DISCLAIMER: This IS Financial Advice!
DigitalSoul.x, April 2022
Article 1 in a 3 Article Series to help you Do Your Own Research (DYOR)
In many ways the IOTA ecosystem has been sheltered over the years. We sit in our bubble, quietly waiting for the tech to mature enough to change the world. It’s not a question of ‘if’, but ‘wen’! Due to the tribal nature of crypto, many of us probably haven’t ventured out very far into the wider crypto space. Concepts like NFTs, DEXs and lending platforms are new to us and present tremendous opportunities. But, wherever opportunity lies, so do unscrupulous actors. Just as you must be extremely vigilant in protecting your private keys, you must also be vigilant in doing your research when investing in new ecosystem opportunities. This article is the first in a series of three designed to help you to Do Your Own Research (DYOR). The purpose of this first article is to discuss some basic market psychology principles and to offer a few evaluation methods for the projects that are available for investment today: NFT projects. NFTs have already exploded on Soonaverse and with Shimmer and Assembly right around the corner, a plethora of new projects are on the horizon. NFT sales are perhaps the most popular way for new projects to raise funds to finance themselves, so you should be familiar with basic methods for evaluating them.
Basic Investing Psychology
The very first step in your due diligence process should be self-reflection. You must step back and ask yourself why you are considering investing in a particular project. There are many valid reasons for doing so and perhaps just as many terrible reasons. Your goal is to be able to recognize your precise motivations with each potential investible project so you can manage your expectations and judge the outcome properly. You should be brutally honest with yourself and make sure you are investing for the right reasons.
A bad reason to buy an NFT is FOMO or Fear Of Missing Out. Maybe you see projects being hyped on Discord or on Twitter and there are a limited number of NFTs available. Realize that in most cases the FOMO stems from a desire to avoid missing out on potential insane gains. But, to ape-in to every project will surely leave you rekt! This is perhaps the worst reason to buy an NFT. Of the unfathomable number of NFTs in the crypto space, relatively few of them have mooned. Even if your NFT increases in value, you can still fall into a trading trap. NFTs are a speculative market prone to wild price swings. If you sell an NFT for a quick gain, it rarely ends there. You will probably follow the price of the NFT and FOMO again when you see it continue to rise. And then you might get stuck with it when it inevitably falls. Many traders who dabble in the traditional finance markets wind up losing money and this is even more the case in the NFT market because there is little inherent value to analyze. One of the best ways to combat FOMO is to remove emotions from your NFT purchases. Decide before the mint if you will invest in a given project and set a spending limit!
Another investing concept to be aware of is opportunity cost. This refers to the opportunities that go unrealized when you make a particular investing decision. By choosing to support a specific project, you are then unable to use the funds you allocated on a different project. Even if there is only one project that interests you, you should be aware that you are giving up something by investing in it. Your MIOTA tokens could have remained happily in your Firefly wallet, staking for Assembly tokens. How sure are you that this opportunity will yield more profit than those lost ASMB? Another useful tip is to mentally convert the cost of the NFT into local fiat currency equivalents instead of “magic internet money”. How many hours of work will it take you to earn enough to buy this NFT? In those terms, are the potential benefits of the NFT worth it?
NFT Prime Consideration #1: Utility
Ideally, the NFT project you are considering will have a specific use or function, otherwise known as utility. Since NFTs are a great way to raise capital, they can be sold to support a wide range of projects. This may even include a non-profit project where your NFT indicates that you donated to support it. Think of a project that plants a tree for every NFT purchased or donates the funds raised to protecting endangered wildlife. Maybe a community member would offer an NFT to support a group of people in need, like the citizens of Ukraine, for instance. You would not expect any return from supporting this type of project other than benefitting the cause they advocate, but you should still DYOR to learn as much as you can about the founder(s) and the project. For instance, are the founder(s) doxxed or well-known within the community? Exactly how will the funds be used? What percentage of the funds raised go to the team and what percentage goes to the cause?
Another type of NFT is sold mostly for entertainment and may not have real utility. This could include NFTs that are sold as collectibles, trading cards, lottery tickets, or games. There is nothing wrong with these types of projects, but you should go into them with the intent of spending only what you would for entertainment. Collectibles and trading cards go in and out of style. Their value can be highly speculative and can hardly be considered an investment. There is no guarantee that you will be able to sell your NFT for more than you paid for it down the road. Lottery ticket NFTs do promise to pay out based on pre-determined metrics, but the odds of winning are generally quite low. Still, if you have examined the odds and enjoy this type of game, more power to you. As with any other NFT, never invest what you can’t afford to lose!
Some NFTs are even being sold with future access to token drops, and this can be considered a good example of utility. However, these can be tricky to evaluate. Part of this is because, in most cases, the tokenomics are not fully developed enough to share before the drop. If the tokenomics have been released, you may be able to do some relatively simple math to determine how much your tokens will be worth once vested. If not, you will have to rely on your knowledge of the team and their history to make your decision. Analyzing the tokenomics of these types of projects is much more involved and beyond the scope of this first article, but some tools to do so will be provided in the second article of this series.
