How do you find NFT projects with growth potential?

Since this summer’s bull run, NFTs have gone from being the butt of JPG jokes to a serious blockchain technology application that could possibly rival DeFi. Clearly, NFTs are in with institutional investors, and crypto enthusiasts, retail traders and casual NFT fans are eagerly buying up apes, bricks and mutants hoping to get their bag.

Footprint Analytics: Trends in financing progress (2021)

However,  the number of active NFT protocols has emerged, especially in this year from 70 in January, to the highest 683 in October.

Footprint Analytics: Monthly Total Number of NFT Protocols (with transactions)

What principles should investors and casual NFT traders follow when looking for NFT projects that will likely succeed or whose assets will increase in value?

Basic NFT concepts and two areas of high interest

NFT stands for non-fungible tokens—unique and one-of-a-kind blockchain projects with blockchain management rights.

Here is an analogy to explain how NFTs work:

• You and I both have one $50 bill
• Both of the bills are the same, with no difference in value
• If a celebrity signs your $50, it not only becomes different my $50, but also makes it worth significantly more
• Similarly, the value of NFT is based on its scarcity, and the belief that it has the value to grow in value

Right now, uncertainty and volatility are defining features of NFTs. Many appreciate 10 or even 100-fold in weeks only to crash down to nothing.

To enter this market, you have to evaluate and assess projects intensively. While investing in an NFT, at this stage, might require more legwork than a top token, the rewards for gaining competency in this area will almost certainly pay off.

NFT will be a key component in the future of the metaverse, art, collectibles, gaming, DeFi, utilities and sports—but very few people can call themselves experts.

Looking at the data can help us understand what types of NFTs are on an uptrend and primed for growth.

Footprint Analytics: Top 5 NFT Trading Volume Last 30 Days

1. Collectibles (e.g. CryptoPunks)

CryptoPunks have been one of the biggest drivers of NFTs into the mainstream, considered to be one of the first examples of "irreplaceable tokens" on Ethereum.

According to Footprint, the volume of CryptoPunks transactions on Nov. 10 was $8.15 million—eight times higher than the volume of NBA Top Shot.

(Total volume tallies the total value exchanged between users and is one of the basic metrics in the NFT market.)

The value of a Punk depends on its type, number of attributes, combination of attributes, and also some element of personal choice. With each avatar being distinctive, using one as a profile avatar has become a symbol of online identity, with people paying hundreds of thousands of dollars to digitally flash their commitment to crypto—or their bank account.

Source: larvalabs

CryptoPunks, one of the earliest NFT projects on the Ethereum network, is a collection of 10,000 uniquely generated pixelated avatars of crypto-punk NFT collectibles created by Larva Labs.

CryptoPunks were available for free when they were first released, and quickly claimed in their entirety. Now, there have been 11,744 sales of Punks in the last 12 months.

According to Larva Labs, the highest-selling Punk is currently "#3100", which was auctioned for $7.58 million on March 11. It is currently listed at 35,000 ETH, or approximately $167 million, an increase of 2100%. It is the highest-priced NFT in the world.

Why are these Punks so valuable?

• CryptoPunks will always be the first NFT project in history
• They will always remain scarce
• They are an undeniable status symbol

2. Gaming NFTs (e.g. Axie infinity)

Axie infinity has a unique economic model that provides liquidity based on scarcity.

Axie infinity, a game published by Vietnam-based blockchain developer Sky Mavis lets players cultivate, collect and trade in-game NFTs like land, items and creatures called Axies. It received investment in the hundreds of millions from investors including Andreessen Horowitz and Mark Cuban.

Its play-to-earn model provides a glimpse into the future where work and play are combined in one—an economic model with strong growth potential.

Source: axieinfinity

Here is how Axie Infinity works.

The gameplay consists of

• Strategy games
• Axie raising and breeding
• Axie sparring
• Scarcity of the creatures

The play-to-earn model consists of

• Issuing tokens and earning rewards for time participating
• Earning rewards for playing against other players
• Reward tokens are tradable
• In contrast to most traditional games, users pay to play and buy equipment

Participation creates liquidity

• At least 3 creatures required to participate,  demand created
• Demand for the scarcity creates the liquidity

Axie Infinity differentiates itself from traditional games and has attracted users en masse to the NFT market. It’s skyrocketing popularity has caused the price of Axie Infinity's offering token, AXS, to rise from $0.59 at the beginning of the year to current $135 as of Nov. 16, an increase of 238.

According to data, Axie Infinity's market cap metric reached an all-time high of $10.2 of 310%.

Footprint Analytics: AXS Tokens VS Trading Trends

Footprint Analytics: AXS Token Market Cap Trends

How to find promising NFT projects

NFTs cover a wide range of areas, including collectibles, gaming, and art, and will have a very different future trajectory within these niches.

Rather than making generalised judgements of NFTs as a whole, you should analyze specific projects within their correct context, boiling them down to the problems they are trying to solve, the unique experiences they are hoping to create, and the ability of the team to turn their ambitions into reality.

• Information about the project team. If the founders have blockchain experience and gaming experience, then this is a team with a lot of potential. For example, the Axie Infinity team built the digital pet game Kingdom, which is now the hottest game in the Ethereum ecosystem. The founding team of CryptoPunks included a Ph.D.-holding computer scientist and a long track record of successful apps and blockchain projects.
•  Partners and investors. Having a well-known venture capitalist involved will add visibility and credibility to the project. For example, Axie Infinity raised $150 million in funding at a $3 billion valuation led by a16z.  
•  Frequency of transactions. Projects with a high frequency of transactions are generally the top ones, such as Axie Infinity and CryptoPunks. However, do not too quickly exclude rising  projects, as a rapid growth in the number of participants will be followed by an increase in the volume of transactions, increasing the confidence of users.
•  Liquidity. By looking at liquidity, you can analyse whether the asset composition of the market is stagnant or liquid. For example, if you invest in a particular NFT whose market is illiquid, you will have a hard time selling it at a reasonable price, or will have to wait for more people to join. With NFT sales records publicly showing the sale price, a history of low sales may affect the value of your NFT in the market.
•  Value Analysis. When building or owning an NFT, it is important to consider its intrinsic value which, in addition to scarcity, has the following other values.
  • Exchange value: the purchasing power of the NFT, i.e. the value of the NFT traded against currency or other items.
  • Use value: the property of a good that satisfies a need, which we consider to include entertainment value, collector value, social value, production value, etc.
  • Entertainment value: the NFT has entertainment properties and is capable of being used in leisure and gaming scenarios.
  • Collectors’ value: the NFT has the properties of value retention, appreciation and commemoration.
  • Social value: NFT products with a large number of users and a large number of followers, such products which allow the holder to express themselves, display their identity, join a community, increase trust, or just show off.
  • Production value: this NFT can be used to earn profit returns.

The true value of a CryptoPunk depends on how the user leverages it to signal their status in the crypto community. Within Axie Infinity, NFTs enable users to earn more as they play and change the experience of gameplay.

Conclusion

With their rapid growth, it’s not surprising that institutional investors are jumping in on NFTs. Whether they are used as a status symbol or an opportunity to generate wealth, smrt investors need to assess projects carefully to some to a value judgement.

The above content is only a personal view, for reference and information only, and does not constitute investment advice. If there are obvious errors in understanding or data, feedback is welcome.

Author bio

Maxine Smith is a crypto writer from Singapore, and DeFi data analyst with a focus on market trends and regulations.