NFTs, for many people, are associated with art and culture. Others deny them entirely and accuse them of being used for money laundering. The reality is more complex. There are a number of solid NFT projects with distributed ownership, a strong community, and a healthy market volume. At the same time, there are a number of scams trying to cash in money from uninformed investors. In the following, we take a look at which stage the NFT market is in and how investors can avoid NFT cash grabs.
The Stage of the NFT Market
As of April 2022, there are only slightly more than 1.5 million wallets that bought or sold NFTs. The number of actual NFT investors is most likely significantly lower since several users have more than one wallet for purchasing and selling NFTs. It can be expected that the number of NFT investors will significantly increase over the next few years based on the overall growth of crypto.
OpenSea remains the largest marketplace for trading NFTs. The OpenSea monthly trading volume peaked in January 2022. NFT trading volume is highly volatile, signaling the early-stage nature of this nascent market.
One of the growth sources for NFTs is centralized exchanges that are working on making NFTs accessible to the masses. In October 2021, Coinbase announced that it would expand its digital assets trading services and build an NFT marketplace. Half a year later, more than 2.5 million people had already joined the Coinbase NFT waiting list. That is more than the 1.5 million wallets that have so far interacted with the largest NFT marketplace, OpenSea.
Coinbase will dramatically increase the number of users that will participate in buying and selling NFTs. The main advantage for less technical users will be that Coinbase offers custody for NFT assets. Furthermore, it is expected that Coinbase will accept credit card payments for purchasing NFTs. Coinbase is not the only exchange working on an NFT marketplace. Overall, the NFT infrastructure that is being built right now will significantly increase the total number of investors and the monthly transaction volume over the years to come.
In terms of NFT use cases, profile pictures on social media such as Twitter and art represented the first use case that found adoption. Twitter recognized the NFT profile picture trend and allowed users to verify their NFT ownership if they subscribe to the premium service Twitter Blue.
More sophisticated use cases such as NFT gaming are possible, and there are several teams working on implementing them. According to a game developer survey, more than a quarter of game developer studios are showing interest in NFTs. For NFT Gaming use cases to play out, it is necessary that the underlying blockchain used is scalable. Teams such as Starkware or Matter Labs are working on layer 2 scalability solutions for Ethereum and are expected to release functional scaling solutions in the years to come.
Five Things to Watch Out for in Order to Avoid NFTs Cash Grabs
The truth about NFTs is that most collections trend towards zero and eventually are forgotten. Only the very few ones that succeed are constantly talked about and accrue substantial value. The difficult part for investors is to select the few NFT projects with real potential. In the following, we take a look at the five dimensions that investors should investigate before allocating their money to NFTs.
● Team: Ask yourself the question whether the team will still be there building the NFT ecosystem in 5 years or whether they are likely to abandon the project? In fact, by investigating the past affiliation and work of the team behind the NFT collection, you can assess how credible they are to continue working on the NFTs they have issued. Furthermore, you should assess whether the team is supportive to the community and whether they have the skills required to develop the NFT project. Among the teams releasing NFTs, there are certainly many bad actors who sell them solely with the intention to extract profit. However, by undertaking your due diligence analysis, you can assess the credibility of the team behind the NFT project you intend to buy.
● License: What matters a lot for NFT investing is the legal aspect of NFT ownership. You should always investigate under which copyright license the material was released. A lot of controversy has appeared with regard to the license of CryptoPunks. Lately, the CC0 License has gained popularity among solid NFT projects. This license reserves no copyrights and enables anyone to use it freely without worrying about copyright infringements.
● Community: Is there a strong organic community forming around the NFT collection? It is easy nowadays to acquire paid followers. However, you can look at the interactions of the community on Twitter and on the Discord channel. Take a look at the sort of people that engage with the project and which other projects they are involved with. By following this strategy, you can quickly identify whether the community behind an NFT project is organic or not.
● Market: How large is the volume of an NFT project? Is the volume fake or real? Is the volume divided across various exchanges, or does it only occur in one marketplace? Are the addresses trading NFTs diversified and engaging with other established NFT projects? Due to the public nature of the blockchain, it is possible to answer all these questions and assess the market health of an NFT project.
● Ownership Distribution: How distributed is the NFT ownership? In order to answer this question, you can use Etherscan and observe the smart contract through which the NFT was issued. All the information is public and on-chain, so it is really easy to investigate the supply and distribution dynamics of an NFT project.
The growth potential for NFTs is real due to better infrastructure that is getting built and the growing user base. However, the value that NFTs will accrue over time will most likely be concentrated among a few projects. While it is hard to identify these projects, it is not impossible. By performing a careful due diligence analysis before investing into an NFT project, investors can participate in the growth that is ahead for the NFT industry.