How to know if an NFT has potential for ROI
A few weeks ago, the former CEO of BitMEX shared his thoughts on NFTs, explaining how he sees the value of each of these digital art pieces can have value.
This set some ground to understand from an investor point of view how to evaluate whether your next purchase has any value and how to make the right decision to buy. For creators, it helps to analyse whether it’s the right time to sell any digital art.
In short, NFTs have and gain value based on three aspects:
- The asset must be perceived as worthless (or replaceable by a cheaper option)
- Owners gain a feeling of higher societal status after purchase
- The asset should have limited quantities
“Why would I buy an NFT in the first place?”
Might you have heard from a friend, your partner or a random person on Reddit. “I could simply take a screenshot, save it and have my own copy of that image without having to even pay for it” — they might add.
First of all, it’s crazy how some people are just drown to content piracy. And how proud they are of coming up with such genius idea…
The answer is no, that screenshot does not give you ownership of the original artwork. And the whole point of owning a tokenised piece is that you can re-sell it for a profit. Not having the original work will not allow you to make any gains, and the beauty of the blockchain is that you cannot fake ownership.
But that’s a topic for another post.
Let’s jump right in and understand the criteria for NFT value.
A growing bubble?
Maybe.
Tokenised art follows similar valuation as abstract art.
You know how those weird paintings sell for millions of dollars?
Well, similar thing happens with their digital counterpart. Why would anyone buy a drawing of a rock for $600k? In short — because they can.
And hopefully to make some profit along the way…
Let’s explore the criteria and how to understand whether your next purchase will give you ROI, status, both or none.
This is what we came for, so let’s get started
An asset easily replaceable by a cheaper option
How many of you can afford a fabulous Gucci t-shirt for $600? And we’re talking about original Gucci, not those fake versions by Ghucci or Guccy.
How many of you would be happy with a cheaper garment from your local store or mainstream chain (ie. H&M, Zara, TJ Max…)?
Well, this is what this criterion refers to. If the artwork being offered has no tangible value or can be replaced by a much cheaper version — then criteria no1 is met.
Owners gain a feeling of higher societal status after purchase
Let’s go back to the Gucci example.
Those who can afford buying Gucci (not pronounced Gucky) do it to belong to a higher status. Many of them will talk about the quality of the clothes, the beauty of the design… But at the end of the day, they wear Gucci to feel the accomplishment of being able to do so.
Not just that, Gucci wearers will most likely hang out with their Gucci-wearing friends and go to places where other Gucci-wearers go to.
Okay, okay, enough of Gucci. Back to our crypto nerd-ing.
If a particular NFT achieves that feeling of belonging and being above others for their owners, then criteria no2 is met.
The asset should have limited quantities
We all like limited edition stuff.
It’s FOMO. We get it.
Marketing experts have been capitalising on it for ages. This is why famous artists offer VIP passes and meet & greet add-ons. Fans really want to take that limited chance of meeting their idols. And we are willing to pay ridiculous amounts of money to make sure we get one of those passes just to shake hands for 3 seconds and be pushed aside as the next VIP needs to have a chance before the show starts…
So, is your digital art limited (have potentially more demand than supply)?
Sweet. You’ve met criteria n3.
Great! I’m a musician so I’ll make a fortune.
Hold that thought. Here’s where your influence plays an important part. You don’t need to be very famous but the sweet spot is for someone to have certain level of influence with the potential to grow.
Useful ways to measure this potential is through historical data on streaming, merchandise sales, sync, ticket sales, social media engagement, newsletter signups…
Get your numbers right. Numbers never lie.
Investors, get your data in place.
Of course, this is not a financial advice post. We encourage anyone involved in investment (stocks, commodities, crypto, NFTs…) to educate themselves.
There’s a plethora of data out there and it can get confusing so get reliable sources of information before jumping too quick into an investment opportunity.
Or do.
At the end of the day, we’re not financial advisors (insert shoulder shrug here).
