It’s essential to research an NFT project properly before investing. In this article, I’ll share some of the things I consider before investing in any NFT project.
While it is possible to list and describe key indicators that you should look out for when doing your research, I will also add that experience is also a key factor in my opinion.
After you spend a few months living and breathing NFTs on a daily basis and spending hours of focused learning, talking to project founders, and investing in different projects, you will most likely develop a kind of sixth sense for things. You will also probably make a lot of mistakes, but this is an essential part of the journey.
A quick look at most new projects will give me a gut feeling that almost always turns out to be correct. A word of warning, though. Being right about a project’s value in an objective way does not mean you’ll be right about the direction the floor price will take.
The floor prices you see for NFT projects, in general, are hard to fathom for most non-participants in the space, but even once you do understand the value proposition behind NFTs, you will struggle to understand why certain projects rise to dizzy heights when your objective analysis points to the other way. Conversely, you will see extremely interesting projects flounder price-wise.
So there’s definitely an element of luck involved, and perhaps it could be said that hype trumps any other indicator to a project’s success, but it really is extremely hard or impossible to predict the floor price trajectory in my experience.
Read more: The best NFT trading tools
The only way to counteract this fact is to be invested in several projects. That will help you to stay invested in good projects whose prices take a long time to take off (PunkScapes and Party Degenerates are good examples in my case), while you can enjoy the profits and success from others (Doodles would be my best example).
This will also give you the ability to let go of projects that really go nowhere or end up being a rug pull. Being well-diversified helps you to avoid being too hard on yourself and just write off these problematic projects, knowing that some of your other bets will cover those losses.
With that said, let’s proceed with the top key indicators that I use to evaluate NFT projects.
What is the Project About?
What’s the product being sold? Is it an art NFT? A crypto gaming play? A metaverse project? Or even music NFT? Is the token really the end product or is it just the ticket to access the actual product, maybe a community or software? There are many different use cases for NFTs, and you need to be clear about what the product is.
Originality is also extremely important. There are a million copycats for every successful project, so make sure you don’t invest in one of those copycats, as they usually go to zero after a few days of hype, if they even manage to gather that initial traction. Unfortunately, lots of people who for some reason or another miss out on minting the successful project think they can get some exposure by buying the copycat since it is cheaper and more accessible, however, 99% of the time that doesn’t work out.
While early NFTs were mostly PFP experiments, and also generative art, in 2022 the focus seems to be shifting heavily towards extra utility, community access, real-life perks, and metaverse gaming.
Typically, you will want to own an NFT for any of the following reasons:
- access to a strong network e.g. punks, apes
- status symbol (any blue-chip PFP or gen art project)
- early access to other NFTs through whitelist collabs
- access to future cashflow/airdrop e.g. apecoin from BAYC
Look for projects that disrupt the norm in some way. Some might be too early (for example banner NFTs in 2021) but others will hit at the right time, disrupt the market and be your runaway winners.
Do I Like and Understand the Product?
If it’s artwork, as in the case of generative art, or PFP projects, does it look good to me? This is subjective, but I think I’ve developed good taste over the years, and more importantly, a good idea of what resonates with NFT investors.
Red flags here would be using copyrighted works, or derivatives of other projects when the original project’s license explicitly prohibits this.
If it’s something else beyond artwork, I ask myself whether I understand the niche enough. If I don’t, that’s a show stopper for me, unless I make the decision to spend significant time understanding the niche first. For example, generative music and crypto gaming are not really my favorite areas, so I avoid buying NFTs that fall in those niches as I can’t value them in any credible manner and thus justify an investment.
I’ll also note that one of the good things about NFTs is that they’ve led me to explore many emerging niches that I was either unaware of or that I hadn’t given serious time to. So I might sometimes make an investment in a new niche for me as a kind of carrot to get me interested and informed through the project and its community.
Having a great founding team is very important for the project.
Sometimes the founders are famous, but this is not a requirement. If they don’t have a big following, however, they need to make up for it with some other relevant background and a ton of work prior to launch.
