So you’ve decided you want to start investing in NFTs?
Not to worry because we’ve all been there and it’s literally just a matter of learning by doing.
However, you don’t need to make the same mistakes that we did and therefore some of our advice will likely be useful to you.
In this guide, we explain exactly what makes a good NFT project and what indicators you should look for before you invest in a project.
So without much further ado, let’s get started.
Table of Contents
- What Makes a Good NFT Project?
- What Are Signs of a Bad NFT Project
Key Points (tl;dr)
- Investing in NFTs is a risky business, so you must know what makes a good NFT project.
- Your ability to identify which projects are “good” and which ones are “bad” will determine your level of success.
- Good projects have a strong founding team, an active community, a clear vision, lots of media exposure and ideally elements of gamification or utility, which promote long term investment horizons.
- Obvious red flags include too many mints for a single project, an excessive mint price, lack of liquidity, an anonymous founding team and the presence of fake “influencer” accounts promoting the project.
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NFT Investing: What Makes a Good NFT Project?www.tokenizedhq.com
Here’s the answer. Great article by @ChrisHeidorn from @Tokenized_HQ here: https://tokenizedhq.com/what-makes-a-good-nft-project/
Disclaimer: This Is Not Financial Advice
At the risk of sounding like a broken record, we do need to point out that all of the content in this article is purely for informational purposes. None of it is financial advice. NFTs are an extremely new asset class. If you thought cryptocurrency was risky, please be aware that NFTs are even riskier. Please make sure that you have done your own research before investing and never invest more than you are willing to lose. The vast majority of people will lose money in this market.
What Makes a Good NFT Project?
A good NFT project usually has a healthy mix of a strong founding team, vibrant and positive community, a clear vision of how to increase value, effective marketing and elements of gamification and utility which build loyalty amongst their token holders.
As with all investments, every asset class that requires a significant amount of research has its own set of indicators.
Some of the indicators are of positive nature and help to assess the likelihood of a project actually becoming successful.
The most obvious example would be the “blue checkmark” on the most well-known NFT collections.
Other indicators are something we’d probably call “red flags”, so basically warning signs that suggest that a project might not be a good investment.
We are going to start off with the positive indicators, which will help you fill up a pipeline of prospects.
And once you have that list of prospects, you can eliminate those with obvious red flags.
After reading this article in full, you’ll know exactly what makes a good NFT project.
Strong Founding Team
Does the founding team have experience in running a project like this?
What skills do the founders bring to the table and are they the necessary skills to pull off a successful NFT project?
Do they even know what makes a good NFT project?
Some of the key skills that a project needs include social media marketing, brand management, community management/PR, blockchain development and ideally an artist with a signature style.
It might seem counterintuitive that the art is non-essential but it’s true.
Artistic merit is subjective and some very successful projects have objectively horrible artwork.
The question isn’t what makes good NFT art, but what ingredients make a successful project.
Bored Ape Yacht Club, currently the most successful project to have ever existed, had all its artwork done by a freelancer for a one-time fee.
Once a project is successful and has an established style, it’s relatively easy for other talented artists to imitate it and thereby fill the gaps.
Ideally, you’d also want the team to be fully doxxed, meaning that their identities are public.
It’s easier for anonymous teams to abandon a project if their personal reputations are not on the line.
Doxxed teams are more likely to pull through in the long run.
Not every NFT project needs a community, but a vibrant community is a strong indicator of a promising project.
If you ask Twitter, what makes a good NFT project, the vast majority will probably refer to the community.
A big community of followers is not only an effective tool in marketing a project, it can also become a core value proposition.
Holders of an NFT of a project are financially invested and their incentives are aligned with those of the team.
Being part of a community with exclusive access privileges also helps build brand loyalty because people want to remain part of an exclusive “club”.
Positive and inclusive communities tend to perform well because they are fun to hang out in and they foster a culture of reciprocal promotion.
We highly recommend that you spend at least a few hours inside a project’s Discord server in order to assess not only how active the community is but also how responsive the founding team is.
Now, to be quite frank, you should always take these roadmaps with a grain of salt.
As GaryVee has said on multiple occasions, roadmaps are nothing but a startup’s pitch deck.
And a pitch deck is never a guarantee that something will actually happen, they are merely a promise at a point in time that a founding team plans to do something.
So if someone asks what makes a good NFT project, the roadmap shouldn’t be your first response.
Remember, you are buying into a vision and the likelihood of that materializing will largely depend on the ability of the founders to actually execute it.
The vast majority of startups fail and the same holds true for NFT projects.
That being said, a roadmap will give you an indication of what the end goal of the project is and that will help you decide whether the project is for you or not.
PR is a hugely underestimated marketing tool.
If a project makes the headlines of big media outlets, the additional exposure for that project will almost certainly increase its likelihood of success.
Just like you are reading this article right now, trying to figure out what makes a good NFT project, most people tend to gravitate towards the things that have been mentioned in the media.
This makes sense because media exposure helps build brand recognition and if the project vision is to become a streetwear brand, then brand building to by far the most crucial part of the endeavor.
This also includes celebrities who have picked up their own NFTs of the project.
Exposure via the social media channels of well-known celebrities is very likely to boost the perception of that project.
Social proof is a powerful thing in social media.
Does It Have Utility?
A lot of the early NFT projects primarily focused on the artistic aspect.
And that still holds true if the primary objective of the project is to create or promote some form of art (e.g. digital art, music, film, etc).
For many people, this isn’t enough though and NFTs enable a whole new category of investments that the world has seen before, however not necessarily in this form.
“Utility” is becoming an increasingly important aspect of many project’s roadmaps.
So what makes a good NFT project? Is it utility?
