NFTs - History, Market Dynamics and Trading Strategies
Part 2 - Profiting from the new frontier
Disclaimer: Any views expressed in the below text are the personal views of the author/s and do not constitute investment advice or recommendations for investments. The author/s views should not form the basis for making investment decisions - invest in markets at your own risk after performing thorough due diligence.
The impact of the internet and social media has resulted in large swathes of cultural growth and expansion progressing online. Many viral pieces of content from the past 20 years could be seen as “cultural heritage” with collectable value. However, the problem is there has been no way to verify ownership of this content. Despite the value these digital assets possess, an inability to verify the owner means that up until now this value has remained locked.
NFTs disrupt this. With cryptographic verification of ownership via the blockchain now a possibility, an entirely new asset class has emerged.
In part one of our NFT series, we explored what NFTs are, why they matter, and who they benefit. In this piece, we will demonstrate how to navigate the NFT space, showing you how to ride the waves of opportunity whilst giving a glimpse into how this asset came to be. With the birth of any new asset class, there is always a gold rush.
By the end of this article, you’ll have your own pick axe and pan to sift through the deep stream on the frontier of discovery. It is important to note that nothing contained in this article is financial advice. These are tips and tactics that we have seen to be effective in some instances, and less effective in others. Any decisions that you make to leverage the materials contained hereafter are entirely your own. We take no responsibility for any losses incurred.
A Brief History Of NFTs
NFTs have existed for a lot longer than most people are aware. The popularity they experienced in the summer of 2021 and the subsequent explosion into the public consciousness was not instantaneous at all; rather, it was the result of numerous small but interconnected events that occurred gradually over time eventually reaching a point of critical mass.
The history of NFTs begins in 2014, at a time when many people in the blockchain space were focused on novel consensus algorithms with the introduction of Delegated Proof-of-Stake and Tendermint. Where both efficiency and scalability were the dominant focal points of the industry, others were working on another paradigm-shifting application for the technology.
Periodically in the history of art, as with technology, a combination of the right circumstances, people and place, births a new movement. This is what happened in the case of NFTs.
As we covered in the previous article, our ability to verify ownership of digital assets has historically been limited at best. Kevin McCoy, a media artist and early blockchain adopter, sought to change this in 2014, and at precisely 21:27:34 on the 2nd of May 2014, he did. With the confirmation of Namecoin Block 174923, the NFT era quietly dawned, laying the deepest foundations for what would build into the 2021 summer of non-fungible euphoria. Quantum, the world’s first NFT project, is a pixelated octagon with circles, arcs and other patterns centred around a hypnotically pulsing core in a selection of fluorescent colours.
Figure 1 - Quantum - A still from the animated NFT created in 2014 by Kevin McCoy.
When asked about the project and why he sought to create NFTs in the first place at the 2021 Sothebys auction of the artwork, McCoy said the following:
“This code-driven work presents an ongoing, abstract, cycle of birth, death, and rebirth. It tells this story through colour, line and movement. In 2014, I had an idea to use blockchain technology to create indelible provenance and ownership of digital images of this kind. Quantum was the first ever to be recorded in this way.”
The piece, "Quantum", was sold for $1.472M, at the height of the NFT craze, and what started as an obscure part of a nascent technology was suddenly dominating the conversation across multiple channels worldwide. The events, notable mints, and projects which led to that euphoria are detailed below.
Figure 2 - History of early NFTs on Ethereum. Source: Leonidas.eth
The above graphic from Leonidas.eth provides a comprehensive overview of the development of the early NFT space.
We suggest you take some time to digest what is illustrated, as some of the projects listed are linked to historically important events in the development of the blockchain as a whole. For example, Cryptokitties was the catalyst for one of the first “gas wars” on the Ethereum blockchain and shone a spotlight onto the inefficiencies of the network and the need to transition onto PoS from PoW.
Universal Speculation
Speculation in markets is a divisive topic. There are both proponents and opponents to speculative investments, and whether they should be included in a well-constructed, robust investment portfolio. Where advocates of the efficient market hypothesis will argue that markets are always fairly priced, speculators believe that markets tend to be overreactive. It is that overreaction that presents the opportunity for significant portfolio growth.
Speculators are one of four key groups of market participants, along with hedgers, arbitrageurs, and investors. Despite the view of many market professionals that speculators are gamblers, they provide significant liquidity and can smooth larger price movements for a given asset. Speculators are not concerned with the underlying value of a given asset, just the price of that asset at any given time.
Figure 3 - The Role of Speculators. Source: CME Group
The speculator's mantra of "buy low, sell high" is significantly more difficult in practice than the term implies.
NFTs work like any other speculative asset - you purchase with the intention that the value eventually increases, thereby allowing you to sell for a profit. The rationale for the allocation decision of the specific NFT/s you determine has the highest probability of making a return will be covered in this article.