Is the team doxxed? Meaning do we know their names, work experience, ages, location etc? There’s a lot of fanfare about being anonymous in Web3, but to me, it’s still a significant downside. It’s not a deal-breaker, but I definitely prefer a doxxed team.
Ideally, I want to be able to judge the team properly and have a look at their track record, including a check on their ethics, as it ends up being one of the crucial elements to a project’s success.
Some of us who have been around for a few years remember the ICO days were every company was promising the most outrageous stuff but then so few ever delivered. It’s always important to look beyond a project’s artwork and learn about what they actually plan to do with the money they raise from selling the tokens.
I like original roadmaps; projects that are trying to do something different, but also very realistic. Tying in with the previous point about the team, I want to make sure that the team has the credentials to actually deliver on what they’re promising in the roadmap.
Roadmaps can change and frequently do once a project launches, but it’s important to see what the initial idea is, because it gives me an idea of what the founding team’s intentions are and what they are capable of dreaming up.
When you buy into an NFT project, you are placing a bet on the community and the team. This is why it’s critical to spend some time in an NFT project’s Discord before making purchasing decisions.
Discord channels are usually open at least a few weeks before minting begins, so even for new projects, you can get a feel of things. For well-established projects, it is very easy to understand what kinds of people are active in the community and if the project has any serious future plans to add more value.
If I see inflated Discord and Twitter numbers my alarms start sounding, so if I confirm that they’ve used bots to inflate the numbers, I’m out.
If, on the other hand, I encounter real people and high engagement, with an interesting mix of intelligent themes being discussed, that’s a positive sign.
It is important to know what the mint price is and what gas fees were like at minting, because this is one of the most important aspects for determining the floor price in the early days.
As I mentioned in my post about NFT analytics tools, you can use Etherscan to verify the mint price and average gas fees paid by minters.
Over time this ceases to be an important factor, but if you’re buying off the secondary market in the first few days or weeks after product launch, you should have a good idea of this price that people paid when minting in order to assess what kinds of returns they are seeking and how much of a quick flip the project is versus a long-term hold.
If you’re minting, you should understand where the mint price falls on the spectrum. There’s a wide range of minting prices, depending on the type of project in question, but a mint price that is too high might mean that the team is more focused on the initial sale rather than the long-term vision.
Royalty percentages can also vary quite a bit, but at the end of the day you might end up paying 10% or more on every secondary market sale between royalties and platform commission.
OpenSea charges 2.5% on every sale, while project royalties tend to range between 2.5% and 10%. Keep it in mind when trading NFTs, as you might end up losing money when you factor in the royalties, platform commission and Ethereum fees, even if you are selling at a higher price than what you had bought at.
Current Floor Price
If I’m not buying at mint or shortly after, then I want to make sure that I look at how the price has evolved over time. I avoid buying when a project is pumping. It’s very tempting to buy when a project is experiencing a big moment, but it’s best to practice restraint. There will be multiple entry points over the life of a project, and if not, there are many other projects at different stages of their lifecycle that you can focus on.
The best timing is when/if you manage to find a period of suppressed floor prices combined with an upcoming release or announcement of a new game-changing utility. These events are usually priced in by the time they’re announced, so in order to anticipate them, you need to put in the work of being in the Discord, talking to the founders, proposing new ideas etc. It’s not easy or even always possible, but that’s the ideal scenario.
Artificial floor price maintenance by the founding team is usually a red flag. Some project founders regularly sweep the floor in order to maintain or achieve the desired floor price. Even worse is the shaming of Discord members who list their tokens, or any other artificial incentive that is encouraging holders to delist their tokens from secondary markets
You can see a list of holders for any ERC-721 NFT project by looking at the contract in Etherscan, and clicking on the “Holders” tab.
There are several tools that will also give you this information, for example, Dune, Nansen and ICY Tools. It’s best if you don’t see too many tokens in any one wallet, as top holders will eventually exit or sell off many tokens (typically at the first floor price pump) and affect prices and confidence.
