What makes an NFT valuable and can you be a data driven NFT investor?

Photo by Vadim Bogulov on Unsplash

NFTs (non-fungible tokens) are all the rage nowadays. You don’t only hear of artist minting but also big companies trying too. For example, large gaming companies, such as Ubisoft.

So, what makes NFTs valuable and why are people and companies rushing into the NFT market?

I’m going to assume that you understand blockchain, so I won’t be explaining it in this article.

The reason why NFTs are valuable is because they are scarce. Whatever NFT art you own, it will be guaranteed as one of a kind. For instance, the Nyan Cat NFT sold for $600,000 and there can only be one owner of the original Nyan Cat. Others can have copies of it, but only one can have the one, authentic digital ledger for it.

The scarcity principle tells us that the less available something is, the more likely we want it and the higher the price we’ll pay for it. For example, imagine there’s a picnic rug in front of you. You have a bag of pretzels to your right and a single doughnut to your left. Which one do you choose? Most people would choose the doughnut because it’s the last one! And, why not? After finishing the doughnut, you’ve got room for the bag of pretzels.

Ultimately, that’s why NFTs are such valuable investments. If you find something desirable and there can only ever be one original of it, people will pay big for your NFT.

How can you use data to take advantage of NFT investing?

Your first thought could be to look at the cryptocurency price charts such as for ethereum or solana. But, this is the wrong tool for the job. If you were interested in taking advantage of crytocurrecy price fluctuations, this would be the right tool, but we’re investing for large capital gain here.

As you should be aware, NFTs are usually associated with digital art of some sort, so you’re better off using the mindset of an art dealer when investing in NFTs. So that raises the question: “What can the ‘tangible’ art world teach us about NFT investing?”

After conducting some research, I can answer that question for you. An article by Jason Bailey called “Can Machine Learning Predict the Price of Auction Art?” in the publication, HDSR, provides some good insight. The author’s research indicates that artist reputation and the number of bidders at auction are the best indicators for future price.

If you’re speculator, this may sound like real insight, but if you have a deep understanding of what investing should be, then it just makes sense. For example, why do many people buy tech stocks? Because many people are already investing in them. Why do people still buy established stocks like banks or utilities? Because they’ve been around long enough to have a decent reputation.

Firstly, the number of bidders is easy to find. If you go on OpenSea, you can easily see how many people are bidding for an NFT and at what price. The data is in front of your face. Common sense and simple maths should prevail here. If the artist is relatively unknown, but he has many bidders, then be suspicious. Alternatively, if the bids seem unreasonable (eg. No one seems to be bidding seriously) also be suspicious.

Secondly, the aspect of finding an artist with a good reputation or finding an artist who will develop a good reputation is harder to discover. Bailey’s research investigated text mining of artist social media accounts and their biographies, but found no real correlation between social media presence and their biographies, and art sale price. However, he did find that artists who were associated with prestigious institutions tend to sell their works at higher prices than those who were not associated with prestigious institutions.

So, what does this tell us about measuring reputation? Realistically, you can’t really find numerical ‘data’ to measure reputation. You can see for an artist how many pieces of work an artist has sold and for what price, but since the number of successful artist relative to the number of actual artist out there is a small proportion, you’re more or less seeing a correlation rather than actual causation.

Perhaps a better way to measure reputation is to see how popular and respected an artist is in his or her own niche. Other than reading the artist biography, you can see how well an artist trends on Google Trends and reviews of their work. However, trending on Google or even on other social media platforms doesn’t necessarily indicate a good reputation. For example, Elon Musk is often a trending topic but he has the reputation of being a hot-head.

Also, as mentioned, being associated with prestigious institution matters. For example, if your artist is an associated Marvel artist, then you at least know the artist may probably already have a good reputation and may want to retain it. Most likely, this information can be found easily on the artist’s Linkedin or other professional pages.

As a side note, you may also want to see what utility the NFT brings. Essentially, can the NFT bring out a feeling of awe towards the owner when she displays it among her peers? For instance, if you’re a Star Wars fan, having a Darth Vader avatar minted by Disney would make other Star Wars fans envious of you.

Conclusions

Here’s a suggested framework to make you an effective NFT investor.

  • Search for niches. Eg. NBA fans will pay more for NBA NFTs.
  • See who are the top artists in the niche but also the up and coming artists.
  • See if your artist is associated with any reputable studios; for example, Disney.
  • Use data to see how well your artists are trending on Google and their reviews.
  • Use data to see how often people are bidding for your artist’s artwork and at what price.
  • Finally, decide what utility their artwork produces. Eg. Can it be used as an avatar, or would it desirable as a collector’s item?

The ultimate goal is to find an up and coming artist whose work has potential but is still relatively cheap in the meantime.

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What makes an NFT valuable and can you be a data driven NFT investor? was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.