NFT Fundamental Analysis
Only invest or trade so much that you can lose. This is the first rule of investing in any market; be it the traditional Fx market, derivatives, crypto, or even the trendy NFTs. If there’s a second rule, it must be to know in-depth what you’re investing in. This is the goal of fundamental analysis — to reach a conclusion that the investment instrument is at good present value to buy into.
Legacy financial markets and the cryptocurrency market have some parameters which are looked out for to help predict the success or upward potential of the considered asset. While these parameters give good insight as to the strength, viability, or legitimacy of the asset to be bought into or invested in, it is critical to keep in mind that they do not guarantee the success of an investment or trade and can be doctored to look good. Fundamental analysis then, is the quest for the least gameable parameters or combination that highlight the health of an asset as well as predict its growth & life span.
Cryptocurrency fundamental analysis differs from that of legacy assets but generally inherits its approaches with different methods. To analyze NFTs fundamentally we are going to derive our methods from the cryptocurrency analysis approaches, besides, they are both blockchain tokens with fungibility being the only difference.
The NFT market climbed above $25B dollars in 2021 and its growth brake lights is not yet in sight. In the first quarter of 2022 alone, the transaction volumes have usurped over 50% of the entire volume of 2021. It’s finding new use cases and attaining higher levels of adoption. However, this gold rush hasn’t yielded millionaires alone, it’s also left some collectors or investors rekt.
Every day, a number of NFT projects spring up with mouth-watering value propositions and irresistible surface value, only to throw in the sponge or in crypto lingo, rug pull all of its investors after the team fills their coffers with investors’ contributions. Some of these projects are outright frauds with not a single good intention and some others, although hold good intentions are just poorly structured and executed. Considering this, investors must be stealthy and meticulous in picking the NFT projects they put their funds into.
NFTs, short for Non-Fungible Tokens, are cryptographically unique tokens that primarily serve as a certificate or deed of ownership of any format of digital and sometimes physical content. They’ve been used to prove ownership of JPEGs, GIFs, Videos, Audio, Text, code, etcetera. The fundamental analysis discussed here doesn’t apply to the entire spectrum of applications for NFTs. A huge chunk of the NFT use case is directed at digital art whose value can not be analyzed but ascribed primarily to subjective sentiments. Rather this fundamental analysis applies to project-backed NFTs, which externally appear as profile pictures aka PFPs.
These projects propose a number of benefits to the holders of the NFTs and the timeline for implementation. To sentiments, these NFTs add utility including DAO membership, Monetary rewards, and airdrops, exclusive access to products, merch, events etcetera. The NFTs for these projects not only serve as the certificate of ownership of the PFP JPG but also as a community-binding glue.
What are some of the intrinsic or extrinsic attributes fundamental analysts should look out for, strong enough to be perceived & measured objectively and resistant enough to gaming? We’ll consider the three categories which also apply to the cryptocurrency market. This includes on-chain metrics, project metrics, and financial metrics.
These metrics are gotten from the blockchain itself. They are the blockchain footprints of the NFT project on the blockchain. The first answer a collector must seek is which blockchain a project resides. The size of the NFT community differs from one blockchain to another and greatly affects the success of the project. The largest NFT community exists on Ethereum, followed by Solana. It’s usually a struggle, with good exceptions though, for projects on other chains to come into the limelight, especially when it’s not been recognized or adopted yet.
Armed with the knowledge of the blockchain on which the project resides, its smart contract address and the chain explorer, an investor can investigate how much activity or interest surrounds a particular project. The number of active addresses holding NFTs from the project, transactions recorded by the project, the value of these transactions and the fees paid to make them happen. Please note that a con project can stage all of these metrics mentioned and as such, it’s recommended that these on-chain metrics be taken with a pinch of salt or combined with other metrics from other categories to inform accurate judgments.
A project poised for transparency is one that readily makes the NFT smart contract address available or open for public inspection.
For NFT Projects yet to reach their initial mint stage, the smart contract address doesn’t hold much data for the investor or analyst to peruse. If any exists already, it will only hold the ownership and transferability agreements that will govern the non-fungible tokens when minted.
In addition to other metrics, the analysis, in this case, is heavy on the project team, community, utility, and timelines. Analysts lookout for previous experiences and networks with the project team in order to gauge the capabilities of the team to bring the proposed plans to fruition. For NFTs, this is tricky as the majority of NFT project teams prefer to stay undoxxed, that is, anonymous. This is still a controversial conversation within the NFT community as doxxing is needed to instill trust in investors. This hasn’t stopped NFT project teams from raising millions of dollars though.
As aforementioned, NFTs are the glue to communities and a large hyped-up community is usually a good sign of acceptance and adoption, even if temporarily. A large active community is one to look out for, however, keep in mind large Twitter or Telegram following, Discord Server Members are one of the easiest metrics to doctor to mislead investors.
The sustainability strength of a project is usually proportional to the feasibility and demand of its utilities. Hype may get a project off to a good start, but the hype fades out without market-fit utilities and the project crumbles. The existence of competitors validates the utilities but should be few enough for the targeted project to penetrate the market and gain good market share.
Not at all exhaustive, but it’s worth noting that NFT tokenomics also provides some insights into the project’s plans. If the token distribution hints at a concentration of the tokens in a particular address that belongs to the team or is associated, it’s usually seen as a red flag. As they will have enough market power to manipulate the market. NFT projects are not known to have whitepapers but usually make known the token economics — utility and distribution to their communities before mint.
NFT collectors lookout for rarities too, for arts, they’d like to own the 1/1 NFT and for PFPs, they watch out for the JPEGs with the rarest traits. The rarest are the scarcest and with good demand will be the priciest. Rarities don’t determine the general success of an NFT project, but help investors spotlight the NFTs in a collection that will hold the most value should the market embrace the NFT project.
NFTs are not as liquid as cryptocurrencies, and so comparing liquidities between the different web3 asset types may lead to misleading results. Also, non-fungible tokens are not priced until they are listed for sale.
Given all tokens from a single collection are unique, they can be listed for sale at independent prices or auctioned. The popular term, floor price, is the lowest ask price in the market for any NFT in a collection. A floor price above the mean price doesn’t hold much significance, as collectors choose what price to list NFT for sale regardless of what the market determines the collection value as. The rarity of the NFT also influences the price a collector lists his NFT at. A complete transaction and the transaction count hold more significance as it reveals the demand for the NFTs at a profit to the collectors. Mind you, this can be gamed too.
The metrics mentioned are usually not used alone, they are combined with others to determine or come to a conclusion about the intrinsic value of an NFT. In other markets, this combination of metrics is known as indicators. These metrics are by no means exhaustive but it points a collector or investor in the right direction to look and also resound the caution that some of these metrics, standing alone, can be gamed. After reading this, your NFT hunt arsenal is no more empty, but it’s not yet 100%.
Team Bictory Finance