Minting, selling, bidding, and purchasing of NFTs all occur through either a centralised or decentralised NFT marketplace. NFT marketplaces are platforms where NFTs can be stored, displayed, traded, and in some cases, minted (created). Think of it like a Jiji or eBay but for NFTs.
NFTs are usually purchased directly for a fixed price or through an auction. An NFT collection will usually launch on a website, with units of the collection available for mint at a pre-determined launch price. After which, it will be available for resale on the Secondary market - the NFT marketplace. Early buyers can enjoy the privilege of selling at a higher price in the marketplace, with some projects selling for over 10x their original value on the secondary market.
NFT Market Dynamics
Market Dynamics are defined as the forces of market constituents responsible for the shift in the demand and supply curve and are therefore accountable for creating and reducing the demand and supply of a particular product.
The NFT market is no different than any other market, with its own set of trends and characteristics that can be understood. These factors determine where the NFT market perceives value. By taking the time to understand the idiosyncrasies of the NFT market, they also demonstrate how one can effectively and efficiently capture that value for personal gain.
Our first observation from trading and flipping NFTs is that the market cycles are markedly shorter than the wider crypto market cycles.
The wider crypto market cycle “peaks” were 2013, 2017 and 2021, each roughly 4 years apart and dictated by BTC halving events. Conversely, notable NFT cycle peaks were May 2017 (proof of concept), March 2021, August 2021 and January 2022. These NFT market cycles are much faster, at only around 5 months in duration. This represents a much more aggressive rotation of capital, meaning any market participant needs to constantly have their finger on the pulse to effectively ride the gravy train.
NFT cycles seem to be driven predominantly by adoption events and are not determined by broader business cycles or crypto cycles. Catalysts for past cycles include:
Proof of concept of NFTs & advent of 10,000 collection projects like crypto punks
Twitter verification for new projects
Figure 4 - Beeple’s “The First 5000 Days” NFT. Source: The Verge
Due to the aggressively cyclical nature of the NFT market cycle, the market dynamics and participants are evolving at breakneck speed. Mistakes and inefficiencies from the past cycles are rarely repeated as the market matures and gradually evolves to become more efficient.
Through August 2021 any project with over 10,000 ETH in volume did extremely well.
In January 2022, any project with over 10,000 ETH in volume alongside any utility did extremely well.
Now we are seeing any NFT with genuine cash flow, business model, and utility doing well. In the future, following this sequential cycle of maturity, we will see only NFTs with extremely robust business models, cash flow, and a wider product offering do extremely well.
In this manner, what would take any immature market or asset several years if not decades, to evolve, we are seeing occur in just months in the NFT markets.
Catalysts - The Next NFT Bull Market
This is the million-dollar question. When is the next NFT bull cycle? We have listed below the main catalysts that we foresee being the spark to the match for the NFT market.
Notice how a number of the themes we have seen trigger bullish price action historically we have also listed again? This further hints at the cyclical nature of the NFT market acting as a microcosm to the wider digital asset market, and acts as further proof that one doesn’t need to be a genius to make money here - you only need a keen eye for identifying trends and patterns.
Social Media Platforms And Instagram Entering The Space
Instagram will likely soon support NFTs from Ethereum, Polygon, Solana & Flow. Many compare it to Coinbase NFT and the menial impact it had but this is a false equivalency. Coinbase NFT had fewer than 1,300 total users as of May 5 2022, compared to Instagram which has roughly 1B monthly active users. Instagram is already well established as a retail commerce platform.
Users that like to show off their exposure to digital assets are more valuable with a larger following (Instagram “influencers” would be a primary target market).
Further Celeb Adoption
The engagement to be had for Web3 posts vs. the engagement for normal posts is like chalk and cheese. It’s very easy for people to get hooked to that engagement — it’s an instantaneous dopamine hit.
As more celebrities and individuals of high social standing (we use this word purely with the implication of a large follower count on social media) progressively enter the arena, a feedback loop of the connection of normalcy with NFTs is perpetuated, further encouraging others to participate.
More Luxury Retail Brands Entering The Space
What is the significance of luxury? As generational wealth transfers take place, luxury brands want to attract “new money”. The main demographic of “new money” is younger crypto-rich, tech-rich traders, entrepreneurs and ordinary people. As these mainstream brands push towards digital assets, they onboard a whole cohort of new users establishing feedback loops that lead to the coveted widespread adoption that we all want to see.
Below are some recent developments and headlines to validate this trend:
“Gucci to accept crypto in leap for luxury industry”
“Lamborghini’s first NFT is here!”
