NFT Trading Strategies

 

NFT Trading Strategies

NFT Market 

NFT market has skyrocketed in both popularity and value over the past year and a half. This is because NFT's have come to be deemed by many as reformers in the crypto space establishing new economic frameworks and unprecedented value preservation infrastructures ranging from fine, art, music, entertainment and gaming. NFT's are effectively redesigning the way individuals perceive the value of uniqueness and scarcity in the digital asset realm. NFT have been experiencing such parabolic momentum in recent times.

The NFT Concept

NFT's cryptocurrencies like Bitcoin and Ethereum whose units are meant to be interchangeable with one another even if they aren't always so in practice. NFT's are designed to store data on blockchains and the majority of NFT projects are currently being built on the Ethereum blockchain because of its higher liquidity and the sheer number of integrated marketplaces.

The data stored within an NFT can be associated with files containing media such as images, videos, audio clips and physical objects in some cases. a non-fungible token typically gives the holder ownership over the data media or object the token is associated with and it is commonly bought sold and traded on specialized marketplaces. NFT's can natively perform a variety of different use cases and this is because of their built-in utility features and dynamic implementation structures. the process of trading NFT's naturally follows a slightly different mechanism. 

When compared to:

The Fungible token market involving cryptocurrencies like Bitcoin and Ethereum for instance. this is because the economic catalysts fueling the adoption of the NFT market are primarily retail driven and this is essentially due to the general lack of institutional capital in the NFT space.

Non-Fungible token market overall has given life to an alternative set of rules when it comes to technical analysis and other trading methods. furthermore because of the inherently social nature of the NFT economy the centuries-long rule of supply and demand is perhaps one of the most prominent components of the NFT ecosystem.

NFT Market Analysis

NFT market in the year 2021 alone users sent at least 44.2 billion dollars worth of cryptocurrency to ERC 721 and ERC 1155 NFT contracts.

These are the two types of Ethereum based smart contracts associated with NFT marketplaces and collections. what the data indicates is that there have been significant increases in both the total value sent to ERC 721 and ERC 1155 NFT's and the average transaction size per NFT which suggests that NFT's as an asset class are generally gaining value as they attract more and more users. The weekly On-chain trading volume for the entire NFT market the two largest spikes in 2021 appeared to be correlated to the Mutant Ape Yacht Club released by Yuga Labs in August . The sale of one crypto punk NFT that supposedly went for 532 million dollars in late October though there are caveats to this.

The Mutant Apes drop and the multi-million dollar punk sale would be the volume spike. The announcement of visa's purchase of a crypto punk for a hundred and fifty thousand dollars back in August of last year. As a result investors confidence in the NFT space grew exponentially with a plethora of collections and individual. One of one NFT's gaining substantial amounts of traction in a short period of time. Now NFT's are a natively socially driven asset class where growing trading volumes are intimately correlated to the levels of demand excitement and interest in the market.

This market dynamic is arguably only possible because of the general lack of major institutional capital in the space which makes NFT trading more of a nuanced and sophisticated endeavor.

NFT trading strategies 

NFT trading strategies and how profitable they are using data from the OpenSEA marketplace there are three different strategies used by NFT flippers to generate a profit with each one showcasing its own pros cons and success rates these are white listings buying NFT's at mint prices and buying NFT's on the secondary market.

1. Whitelisting

The first tactic which seems to be quite effective is whitelisting essentially the process of getting early access to a project or NFT drop before the mint. The initial creation of that NFT chain analysis noted that quote "white listing is key to success in trading". It's almost impossible to achieve outsized returns unless a user is involved in a project from the very early days. Most things in crypto and particularly NFT's investors fare best when they're either really early or really patient or sometimes a mix of both.

The white list for the next hot up-and-coming NFT collection has proven to be perhaps one of the most successful strategies implemented by NFT flippers. the crypto verse for instance look at any historically successful NFT project. Discord Servers and Twitter Threads booming with enthusiasts promoting the project and this is design by NFT creators typically begin building interest in upcoming projects long before the first assets are released gathering a core of dedicated followers who help promote the project from the outset.

These NFT creators will reward those dedicated followers by adding them to a whitelist essentially allowing them to purchase NFT's at a discounted and much lower price than other users. But whitelisting isn't just some nominal reward as it can actually translate into dramatically better investing results in fact OpenSEA data shows that users who make the white list and later sell their newly minted NFT's gain a profit 75.7 percent of the time versus those non-white listed users who end up landing a profit 20.8 percent of the time that is quite a discrepancy.

This essentially means that while some NFT mints can potentially result in major gains especially if those newly minted assets become blue chip NFT's in general sales by un-whitelisted buyers. Usually result in a loss on resale essentially equating to an unsuccessful flip on the other hand a recorded 78% of sales by whitelisted buyers resulted in a profit with 51% of these resulting in a profit of 2x or more. On the initial investment thus it's clear that whitelisting constitutes one of the most data-backed effective strategies for flipping NFT's and it generally ensures greater financial reward for those early supporters of a particular project. It depend on how strong the community of supporters is the level of demand for the project. What its roadmap looks like and how effective the developing team is in keeping their community engaged rewarded and dedicated.

