resource for learning about artists and understanding their work is Proof, a podcast where Kevin Rose interviews different artists. Listening to artists talk about their work and process, and reflecting on the questions they’re asked, has increased my understanding and helped me to analyze art. Learning about art in general can also make us understand what is valuable or not, and why.
Do I like it? This one is pretty obvious; if I find the artwork aesthetically pleasing or interesting in any way, I am more inclined to buy it.
Investigating trend-setting artists or popular types of art. This is something else I’ve found to be helpful to learn about this market. While generative art isn’t something new, its use in NFTs has exploded and become quite popular. Tyler Hobbs’ Fidenza is one well-known example of the genre.
Fidenza #313 sold for 1,000 ETH on Aug 23, 2021. Source: OpenSea
Somewhat unrelated to the above, price is another key factor I use to consider whether to purchase NFTs or not. However, this is not exclusive to this subset of NFTs. No matter how great an artwork, artist, or team behind an NFT is, there’s an amount at which I will no longer consider buying it.
Now let’s take a look at how NFTs become valuable and different types of NFT utility in the space. Here I’ll mostly focus on the Solana ecosystem because it’s the one I’ve followed most closely, although I’ve seen a fair share of projects on Ethereum and they have many similarities.
Many teams behind NFT projects have created roadmaps with the aim of providing further value to holders and early supporters. Examples of these include regular airdrops of new NFTs, merchandise, comic books, governance tokens, staking mechanisms, and early or discounted access to other NFT projects.
Why some NFTs are more valuable than others comes down to three factors: being early, executing on a roadmap, and community.
First and foremost, being early pays off. CryptoPunks are highly regarded in terms of historical and cultural value because they were one of the earliest projects that launched.
Second, when there is a roadmap, execution is crucial. If you’re buying NFTs you’d do well paying close attention to the team behind it. Are there identities known? Have they built something before? What’s their track record? Do they have a reputation to live up to? None of these things guarantee that the project or collection is going to succeed long-term, but it definitely makes it more likely than an anonymous team that hasn’t created anything before.
These are important questions to ask before getting in, and this is why some people say that picking NFTs feels similar to angel investing: ultimately you’re betting on people and their ability to deliver, and most projects will disappoint.
Something you can do early on is join their Discord and get a sense of what the team is all about. If they host Twitter Spaces or community calls, it makes sense to listen and see what they say. Does it make sense to you? Are they promising too much? (Not everyone can ship great work!) Are you genuinely interested in what the team is planning to build?
Finally, the community is an important factor that ultimately affects the direction of the project. The kind of people an NFT project attracts and engages with can say a lot about it. But what does community mean exactly? Let me show you three different kinds of communities I’ve seen and it will become clear.
I’ve been in some Discord channels where all people do is chat about the floor price: “Why isn’t the price going up?”, “This will 10x in a few days!”. This leads nowhere. Most people in these communities bought the NFT to make a quick profit. If holders aren’t engaging in positive ways (asking genuine questions to the team, building derivative projects or applications around the NFT), that’s a bad sign.
Another red flag is if the team behind the NFT is never showing up in the chat engaging with holders, building community, or executing their roadmap. I’ve seen teams that managed to create a strong, positive, and friendly community around them by showing up throughout the day to chat and get to know the people in the Discord, hosting Q&A sessions, creating contests, hosting trivia events, and so on. One project excelling at this is Grim Syndicate.
Another special type of community I’ve seen is one filled with developers or other kinds of builders. Clear examples of this are Loot or Adventure Cards. If you hop into the Discord channels of these or similar projects, you’ll find people constantly talking about further development and coordinating to build things together.
Builder/developer communities and positive early adopter communities have better chances of succeeding long-term.
When people mention community as being a key driver of a specific NFT’s success, that’s what they mean. Are people chilling, getting involved, building things, hyped about the things that are coming next, and creating things around the project? Or are they only concerned about the price? Identifying the community vibe surrounding an NFT can help predict long-term success.
Something should now be obvious. Teams behind NFT projects are effectively building a reputation and constructing a brand, whether conscious of it or not, and their NFTs represent precisely that. Pixel Vault has become one of the most reputable and recognizable brands in the NFT space because they’re constantly overdelivering and focusing on their early supporters. And when people use their NFTs as PFPs, they’re signaling they’re part of a community that’s valuable to them.
That is why non-web3 native brands are experimenting with NFTs and utility. Adidas recently dropped an NFT that is tied to exclusive merchandise drops to holders during 2022. But this is just one example; many brands are using NFTs to focus on their biggest fans and fostering brand loyalty. Because of the nature of NFTs as gateways to private and exclusive communities, events, and other type of perks, the space has been quickly gaining popularity.
Note also that when there are brands with a reputation behind a project, the stakes for them to deliver are high. So buying NFTs of well-known brands should be much safer than a random project with unproven or anonymous founders.
Deciding on whether you want to buy an NFT or not is only half the work. The other half is following up. Your goal is to find evidence that confirms or negates your initial judgement. And if you end up buying, your next task is monitoring your NFT collection every so often. If you own a lot of NFTs this can require a significant amount of time, but monitoring doesn’t mean looking at prices hourly or daily.
Mostly, you’ll want to pay attention to what the artist keeps creating, or what the team is building. Occasionally it also makes sense to pay attention to prices. Discord, Twitter, and any community calls or updates the artist or team does are some of the best ways to catch up on what’s happening. Generally speaking, any kind of regular update that provides transparency on development is a good sign.
Whether you decide to keep a particular NFT for a long time or sell it after a short time, it is good practice to stay well-informed about the community, the market, and trends in the NFT space. That way you can make decisions based on experience rather than emotion.
Author Bio
Marc Bisbal Arias focuses on research, analysis, and investing.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
Disclaimer: this isn’t investment advice. This article has been written for informational and educational purposes only and it reflects my personal experience and current views, which are subject to change.
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