NFT Prime Consideration #2: Community
One potentially good reason to invest in a particular project is to be part of a specific community within the IOTA ecosystem that really resonates with you. For instance, there may be an NFT project that grants access to a DAO, a club, an event, etc. In this case, the purchase of the NFT can be considered a membership fee. If the cost of the NFT is a reasonable amount for you to pay for membership, you can be satisfied with the purchase even if the NFT can’t be resold to make a return. The value of the NFT is in the community. Note that, when considering the community of a project, size matters! A large community can promote a project just by talking about it in other circles. This gets new people hyped and keeps the interest high. A small community may indicate fewer, but more dedicated members. In this case, liquidity may be low and it might be more difficult to sell the NFT in the future, should you decide to do so.
There is even some value to a PFP (Profile Picture) NFT that indicates membership in a specific community even if there is no added value or utility. But in this case you should be acutely aware that you are paying for a profile picture and in that sense it is similar to art. The value is very subjective and there is a good chance that you will not be able to find someone to offer you more for it than you paid. As long as you acknowledge this, there is nothing inherently wrong with buying a PFP NFT. That being said, you should still take some basic precautions pre-mint. One simple way to judge a new project is to use reverse image search. Navigate to images.google.com and drag / drop the NFT image or copy / paste the image link to see if you get any hits. Projects that use non-original images should be considered highly suspect unless they have a really good reason for using existing images. Buyer beware!
NFT Prime Consideration #3: Rarity
If you are considering a PFP NFT or even some other NFT, another consideration is rarity. One aspect of rarity refers to the total number of NFTs minted in a given collection. If a large number of NFTs are made available, the project runs the risk of not selling all of them. In this case, the team may not raise the amount of funds they are expecting, and this puts the roadmap at risk. Another aspect of rarity surfaces when each of the NFTs in a collection is unique. In this case, rarity refers to the scarcity of a given combination of traits within a collection. Rarity tables are often published after the mint to list the number of times a specific trait appears in the collection. Multiple rare traits can make a specific NFT quite rare overall. But do not get too caught up considering the rarity! Rarity is a “collector’s game” and the value is subjective and speculative.
NFT Prime Consideration #4: Founder / Team
In the end, you will need to place some trust in the founder / team when you support an NFT project unless you are only in it for the picture you mint. Despite the best laid plans and most developed roadmap, founders have still used their NFT sale as a cash grab and have run away with the funds raised. If the founder / team is doxxed, this is much less likely to happen but still can. New, undoxxed teams should be considered highly suspect until proven otherwise. Even if the founder / team is well-known within the community, you should consider their track record from other endeavors. Do they complete work on-schedule? Do they work well with others? Do they stay on budget? Have they worked on a similar project in the past? All of these factors and more can provide you with good indicators of the current project’s chance of success. More tools to evaluate a given team will be presented in other articles as well.
Wrapping Up
When used as a tool to raise funds for valid projects, NFTs present an interesting opportunity. However, when considering an NFT as investment, one must be very careful to avoid common pitfalls and to properly research the project before investing. It is of the utmost importance to note that, depending on how the project is structured and in what jurisdiction, these NFTs could be considered securities and may be subject to securities law. If the project has not considered an appropriate legal and regulatory framework, the risks are magnified and you should be highly suspicious. If you are considering an NFT as an investment, you need to have strong evidence to support your position or you risk losing your precious tokens. That being said, not every NFT is an investment. If you aren’t planning on flipping the NFT for a profit but want to retain it for the long term, you should understand it well and genuinely like it. That way, even if it decreases in value on the secondary market, you can be happy with your choice. There may be intrinsic value in the community that isn’t reflected in the market price and if that’s of value to you, that’s all that matters.
Lastly, if you do decide to purchase NFTs that have a substantial value, you should be a bit careful about how you store them. Marketplaces do get hacked from time to time, and while Shimmer is expected to be quite robust, it’s still a staging network. To protect your NFTs, it’s recommended to use a hardware wallet to secure them with MetaMask. It works like this: when you are logged in to your NFT marketplace and wish to buy or sell, your MetaMask wallet will send a request to your hardware device (for example, your Ledger device). You will be required to physically sign to approve the request using the private key in your hardware wallet or the transaction will not go through. This gives you an added layer of security and peace of mind when you’ve invested your hard-earned IOTAs.
While this article has provided a basic introduction to investing psychology and NFT Prime Considerations, tools for evaluating more advanced NFT projects with tokenomics and other ecosystem projects will be presented in the other articles in this series. These articles are written by different authors, so some concepts may be repeated, but hopefully that will only serve to reinforce the importance of those topics.
Note: I personally own all NFTs imaged in this article and they have been included for illustrative purposes only. This is NOT an express endorsement of these projects, but an invitation for you to DYOR! I may have personal reasons for buying some of these that are unrelated to investment. Stay safe, frens!
