I was surprised by the response I received from my first NFT focused article. I've discussed them in terms of companies offering NFTs, but I had not delved much into the community aspect until last week. The results of the article led to some interest, a lot of questions, and even more confusion.
As I've jumped deeper into the world of NFT investing and trading, a few lessons have fallen into my lap. And by fallen, I mean I've paid my share of NFT Trader's Tuition. Yes, that's a real thing, the same as the Trader's Tuition stock folks discuss. Today, I want to pass along some of my education and observations. Again, these are simply my views, but most of you likely haven't traded or owned an NFT. Heck, a few of you probably still haven't heard about NFTs, and plenty of folks can't wrap their head around the growing popularity and value of these tokens.
Whether you have an interest, want to understand, or just don't want to feel left out of the chatter around the water cooler, here are a dozen takeaways:
1. Momentum is very real. The right celebrity tweet or whole entry can happen fast and draw buyers in fast. One minute an AlphaBetty Doodle NFT cost .06 ETH and an hour later its sitting at .15 ETH. Fortunately, movement is is easy to watch on a trading platform like OpenSea. You won't get tick charts, but you can refresh to check prices since sellers place their NFTs up for everyone to see. Similar to level 2 stock trading, you can see down every level of the book from those that has their NFT listed to last sales to highest sales to simply portfolio holdings not open to be purchased. Of course, virtually everything is available for the right price, so interested parties can make offers. Those offers are open for all to see as well. The recent volume stats provide an idea of how long it may take to chew through a floor, the lowest price something from an NFT collection can be purchased. Stock traders would call it resistance. It can go quicker than you think if a whale comes into the picture.
2. Speaking of whales, they exist in this market and hold tremendous influence. They have the ability to price the small players out of the market during something like a minting event if the development team behind the mint doesn't properly plan or care. They whales have teeth like a Great White.
3. It's a good reminder though that if you miss out on something, there's probably another opportunity that will come along shortly. Without a whale-sized wallet, you'll quickly find out you can't own everything. Hype and FOMO will draw you in, so be aware of what is coming down the pipeline before you go chasing. Hot and cold mints can lead to a whole host of issues.
4. Beware of extraneous events like minting, especially when the supply is limited. Hot mints, when the demand far exceeds supply, can lead to gas wars. Since minting often takes place at a set time, everyone rushes to mint (create) their NFT before supply runs out. This creates pressure on the blockchain, reflected in the price of gas - cost needed to pay to create or make changes to the contract. Think of it as a commission or SEC fee when trading. And let me tell you this gas stinks. The wars don't just drive-up prices on those minting, but also on trading taking place on OpenSea or other platforms.
5. I'll give you an example, I was trying to make an NFT purchase. As I was pricing different opportunities, gas cost around .01 ETH (or $32) at the time. That's still high but not completely uncommon. As I went to make the NFT purchase for .09 ETH, I didn't pay close enough attention as gas shot up to .1 ETH ($320). My eye caught the .1 and thought it was .01. It wasn't the greatest feeling when the cost of my NFT just doubled because of my own stupidity.
6. Think of it in stock terms. Could you imagine two people each buying 100 shares of the same $3 stock, but one pays $20 commissions and fees while the other pays $320 in commissions and fees. They end the purchase with very different breakeven points. And while NFTs are "unique," they aren't quite as unique as we're led to believe. The NFTs of the same collection, trading around the floor price, will essentially all move together like a stock, so now my paying .19 (after gas fees) for that NFT when the floor price is .09 suddenly effects my emotions. I need this NFT to double and then some just to get back to even. In one recent mint event I watched, gas costs shot up to $6,000+. Of any lesson I can pass along, watching the price of gas on your transaction may be the most valuable. The good news is you can use this as part of your strategy. When gas spikes, prices often fall on other NFTs. There's a small lag between the NFT price recovery and gas prices falling, so if you can catch the low NFT prices with the declining gas prices, you can grab some bargains.
