Understanding the NFT market - where does the hype come from?



One sector within the world of cryptocurrency that is not only intriguing but is also set to continue growing in leaps and bounds is that of the NFT market. The volume of NFT sales hit a monthly high of $2.3B (yes, billion) in August, which was up almost 260% in just two short months. The asset class is awake again after the hype surrounding the sector in March and April. Popularity and prices are growing again, attracting more and more people to new projects. This article is to help you understand the NFT market, where the hype comes from, and how you can participate. I'll cover:

  • Current state of the market

  • Where I think its going

  • How to find undervalued NFT projects

To the uninitiated the astronomical prices that NFT bluechips command might be somewhat absurd, so let's start with why they are so valuable.


Average weekly NFT sales over $325,000,000


CryptoPunks


CryptoPunks are the orignal NFTs - the first-ever edition. The team responsible literally invented the ERC-721 token standard that us used by all Ethereum based NFTs today.


CryptoPunks are 10,000 avatars randomly generated by an algorithm mashing together variable attributes like hats, pipes, tattoos, hairstyles, and skin tones.


No two punks are alike (they're non-fungible, just like you and me), and some have traits that are rarer than others. For example, only 9 of 10,000 punks have the Alien skin tone, so there's no supply for the demand. The most expensive CryptoPunk ever was an Alien, and it sold for over $7.5M on March 11.


Would you believe that CryptoPunks were given away for free when they came out in 2017? Now, the celebrities of crypto Twitter use them as profile pictures. Owning a Punk is now a status symbol and the formula used by all portrait art NFT collections. The current average price that buyers are willing to pay is over $500,000.


Types of NFTs


Most NFTs you’ll see fall into the following categories. Keep in mind that many NFTs fall into more than one category, and the space is constantly evolving and coming up with new and novel ways to use NFTs.


Profile picture avatars


These are collections of randomly generated avatars (usually in groups of 10,000) that feature different combinations of eyes, faces, skin tones, hats, tattoos, and more. These most commonly show up on Twitter and discord.


Metaverse/Gaming


NFTs that represent ownership of in-game assets. Think playable characters (Axies), in-game weapons and vehicles (Star Atlas), and digital real estate (Decentraland).


Social clubs


Communities can exist around anything. These are built around NFT ownership. Private discord groups can be made to allow entry exclusively to NFT owners. Think MonkeDAO and Bored Ape Yacht Club.


Art


Digital art can now match the scarcity and authenticity of its physical counterpart. Artists like Beeple, Pak, and xcopy are minting NFTs of their work, often as 1/1s, and migrating to crypto. Top artists in the space have sold art in the tens of millions, with Beeple taking home an absurd $141M.


Utility


NFTs represent ownership of assets, unique or common. For example, Uniswap V3 uses NFTs to track ownership of customized liquidity pools known as concentrated liquidity. Utility NFTs have further application in any unique financial derivative or product on a blockchain, like calculating and distributing dividends


Where Can The Market Go From Here?


Despite all of the recent hype, active wallets holding NFTs have yet to increase significantly. As was pointed out on Twitter in August, active NFT wallets are nowhere near "euphoric" levels.



Active wallets rose by 50% before dropping back to pre-2018 levels since this tweet. Logan Paul launched his own NFT collection, so the space may have a lot more room to run as it attracts capital from the multi-billion dollar art industry. The legendary auction house, Christie's, is setting an example for mainstream NFT adoption with their "No Time Like Present" auction that took place on September 17. The auction featured a Cryptopunk, BAYC, and Meebit, connecting the traditional art world to some of the most sought-after NFTs around.


This was the first NFT auction in Asia and the hype surrounding the sale did not disappoint. Six CryptoPunks, four BAYC and four MeeBit NFTs sold for an approximate combined $12.3 million.



CryptoPunks have long been the leading NFT project in the space and were expected to sell for the current floor price of a punk – $305,000 (105 ETH).

However, due to the premium of the auction and the rampant interest in NFTs, the punks smashed their initial estimates and proceeded to sell for at least double the highest estimate.


The lowest priced Punk sold for $610,000 – with the remainder selling for between $642,000 and $1.1 million.


The most expensive NFT sold in the auction was a Zombie CryptoPunk (above), which sold for $4.34 million – placing it in the top 10 record sales for CryptoPunk.


As more traditional art houses include NFTs in their auction, more people in the art scene will meet crypto through NFTs and introduce serious money to the entire sector.


There's still a long road ahead before NFTs fully integrated with the mainstream, and while there will be ups and downs, the general market is trending up. We are still very early – one million active NFT holders would represent a (roughly) 20x from today.



Finding Undervalued NFTs Post Mint (AFTER RELEASE)


Below are the tools necessary for finding undervalued projects in the NFT space that have already launched and are trading in secondary markets.


Rarity.Tools


Rarity Tools tracks upcoming NFT releases and hot new NFTs. You can see which projects have high trading volume and watch upcoming projects climb the list. You can also view the rarity and price of NFTs in a given collection, allowing you to take advantage of price discrepancies across markets.


Opensea.io


Opensea is the premier marketplace for NFTs. Checkout the main page and explore to find new projects. Once you find something cool, head over to their Twitter and Discord to scope out the community, the devs, and the project roadmap.


Project Website


This is probably the most important step. Review their website and look for a roadmap. I prefer to avoid projects with vague plans like, “we let the community decide.” That often means the creators have no agenda beyond the initial mint. You want to find NFTs that provide future value through mechanisms such as a percentage of royalties, future airdrops, exclusive community or DAO, or access to a game.



Pre-Mint NFTs


Pre-release NFTs are ground-floor opportunities! But you have to find the ones with sustainable value; otherwise, it'll trend to 0. Again, avoid roadmaps that lean too heavily on vague and deferring statements like "let the community decide everything." Community governance is a central part of the blockchain hypothesis, but something is iffy when you walk into a restaurant without a kitchen. High-quality projects with competent leadership will always have defined goals that create utility for and/or preserve the value of their NFTs. The two main places to research pre-mint NFT projects are Twitter and Discord.


Twitter


Some of the largest NFT Twitter accounts are @DeezeFi, @C0inAlchemist, and @Punk6529. Follow them to gauge the fads in NFTs and how the market is evolving. Once you find a project you like on Twitter, look at the engagement on their profile and hashtags to see if people are organically discussing the project.


Discord


Every NFT project has a discord for the community (NFT holders and creators). When looking at new projects, see how active it is and how many people are in the server. This can be the easiest way to gauge interest – if there are over 50,000 people in the discord but only 10,000 NFTs available, there is a good chance a secondary market will exist after launch.


We are still very early in the evolution of this sector and there is a long way to go to reach mainstream NFT adoption. Remember: the most important thing is that you like your NFTs. If you’re not finding value looking at NFTs from your collection, then you are just buying empty hope. Be careful and happy hunting!



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Hi,
I'm Paul

I am on a mission to help people start a journey to financial freedom. The key to long term success is education and understanding the incredible opportunity that exists right now.

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