5 Things To Check Before Buying an NFT

All through 2021, investors have witnessed the entry and subsequent meteoric rise of NFTs – short for non-fungible tokens. In 2021 alone, NFTs have boomed, shattering records to explode into a $27 billion segment of the crypto market. For the uninitiated, we shall now shed light on what constitutes an NFT, as well as underscore certain key factors an investor must factor in, before investing in an NFT.

• What is an NFT?

An NFT, or a non-fungible token, refers to a unique unit of a cryptographic token, one that makes use of the latest in technology to ensure that varied forms of digital content – images, videos, songs – can be uniquely logged, and corroborated to cryptocurrency blockchains – primarily, Ethereum. NFTs greatly ease the process of owning and transacting varied forms of digital data, with details of every sale being recorded on-chain, ensuring seamless accountability and transparency. 

• How does it work?

An NFT is created by an artist, first through the process referred to as ‘minting’ – creating a smart contract on the blockchain, a process that ensures royalties are duly paid to the creator and other related parties, each time an NFT is sold. Each NFT comprises 2 parts – a smart contract and the asset itself. The creation of any such NFT is not without its costs, with the current rate pegged at approximately $70 on Ethereum, with certain platforms now aiding in offloading the process and passing it down to the consumer.

• 5 red flags to check before buying an NFT

Listed below are 5 essential components that every investor should carefully consider, before purchasing an NFT:

1. Process: It is essential to check the developer’s mode of operation, paying close attention to the frequency of updates and announcements, while also ensuring that the developers can capture your attention with each such announcement/update – proclamations for the sake of proclamations are a red flag.
2. Team: Every NFT is a result of a strong, capable team – people who are seriously vested in the project and wish to make it the best in the market. It is crucial to gauge the team behind the product – skills, experience, qualifications – if something isn’t adding up, do not engage further.
3. Website: A sound NFT project will have an iron-clad website, one without any security leaks – either on the page or if you are more tech-savvy, in the code. A shoddy website is a definite red flag, and investors must refrain from indulging further. 
4. Engagement: Check their social media page and discord, for both toxic/fake followers, and make a comparison between their online member ratio to the total member count - any mismatch should warn you against investing.
5. Roadmap: It is vital to check if the developer’s vision is a realistic estimate for the time frame mentioned and if there is an estimated utility for the product. 

Conclusion

NFTs have succeeded in popularizing digital art, in the process also helping their developers generate immense turnovers. Whether or not they are here to stay, only time will tell. We at Motilal Oswal recommend extreme caution and due consideration before investing in such assets.

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