Keep in mind that the same person or fund might have used several wallets during the buying process, so this metric can be inaccurate or purposefully gamed.
The best projects tend to have a 2:1 ratio. So for example, if it’s a 10k collection, you’d want to see number of holders being in the 5000-6000 range.
Read more: The Best NFT Trading and Analytics Tools
NFT projects will usually start off with a few whales taking strong positions, tying into the previous point. In the early days, it is important to not only watch the distribution but also the actions of these whales.
If they start dumping and listing many of their tokens at the floor or even lower, things are looking grim (at least short-term) for the price of that project. What they are signifying is that they are only in the project for some quick flipping profits, or that they lost confidence in the team somewhere along the way.
Since whales hold a lot of tokens and have tied up a lot of their ETH in those tokens, they are incentivized to dump at the slightest inkling of a project turning sour, else they are risking losing all their money. Again, tools are your best friend for analyzing this action.
On the other hand, if you see that whales are delisting their tokens or listing them at high prices, that is a positive sign that shows that they are in it for the long run and have no anxiety to sell.
Who is Promoting the Project?
I always look for how many artists are promoting/mentioning the project. Whales and influencers are also good to have behind a project, however, you should keep in mind that these are typically in projects to turn a profit and seldom have diamond hands.
If you follow some of the best NFT experts (not the typical influencers who only hype projects in exchange for money or tokens) a quick metric I use when looking at new projects is to see how many of the people I respect have followed the project I’m looking at. If I see several following, and even better, tweeting intelligently about them, I take it as a good sign.
Is the team sending free NFTs to influencers and celebrities? Are they paying people to advertise it? This is not necessarily a bad thing, but can indicate using marketing as a crutch rather than being supported with a strong team, community, and roadmap.
As I mentioned earlier, if a new project has an unusually large amount of followers on Twitter or members on Discord, that could be a red flag, especially if they got those followers in a very short time or they’re specifically using those numbers as part of their hype strategy.
Some projects, especially the generative art ones (for example some Art Blocks collections) shoot up to very high prices but are extremely illiquid.
It is quite normal to see no sales at all happening in certain months, with the most liquid months having a few sales at best. These are dangerous territories unless you are both super-rich and want to hold on to that artwork for life.
I keep a very close eye on how rarity influences the value of each token. However, not all NFTs are very dependent on rarity. For example, HeadDAO tokens theoretically are all worth the same, as they only exist to give you a stake in the DAO. In fact, the artwork is not original, it just reuses the Nouns artwork as it is open source.
If rarity is indeed an important factor, then it becomes one of my major reasons for buying one token over another. On launch/reveal I use tools like Trait Sniper to understand the value of the tokens I own (in the case that I had minted some) and also to snipe underpriced ones.
When sniping, I tend to pick up ones with relatively high rarity but close to the floor, and I also monitor the top 200 to find ones where I really love the art and where the token also looks underpriced. In these cases, I would be ready to hold long-term since I’d really love the art and would use it as a PFP or hang it in my house.
For a new collection, it is generally advisable to favor liquidity, thus buying and flipping (if that’s your thing) items at the floor. This has proven to be more profitable than acquiring rare items and hoping that someone comes along with sufficient wealth who really likes your particular token and wants to buy it at a high price.
Some people base their trades on trait floors, but from my conversations thus far it seems that it is easier to turn a profit around trading near the collection’s overall floor.
If I have the liquidity, all other factors excluded, I will try to go for the very top in rarity, meaning the uniques (most projects have a few of these). I usually plan to use them as PFPs or hold onto them for a long time unless an incredible offer comes along. Then I would also buy a few common but good-looking ones that I can resell on the way up.
If there’s a project I really want to get into but have limited liquidity, I prefer to get a couple of floor tokens rather than one premium one.
How’s the Overall Crypto Market Doing?
