Explained: What are NFTs and how you can invest safely

This article will help you understand how NFTs are valued and what factors to consider when buying any NFT.

Source: India Today

If there is one thing common in all NFTs, it is uncertainty. You can never be 100 per cent certain about what is going to happen with a particular project. It can go 10x in one week and come crashing down the next.

To avoid such fast-rising and free-falling valuations, you need to properly assess NFTs. Value assessment of NFTs is entirely different from ordinary crypto tokens, so you need to follow a relatively new approach to get the most out of your ownership rights.

This article will help you understand how NFTs are valued and what factors to consider when buying any NFT.

Basics of NFT investing

To make decent returns by collecting digital art, you have to be aware of some basic principles of NFT investing. Some of them can help you land rare pieces of art, while others can assist in discovering fast-growing niches in the market. Here are five basic principles you should consider for Non-Fungible Tokens:

Explore different verticals of NFTs

Many people still think NFTs are limited to digital collectibles or paintings deployed on the blockchain. In reality, the ecosystem has gotten so big that we have close to nine verticals in the NFT market. Each one fulfills a different user demand. The ERC-721 standard helped initiate many of these protocols in different segments such as gaming, DeFi, Metaverses, and marketplaces.

Find earning capacity of an NFT asset

NFT valuations depend a lot on the earning capacity of a particular collection or asset. It can be in the form of cash flows or other economic benefits. If you are a creator, your revenue streams must be coming from licensing and royalty payments. It can be adjusted to the fair market value after balancing total liabilities.

Your NFTs should also provide you with passive income. Staking of NFTs is done by assigning governance and determining tokenomics. This will not only attract more buyers but also make the liquidity go higher.

Choose projects with a high liquidity premium

When it is difficult to convert an asset into standard currency, there will be additional compensation in the form of liquidity premiums. As NFTs are also hard to trade, you need to consider the ones which have a high liquidity premium. If the demand increases and assets mature, the premium will also go higher and higher.

Rare pieces of art are hard to sell at desired prices because it is extremely challenging to assess them from a general point of view, so instead of comparing valuations- make sure to check sales history to determine liquidity premium.

Understand market sentiment

Believe it or not- most of the NFT collections are driven by either hype or community support. In both cases, you can benefit greatly if you understand the market sentiment towards a particular project. For example, generative-profile pictures and art is done by algorithms are key drivers in the NFT market. So, the next time a similar project comes by, you will know how the market is going to react.

The best way to crack market sentiment analysis is to explore more NFT marketplaces and monitor how people are jumping into new projects. This method may not be suitable for long-term price movements, but it will help you identify short-term yet profitable price trends.

Only invest in what you can afford to lose

When it comes to NFTs, you can do everything right, but there is still a chance you could lose it all. It is just how fast the market evolves. Holding NFT assets long-term is the best strategy, as it gives enough time for the market to mature and create more buying interest around NFTs.

FOMO should not be why you are buying an NFT. If a project is too complex, you do not have to invest your hard-earned money, hoping it can give you astronomical returns. I am not saying it is not possible, but it would be a bad bet to invest most of your savings.