7. Small numbers can be a big problem. With many projects priced in Ethereum, it can be easy to fall into the trap that something costing .1 or .05 Ethereum is "cheap." It's almost like using a credit card or debit card. Most of us are still taught to think in terms of fiat, it's like a second language. Low numbers like .05, .10, or .50 feel cheap but with ETH trading above $3000 we are talking about $150 to $1500 here. It can make a huge different in gas too. We don't blink when something is .01 or .02 because what's a penny. With Ethereum that difference is $30+ right now per .01. It should make you pause but until you get used to transacting in Ethereum, you might find you don't pause at all.
8. As far as minting versus buying in the secondary market goes, it is all about risk versus reward. With the secondary market, you know what you are buying, especially in terms of rarity. You can find some bargains or decent rarities trading near the floor, but you do know what you are getting. I like to look for NFTs within the top one-third of rarity trading near the floor (within 10%). As far as minting goes, it's like buying a pack of baseball cards. You pay the set price and have no idea what you'll get. I did one mint and wound up with an NFT that was ranked in the bottom 20%. Its value fell below the mint price quickly. I did another mint and hit an NFT ranked 42nd out of 10,000 mints in terms of rarity. Being in the top .5% is pretty darn good. That being said, there are some projects like MetaChamps, where I'll go after the mint aggressively and pay a much higher than normal gas to get in on the mint.
9. Wasted gas. Imagine if you went to buy a stock, entered a limit order but the stock never hit your limit, your transaction was cancelled, but you were still charged a trading commission. That's what can happen with NFTs. You can attempt to mint or buy an NFT and have your transaction fail (for multiple reasons), but you still pay the gas fee if you aren't on a proof of stake blockchain. You're going to miss some transactions, so factor this into your planning and thinking.
10. A project's success will have an X factor. Often this is a surge in support by the community around it. What exactly that is is tough to say as it varies from project to project. Most of the folks I know very active in the space can't put their finger on it either. A strong development team, successful marketing, and benefits for the holders is always a plus. I'd like to stay great art is a factor, but art is so subject. What's great to me may be unappealing to the next person. Beyond these factors though, there is an X. If you can learn to spot it, you can make a mint, no pun intended.
11. Don't be shamed into diamond hands. Because this market is so new and so volatile, take profits from time to time. Also, take losses. There's nothing worse than getting stuck in a dead-end project. Liquidity can be fickle. The floor, the quickest place to sell, only matters when there is volume. No volume and the floor mean very little. Here is another place where minting versus the secondary market have different risks-reward setups. Buying an NFT via a mint (creation) generally offers the most and quickest upside, but if a project doesn't sell out their mint and keeps it open, then the secondary market will often fall under the mint cost and volume can be non-existent. Why would someone opt to buy off the floor in the secondary market for an NFT with terrible rarity or nothing special when they can roll the dice with the mint? Few will. If a project has a floor sweeper program (think of it as a stock buyback), then that will help with liquidity, but these aren't overly common in projects that don't sell out.
12. Trading strategies. In my view, you either buy the floor or you buy a top ranked NFT in a collection. Collections tend to rise from the floor, dragging every NFT higher with it no matter what the rarity. Personally, I prefer to buy just above the floor, within 10% of the floor, if I can get a rarity in the top quartile. If I can't get that, then I'll simply buy the cheapest offering. On the flip side is buying a rarity in the top 1% or a rarity that is highly sought after. One other consideration here is to buy at least two rather than buying one. Then, if the floor doubles or more, I can sell one and ride the other for "free." It's the same concept as scaling out or playing with the house's money.
I guess I shouldn't be surprised that many aspects and lessons from trading stocks apply to NFTs. It feels very much like mid to late 1990s stock trading: big movers, information harder to come by, commissions, and slow execution. About once a week, I'll update what I see happening in the NFT market, any potential opportunities, and how it might feedback into stocks.
In my view, we're seeing more and more stock traders, especially aggressive and high-risk traders, move into the NFT market. Lastly, I'm still waiting for that first public company to jump into the space. First-mover advantage could be big.