NFTs: Should you Invest?

#1 NFT Sectors

Crypto markets is mainly being divided into 5 areas—three of which constitute its main “sectors” at present, namely decentralized finance (Defi), NFTs, and Web 3.0 tech.

Even those areas have further distillation. Indexcoop’s DATA coin (an ETF of other cryptos) tracks “backbone” Web 3.0 tech — the blockchain version of APIs, graphing technology etc.

The DeFi space can be analyzed further into decentralized exchanges, lending platforms, synthetic stock platforms, yield aggregators, etc.

With NFTs, I think we have something like the following:

• art & history
• entertainment
• utility tokens

This is a functional categorization of the NFT space because I have segmented it according to the sources of value for each area.

Art & history NFTs derive their value from institutional support (Beeple’s FTwas launched through Christie’s, for example) and uniqueness.

Entertainment NFTs, like Axie Infinity, derive their value from the continued engagement with the game (or movie, or song, etc.).

Utility tokens, as the name describes, derive their value from the utility they provide. Silica NeXus is a massively ambitious project, but right now, they have tech that costlessly transfers gift cards as NFTs. If people use those gift cards, then their platform will be worth billions.

So, that’s my functional analysis of the NFT space. It doesn't capture everything, though, especially not one sector …

#2 The Future of Avatar NFTs

That image is a random assortment of mostly Avatar NFTs. These are representations of a person that could be used as a profile image. They fall into what NonFungible.com calls the collectables category.

Presently, these things are selling like crazy. An artist will work with a coding team to make a single scalable vector graphic file, and this will include all possible combinations of base faces + accessories.

The resulting block is usually 10,000 NFTs, which the team then pumps through influencers and social media channels to get interest and buzz. Often, they give away all 10,000 NFTs and just ask the early whitelisted people to pay for minting gas fees.

They make money through the sales of those NFTs afterwards, as they get 20% royalties. The initial speculators hope to get the hits, while the NFT production crew monetized the sale of the hits + the many not successful NFTs in the long tail.

I’m not certain that this fad will last long, but that’s the business game. They do use frames occasionally (though not universally). This area of the market is, I think, part of the boom that will bust.

Oh no, the NFTs monkey has fallen. What should you opt-in then?

So, where do you find those 1000x returns? Well, let’s have a look at the market’s performance overall in the last 3 months (data from Nonfungible)

The Non-Fungible Token crested with $607 million in NFT sales, but the market’s high point was $1.5 billion in August.

Now compare that with the Metaverse Index—these are cryptos that support NFTs.

Even as the broader crypto-market has dropped, then, the MVI has held strong. Technology supporting the growth of NFTs is still booming, even if there is less interest in buying NFTs than in August.

What I think this means is that institutional money is now going into projects that will build the future infrastructure of the NFT marketplace.

Appetite for collectables seems to have dipped, however. By contrast, interest in utility NFTs is at an all-time high (see below).

In short, what we are looking at is something like a sector rotation within the NFT market. Collectables are down, utility tokens are moving up. Platform coins that support NFTs are also up (metaverse coins).

I still think the best way to get a great NFT is to wait for a crash and pick up something like a cryptopunk—which has historical value. Or at least a fractionalized part of one if you can find it on NIFTEX.com.

• This could net you 100x if you time it well.

The next thing to do is to look at utility tokens and related use cases for NFTs. This area is simple. Just ask, “would this actually be useful?” I think Silica NeXus is onto something, for example. Then look at the road map for the project and ask, “how realistic is all that?” Finally, if they have coins, make sure that your initial purchase won’t be diluted too much.

• Silica’s Droid tokens aren’t even listed on coinmarketcap.com or coingecko.com. This means that project could be great, or a total dud. You’re in super early, which is good and bad.
• This could net you 1000x.

If you don’t want to bother with all that, then maybe the easiest thing to do is just buy the MVI and be done with it.

• This will probably net you 2x - 5x if this bull run continues through the first quarter of 2022.

In sum, the NFT boom has already crashed for some sectors and is just beginning in others. Knowing the difference can help you identify the best sources for possible returns.

Happy Trading!!

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