NFT buyers are the angel investors of Web3. Angel (early stage) investors have always been the lifeblood of the startup economy. While the brand name venture capital firms dominate the news cycle, they rarely write the first check that gets a company started. It’s the angel investors willing to help a startup that fund a prototype. Those same angels volunteer their time and resources to help startups build and grow. That’s exactly what we’re seeing with NFTs.
Unfortunately, we’re also seeing NFT investors making some of the same mistakes that new angel investors make. These investments are inherently high risk. Following a few best practices can reduce that risk as you get started.
Decide whether the timing is right for you. Before you make your first investment, you should make sure you’re in a good financial position. If your NFT investments lose money, will you be ok? If the answer is ‘no’, then it’s not the right time for you to invest in new NFTs. Seek financial advice from a professional (not just this blog post) if you’re unsure. Equally important is to actively reassess your financial situation periodically. You can do this on a regular cadence (quarterly, annually) and also after life changes such as a new job or family illness. Just because it makes sense this year doesn’t mean it’s safe for you next year. Don’t get caught financially off guard. If you’re not ready to invest financially, that doesn’t mean you’re locked out of NFTs. There are many ways for the community to get involved and even earn NFTs though your participation.
Set a budget and a timeframe to deploy the capital. Allocate a certain amount of money to invest over a period of time. Whatever that amount is, whether $100 or $100k, make a decision and stick with it. Then determine what period of time you’ll invest the funds. With early stage investing, 6-18 months is a good range. It gives you a chance to see multiple projects and the evolution of a market. The NFTs market evolution is moving quickly, so leaning towards the 6-month time frame may be better. It’s difficult to predict more than a year out in this market. Planning in 6-12 month periods gives you an opportunity to reassess.
Invest in multiple projects. Most NFT projects are brand new companies, which means they are high risk. Some of them will fail outright. Others will survive but won’t return a profit. There will be winners that return 10x or 100x your investment, and these pay for the losses. Even with careful selection, it’s unlikely that every individual NFT investment will be successful. Investing in multiple projects increases your chances of a return across the entire cohort. A 10x return covers a loss on another.
Be sure the project has enough money. Companies go through stages. They’ll need enough money to meet their goals if they hope to bring in more money and advance to the next stage. Founders can often be overly optimistic about what they need to succeed. Ask yourself if there’s really enough money to deliver what they’re promising. Will they need more money, and if so, what is their plan to raise that money?
Determine what type of projects you prefer. There are many options to choose from: Communities, Software, DAOs (distributed autonomous organizations), Brand plays, Collectibles, and real estate are just a few examples. Sometimes it’s difficult to identify exactly what an NFT project is at the outset, but it is worth investigating before you invest. Each market is growing at a different pace and some have more regulatory hurdles. It’s a good idea to decide what you’re most comfortable with. You may also want to make sure you don’t have too much exposure in one project. Start by reading everything they’ve posted publicly. This may include website, twitter, discord, and be sure to look for Twitter Spaces with the founders. One unique benefit of most NFT projects is that you can ask the founders questions directly through Twitter and Discord.
Will you add value? Passive investors don’t contribute beyond money, but new projects frequently need help early on. If you have relevant expertise and a little time you may be able to help the company succeed. If you plan to support the projects after you invest, this should factor into your decision making. You may gravitate towards NFT projects that would benefit from your expertise. One word of caution: be sure to define how much time you can give and hold yourself to it. Otherwise you may become frustrated or burned out later.
Will there be dilution? Dilution happens when additional NFTs are released with the same or similar benefits. Adding new investors and investment dollars can help a project maintain it’s momentum. If not handled carefully, your otherwise valuable NFT may not be worth what you think. If the project plans to release future NFTs, you should investigate. When will it happen and what triggers it? Will there be any preference given to original NFT holders? Allowing original holders to claim a new NFT for free is a good way to reduce the chance of being diluted. One word of caution: don’t rely on the “OG” label to deliver the value on its own.
Think about your exit. Investors take profits. It’s an essential part of investing in new companies. Before you invest, think about the future market for the NFT. Will demand be sufficiently large to ensure a sale? Is the market large enough for what the company is offering? You should also think about the timing of when you’ll sell. If your target is 10x, and your NFT hits the target, you should be thinking about selling. Of course, there are exceptions but be sure you have a good reason to continue holding. If you’re not following your investment strategy, you’re susceptible to trading to win.
Don’t get confused about what you’re holding and why. This is unique to NFT investments–pay attention. NFTs can be many things–from art to collectibles to membership and more. In some cases, they’re multiple at once. This makes it confusing at times from an investment perspective. You may hold some NFTs because you love the art. You may have a favorite PFP, or one that represents you. Be careful not to confuse which NFTs are investments and which you retain for nostalgia or some other personal attachment specific to the NFT. If you’re not willing to sell when the value is up, or to recoup losses in a failing project, it’s no longer an investment, just a sentimental digital asset.
Have a system and follow it. Trading to win is a surefire way to lose money with NFTs. What is trading to win? It's buying and selling for profit (wins) without a broader strategy or guidelines. It may sound counterintuitive, but chasing a “win” leaves you susceptible to social proofing and holding to zero. Define what you’re looking for and how you’ll operate as an investor. Create guidelines for your buying decisions. How will you know it's the right time to buy? It’s also important to know when you’ll sell; both for gains and to minimize losses.
About the author:
Daddio is a successful founder with two decades worth of experience in early stage startups. If you have questions/comments, find him on Twitter @daddio.