With increasing NFT prices many late investors obviously want to know how the team plans to bring additional value to its holders which will help increase the token’s price.
There are roughly 2 different categories of utility that have emerged.
The first category involves some form of real-life utility, such as access to a conference, exclusive access to a high-end restaurant chain or in its simplest form, access to merchandise.
The second category is purely digital in nature and can involve access to certain areas within the project’s Discord, early access to content, access to play-to-earn blockchain games or even yield from the project’s own ecosystem token.
That’s right, some projects actually provide a form of yield.
A good example of this is CyberKongz, where each holder of a Genesis Kong receives 10 $BANANA per day.
1 $BANANA is currently worth $26, so that means $260 per day.
That might sound crazy but the cheapest Genesis Kong also currently costs 80 ETH ($250k).
I’d definitely say that’s one example of what makes a good NFT project!
Gamefication & Game Theory
You may want to invest in a project for its real-life utility or the social credit that it gives you in public.
However, the vast majority of people are primarily looking to make a profit.
Some projects have developed complex ecosystems where certain tokens or combinations of multiple tokens may have more value than others because they yield a different type of token.
And these tokens are required in order to pay for things within the ecosystem.
Most of the mechanisms are designed to incentive holding tokens for as long as possible and not list them on marketplaces.
Less listed tokens mean that supply is limited and with growing demand, the price of the tokens will go up as well.
This is also where the total number of unique token holders comes into play.
A project with a very high ratio of unique holders will be inherently more stable in price because if everyone only has 1 token, they are less likely to sell it.
So is this what makes a good NFT project?
Price Stability & Endurance
As mentioned in the last section, a high holder count will usually result in more stable prices.
A project with a history of stable growth and only limited hype-driven swings is usually a better investment because they are an indicator of long-term holders.
A good example of such a project is Veefriends by GaryVee.
Big swings driven by hype are usually a sign of a lot of day traders, who feed off of the pumps and subsequent dumps in order to make a profit.
They are rarely interested in the long-term viability of a project.
Price history also comes into play when a project has already been around for a while.
Or did the price actually recover over time because the team kept building?
In this asset class, the survivors are the winners.
No one knows what projects will come out on top, so your primary objective should be to pick the survivors.
That’s why so many people are asking what makes a good NFT?
What Are Signs of a Bad NFT Project
A bad NFT project will usually raise multiple red flags. These include but are not limited to too many mints, an excessive mint price, lack of liquidity, an anonymous founder team and lots of fake influencer accounts that are promoting the project’s mint. Very often these projects will end in a so-called “rug pull”, where the founding team disappears with all the money.
Now that we’ve established what sort of indicators will help you choose a big basket of prospects, let’s have a closer look at the early warning signs of a scam or simply a bad project.
Some of these red flags will be obvious to you and are easy to identify, while others are trickier.
In the end, it all depends on your personal risk appetite, but make sure you take note of these.
Too Many Mints
What makes a good NFT collection is not the number of mints you do.
If a project has already done a couple of mints and still hasn’t gained notable traction, then it’s definitely a red flag.
This doesn’t mean the team isn’t trying, but it might mean they simply lack the ability to execute.
Since new mints indirectly dilute the value of the original collection, it simply doesn’t add true value either.
If the original collection doesn’t sell, there is absolutely no reason to assume that it will work with the second or third mint.
Mint Price Is Too High
Over the past year, average mint prices have consistently increased.
Part of that could be attributed to the high volatility of the ETH price.
But is that really what makes a good NFT project?
Considering that some of the most successful NFT projects of all time started with a free mint, asking for 0.5 ETH or more to mint new tokens seems a bit greedy.
That doesn’t mean that a free mint will necessarily perform any better, but at least the burden of risk is shared between investors and founders.
Lack of Liquidity
Lack of price appreciation is one thing, lack of volume is another.
A project can easily be undervalued if its trading volume is still relatively high.
Good trade volume also means that the project’s treasury is filling up with funds to spend on growing the project.
But if there’s little trading volume, then it’s also an increased risk for investors.
As an investor, you want to be sure that you can actually cash out of your position at a reasonable market price.
If there’s little demand, you may be forced to sell at a discount, even if the market price is already low.
In this case, the question of what makes a good NFT project becomes irrelevant because even if it was a good project, you still can’t cash out.
We mentioned earlier that a doxxed team is a positive sign for a project.
It’s amongst what makes a good NFT project.
And yes, an anonymous team is unfortunately a bad sign.
This does not mean that every anonymous founding team is automatically a scam or a rug pull.
It also doesn’t mean they can’t turn it into a successful project.
However, the risk lies in the fact that anonymity reduces the founders’ incentive to act in good faith.
If you are anonymous, you have few consequences to fear if you mess up.
If you see a new project being pumped on social media by a lot of Twitter accounts with thousands of followers (preferably with a stolen Bored Ape as their profile pic), then it might be a good idea to stay away.
You can identify these fake accounts by the constant giveaways that they organize.
They usually promise people unrealistic amounts of free money or crypto for simply following them and liking their tweets.
This is a huge red flag because it’s a typical scam used to manipulate gullible people on the internet.
Do you really think that’s what makes a good NFT project?
If a project is being promoted by these characters, stay away!
NFT projects with profile pic collections of 10,000 items are at the forefront of a totally new asset class.
It’s a market full of high risk and high rewards, totally unregulated and akin to the wild west.
If you research thoroughly and conduct proper due diligence, then chances are you will succeed in investing in a number of very promising projects with a bright future.
But what makes a good NFT project?
It is the so-called “blue chips” that you are trying to find, the projects that will survive the crash when it happens.
Just remember to do your own research, watch out for red flags and never invest more than you are willing to lose.