2. NFT's at Mint

NFT's is buying at mint prices now this is a bit of a controversial one and it really can go both ways. when they first mint this is because without white listing prices only 29 of sales of NFT's bought. when they were brand new resulted in a profit according to chain analysis. The report also notes that the low success rate of individuals making a profit selling newly minted NFT's doesn't take into account those investors who bought NFT's at launch and never sold.

This is because according to economist Ethan McMahon it's technically really complex to assess the price of NFT's that haven't been put up for sale and that don't possess any previous trading history. In addition he argues that those who choose to sell their newly minted NFT's do so more quickly than those who are purchasing an already sold NFT and roughly 50 of first time sales are completed within two days of the initial mint. 

There are exceptions of course and some advanced NFT traders recognize a profit can be made off of a near instant resale whereas others sell after months of holding. The process of buying NFT's at mint has also shed light on some native scalability issues within the blockchain sphere and particularly on Ethereum. 

Launch of NFT collection the 7 in early September 2021 resulted in at least 42 NFT's being accidentally burnt or destroyed and a total of 26,000 failed transactions that cost users an accumulated 4 million dollars in fees. 

This is because unlike standing in line to grab a sweatshirt from supreme or trying to order a pair of high end Nikes the minute they launch on the website. There's no mechanism that can stop Ethereum transactions from going through and charging the user gas fees. if they've been sent before the sale starts or for an NFT that's no longer available. if one includes those gas fees in profitability calculations buying and trading newly minted NFT's becomes a much less attractive investment proposition than one would initially think on top of that. Just like with the more traditional crypto market it also appears that some experienced users employ bots to purchase NFT's as soon as minting begins resulting in more failed transactions and making profitable trading even more difficult for the average user. So the jury is out on whether selling NFT's bought on mint is really that profitable. 

3. NFTs On The Secondary Market

The trading strategy has proven to have a much higher success rate and that strategy involved buying NFT's. On the secondary market and selling them later in fact according to data from OpenSEA users following this strategy tend to profit on 65.1 percent of resales. NFT flipping appears to be a rather concentrated practice as there have been over 2,000 individual NFT collections recording a secondary sale. Just 250 collections account for 80 of those secondary sales interestingly. This concentration of trading activity isn't just limited to the number of individual collection but also includes the particular addresses doing most of the flipping in fact only 20 percent of user addresses on OpenSEA account for 80 of secondary sales. While just 5 percent of all addresses account for 80 of the profits made on secondary sales this points towards a rather large divergence between the top most successful NFT flippers who only account for 5 percent of all active addresses on OpenSEA and the remaining 95 of NFT traders out.

This major discrepancy between the most performant NFT flippers and the least profitable ones could potentially originate from the fact that the most advanced traders on OpenSEA either have more experience in spotting market inefficiencies and finding those NFT's that are likely to increase in value over time or simply have more capital to deploy. This could perhaps translate into more capital. When first starting out or capital that has been accumulated over time from successful flips. A mix of both this in turn allows them to buy and sell assets more frequently compared with other investors giving them more exposure and diversification in their NFT portfolios.

Another compelling data point is that some of the most profitable flippers on average pay 2.2 ETH for the NFT's. They later resell this is potentially due to the fact that some of the most established NFT collections in the space. Being generally more expensive have months if not years of previous trading history to back their performance. This subsequently enables traders to spot a project's technical highs lows support and resistance levels and capitalize on growing trading volumes. NFT flipping turns out to be drastically easier and perhaps increasingly more profitable with NFT that have seen previous trading history and this is primarily because investors can analyze the NFT market by using the technical tools.  They're most familiar with and accustomed to using. 

Trading Volume And Market Cap

Another factor that's worth noting here especially when it comes to trading NFT's on the secondary market is the importance of trading volume and market capitalization NFT's with previous trading history generally give traders an idea of these metrics looking at a collection's market cap can potentially lead to a successful NFT flip. A particular NFT collection appears to be trending on social media platforms such as twitter for instance it might be too late to consider it a viable investment since prices will most likely have already skyrocketed.

Now technically speaking the market cap for a specific NFT project is represented by the total number of holders multiplied by the average price of one NFT from that collection and since the NFT market is far less liquid than the fungible crypto market. A growing market capitalization on an NFT project is precisely what the most sophisticated traders keep an eye out for.

Because expectations of a higher market cap imply that more token holders will be available which naturally translate to higher asset demand couple that with a limited supply and have the ingredients for potentially higher prices for that NFT. Another extremely important metric to consider when researching an NFT project is trading volume a high or increasing trading volume for a specific NFT collection is typically an expression of growing demand for that collection. 

Traders should pay close attention to these trades and perhaps even double check the trade history just to make sure that volume wasn't artificially created as this is indeed quite a regular occurrence called wash trading. 

Some NFT owners use multiple wallets to trade their NFT's in the hopes that the artificially created volume will attract new and oblivious investors to the NFT market. Always verify that the trading activity on a specific collection or individual NFT is genuine and organic and always do your proper research before execute your first NFT trade as this could easily result in the trade of a lifetime or in the asset causing you a significant loss.

Basic NFT's Intro Link: https://fcnmn.blogspot.com/2022/02/nfts-non-fungible-tokens.html