How to invest in NFTs: Tools for beginners
NFTs work like eBay, where sellers set their prices and buyers match the ask or do a bid-and-buy to negotiate the price down. Since there is no instant, automatic way to sell any NFT, an NFT investor has little wiggle room to make mistakes when buying NFTs. After all, you don't want to be in a position where you are stuck with the NFT as the collection is at death's door.
Survival as a profitable NFT trader comes down to a simple rule: Gather profits fast, cut losses fast. As a beginner with small amounts of funds to spare, instead of focussing on 100x profits, you are better off making small wins.
So how do you approach the NFT market? The key to a good approach is to find the relevant indicators of potential gains in your NFT investment. Let's learn about the basic metrics that are important in NFT trading!
Key Metrics for analyzing an NFT collection
In the NFT market, timing is as important as price. Buying low and selling higher is the goal but this depends on timing. Looking at the right metrics can give you hints about which project is more likely to grow.
Disclaimer: Although analyzing metrics are important, you must view them in context. Just because the price of a collection has been increasing for the past 2 months does not mean that it will continue to show the same trend. Additionally, these metrics have to be customized to the individual project, which is why you need to consider many questions about the project before you make your decision (you can find these questions below). Remember, researching into the project is not just optional, but mandatory! Make sure couple your understanding of the project's community, mission and team before coming to conclusions about the metrics.
The two key metrics to consider are:
Trading volume indicates the amount of currency exchanged for the collection over a given time period. Generally, when volume is soaring, many people are interested in buying into the project, which increases the average price of the collection. How do you evaluate trading volume? Start by considering the following questions:
Is the volume rising or falling?
A rising trend is a positive indicator of the project's growth. Of course, you have to balance the finding of these metrics with context of other metrics and relevant news about the project. But overall, start by looking out for projects that have a general upward trend.
Are there market conditions that affect this trend?
For example, during a bear market, most sales volume decrease. In this case, the project might be worth your investment if it has potential long-term upsides. To determine this, the better the project ranks in the factors below, the more likely it will have long-term upsides, allowing its average price to increase.
Growth potential. Could this project become more valuable in 6 months time? If this project were a brand, would it be a hit or a miss?
Authenticity. Is the team building something original with low competition (think of them like startups)?
Relatability. Do I relate to this project?
Team. Does this project have good leadership?
How to discover the trading volume of an NFT collection
You can find trading volume statistics on the NFT Marketplace platform itself. Here is an illustration of how to find information about Trading volume on OpenSea.
Enter your selected NFT collection profile on OpenSea (example, Bored Ape Yacht Club) and tap Activity on the top left-hand corner.
2. Here, you will see the analytics for trading volume over time. Custom the time period using the drop down bar on the right-hand corner of the screen to compare volume over time.
Considering context for why the trading volume trend is going upwards or downwards is important. Trading volume can be artificially manipulated to inculcate a designed narrative among potential buyers. What are some factors that can cause the metrics to "lie"?
Things to be aware of when evaluating Trading Volume
Shilling by influencers
Many NFT projects gain momentum by using the help of big influencers to grow sales volume. Objectively, there is nothing wrong with this. But, if the NFT project does not have a strong enough community retention strategy, the influx of buyers will not necessarily create continuous momentum for the project.
2. Floor Sweeping
If a collection is losing sales volume, a wealthy group of holders with liquidity or a whale is able to buy all of the collection’s floor-priced NFTs. This automatically raises the floor price of the NFTs in the hopes of artificially adding traction to the project and indirectly increasing the prices of their more expensive NFTs. This has happened before and you can keep a lookout for instances of such an event by monitoring isolated, abnormal spikes in Trading Volume that cannot be explained by any upgrades in the project itself or by the marketing efforts of the collection’s team.
Floor Price is the lowest price of an NFT in a collection. This price is listed by the NFT owner that is willing to sell the NFT for the going amount. This is an important metric because it is an easy indicator of the lowest anyone is willing to pay for becoming a member of the project. If the lowest asking price for a collection is extremely expensive, that indicates that the project is thriving.
To buy a Bored Ape at the time of this writing, you need at least US$108,708!
Source: NFT price floors
Reasons to avoid mid-level rarity
For beginner investors with a relatively small amount of funds to play with, buying floor priced-NFTs reduces your risks. NFT prices and trends are unpredictable to some extent. While you want to make a profit on your investment, you have to prepare for losing profits too. NFTs of a collection come in different prices for several reasons, with the most notable one being rarity. Some NFTs have more rare traits than others, making them more expensive.
Crypto Briefing: One of the rarest Cryptopunk sold for $23.7M in Feb 2022
Understanding human behavior in NFT trading
Humans' emotions can fall victims to FOMOs and market downturns.
For any investment, approaching the market through an analytical state of mind rather than an emotional one will yield better results. For example, setting a buying and selling price for any NFT you invest in, will prevent you from being a victim to emotional roller coasters o. After all, you don’t want to buy the NFT market. After all, you don't want to buy or sell your assets out of pure FOMO.
2. Humans are status-seeking.
NFTs that are traded more frequently are more valuable than NFTs that are not. This is because they have an established narrative and status behind them. For example, consider a collection of baseball cards. Which card is easier to trade?
Card A: Traded 5000 times
Card B: Traded 5 times
Card A is easier to trade because it has collected narrative behind it. Its trade volume shows that a lot of people are interested in it, which increases its price. So, if you want to “flip” NFTs, find a market that shows active price action.
Note: Once some collections reach a high enough status, they might not be traded as actively anymore as more people are interested in holding them.
Tools for getting deeper analytics
Once you have mastered the basics, you can delve deeper into more metrics and conduct more sophisticated comparative analysis as well. Crypto has many free, useful tools to get you started! Get deeper insights about the metrics outlined with these tools:
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