At the end of the day, most participants in the NFT space are there to make more money, and by this, we mean more ETH, which is the currency most commonly used to purchase NFTs.
History shows that when ETH is steadily climbing and/or other altcoins are pumping, NFT activity plummets. The reasons are twofold.
Because a lot of altcoin trading happens on DEXes, this drives up the gas fees on Ethereum. With ETH 1.0 we are seeing that there are a lot of scalability issues, so when some application heats up, gas fees go through the roof. This makes the trading of NFTs prohibitively expensive, and thus eliminates a big chunk of potential market participants.
It’s particularly rough on new projects, as the minting process typically results in higher fees being paid for gas than for the NFT itself. Most projects actually delay their launch when gas prices are especially high, but a launch can’t be delayed more than a few days without losing a lot of momentum and reputation.
Secondly, if altcoins are pumping, traders are likely to be looking at moving their ETH (seen as a low-risk and stable store of value) into riskier coins and ride the wave to ultimately move back to ETH but end up with more of it. Thus, altcoins are a more attractive trade than NFTs in those situations. Gas fees on crypto trades are also lower than minting or trading NFTs (the latter also usually involves a royalty to the creator and a fee to the marketplace).
Moreover, those who are just passively holding ETH see that their investment is growing in fiat-terms and thus feel happy and have no real anxiety to pursue riskier investments in a bid to grow their wealth in fiat-terms.
What Values Does the Collection Champion?
I left this for last as it’s a personal criterium of mine that is not really necessary for you to be successful (read: make money) with NFTs.
There are a lot of evil-looking artwork projects that I don’t see myself ever owning. Jungle Freaks would be one example. I love to involve both my wife and son in my purchase decisions, but I love to especially explain to my son what I’m doing and to get his input on the looks of one NFT over another. I like to print my favorite NFTs and display them around the house too, and with two very young kids around, you don’t want anything scary on your walls.
Scariness aside, some projects are just much more family-friendly than others.
Doodles just give off a very positive vibe and have some lovely animations planned.
Robotos frequently has art competitions and provides downloadable coloring sheets, which my son loves to color up and eventually see me hang them in my office.
Kumo’s World features a storybook in its roadmap.
Cosmic Cowgirls has a strong focus on empowering women within the NFT space, which I think is a good aim (although it can’t be the only aim of the project), and Curious Addys not only tries to help women break into the space but actually is built for the sole purpose of helping onboard more people into NFTs and crypto in general.
The PunkScapes community is incredibly humble and helpful, and there are constant initiatives to reward members for their participation.
All these features or goals feel wholesome to me and make me want to be part of each of these projects’ communities.
The above are the key indicators that I keep in mind for every NFT project I invest in. Over time, I’ve learned to make this analysis intuitively and I can rapidly conclude whether a project is right for me or not. Note the key point here – a project can be a top project, but unless I have the confidence in my ability to understand all its facets then my strategy is to sit it out.
Given that I make a significant investment into every project I get into, making several purchases, I don’t want to gamble and instead want to be able to be in a position where even if the project fails after some time, I can look myself in the mirror and honestly say that I did my research and the failure was beyond my control, or at least not something I could anticipate with the knowledge I had at the time.
What I don’t want is to find myself ruing the fact that I threw good money after some hyped project that I didn’t research properly myself. That’s just a recipe for regret, and I want to minimize those feelings as much as possible.
The best way to gain an edge in NFT investing is to actually put in the work and digest a ton of information, be humble and learn from your mistakes and others’ success, and manage your own emotions.
As for prices, remember that in this space, the main currency is attention. If a project can generate attention, it will be able to sustain a healthy volume (many transactions per day) and over time more people will want to own that NFT, hence the supply will be squeezed (demand > supply) and the price will rise. This is the hard truth of the NFT space currently works. Whatever opinions you have of a project or the space in general at any point, make sure you never forget this rule.
Do you agree with my key indicators for evaluating NFT projects? Let me know in the comments section below.