“Dolce & Gabbana to Launch Exclusive NFT Collection on Polygon”
More Regular Brands Entering The Space
What is the significance of mainstream retail? The broad market exposure that these TNC brands provide is critical for increasing general acceptance. The appeal is immediate for the crypto-curious who have yet to delve into the sector. Many people will experience FOMO as they watch their friends participate in these business feedback loops after the digital value-accrual and business models are more established and have been stress-tested to some degree. All of this is also important for wallet adoption — a cryptographic wallet may be the best way for brands to micro-target discounts, perks, in-person access and experiences to customers via airdrops. They can also engage their customers in a fully immersive way through the metaverse and in the real world.
https://www.ledgerinsights.com/coca-cola-nfts-pride/
Figure 5 - Coca Cola’s Pride NFT Project. Source: Ledger Insights
Macroeconomic Catalysts
Without taking the 10-meter board directly into the rabbit hole and doing a ‘Tom Daley’ - we won’t give too much detail in this section. Instead, in future articles, we will be comprehensively summarising our actionable macroeconomic views and thesis regarding the digital asset markets. Alternatively - you can follow our Twitter accounts (here and here) for more regular updates.
Fed gets cold feet (becomes dovish) due to max pain reached in financial markets.
Fed catches up with inflation and we begin to print lower CPI gradually month-on-month.
The market corrects the massive tech/growth sell-offs (reversing reflexivity) with a reversion to the upside.
Stimulus checks are handed out to help people deal with the effects of the current high inflation monetary regime.
QE is slowly restarted to encourage commerce and growth.
The economy miraculously starts to bounce back due to Fed measures (least likely).
Russia/Ukraine de-escalation and easing supply chain shocks (will take around a quarter to feel this).
The above Market Dynamics section was inspired by the extremely talented @ethernaz - he posts regular long-form Twitter threads on the above concepts and topics.
Flipping NFTs Profitably - Our Strategy
Now we have ascertained the potential main catalysts and driving factors to cause the next major NFT value rally; we will now delve into the technicalities of how to profit from such an event.
Before you dive into the NFT space, you’ll need to do two things:
Get a crypto wallet: You’ll need to choose a wallet that is compatible with the blockchain network that supports the NFTs you wish to buy.
Fund your wallet: You will need to fund your wallet with the compatible Chain the NFT is built on before buying, listing or minting an NFT.
If you’re buying an NFT based on Eth, you must have a number of Ethereum in your wallet to purchase and pay for gas fees. Likewise, if you’re using another chain such as Solana, you’ll need SOL in your wallet. We like to use Sollet wallet (link) for this.
Once you’ve completed the above and your wallet is locked and loaded, work your way through the below list. There is far more to the NFT space than just that which makes the headlines. Taking the time to immerse yourself in the ecosystem, learn the language (we’re not joking, there is a language to learn), and understand the dynamics of the different communities you are joining will pay dividends in the long run.
The points on this list are tactics we have found to be effective for us but your experience may vary. This list is also by no means exhaustive, and owing to how fast the NFT space moves, will very likely be out of date in the near future.
1. Study trait/rarity premiums and know them better than everyone else.
This part takes a significant investment of time, but it’s by far the most important piece to this puzzle. The listings/sales page on https://opensea.io/ combined with sites like https://raritysniffer.com/ will be your best allies here.
The alpha here is that you can view real-time sales and listings as they come in. To navigate here simply click the activity tab and toggle listings and sales. This page is your bible, study it relentlessly.
2. Volume is always more important than price.
Price in itself means nothing. A floor without any real volume is as feeble as a helicopter ejector seat or waterproof sponge. It is doomed to failure. Volume stability is crucial for projects to do well, otherwise, it will correct itself quickly when new sellers appear.
In general, greater volume means higher price stability.
As mentioned above, use the alpha of listing/sales in the activity tab. This would give you some idea about the new listings that are coming in and the remaining supply yet to be minted. In regards to minting - only mint when the asset is trading at least 175% of the original mint price with good volume (a ballpark figure accounting for associated gas fees, approvals and royalties). At this level, you’ve maximised your R:R for a profit, regardless of flipping the NFT or holding it.
When buying, you can go about it in two separate ways. Directly from the listing page, or wEth bids. A lot of people don't know this but if you have 1 wEth in your account, you can actually place as many 1 wEth bids as you like. If one gets accepted, the rest of your bids become inactive. This greatly increases your probability of securing an item.
3. Always sell into high volume
We almost always sell into high volume. From an order book perspective, we can maximise our chances of enough liquidity being present to fill any sales if we only sell into volume.
The first 24-48 hours after any successful project launch will always see the most volume, hype, and price action - this is the best time to aggressively sell, even for the projects we like long-term. If you like the project and wish to hold it long-term, buy back in after a couple of days/weeks when there is less hype and lower interest and volume. Better still, buy it post reveal for a cheaper price as mentioned earlier - we will examine this finding of ours in a later section.
Selling early also allows you to quickly compound the initial gains, get principal capital back and be ready to snipe the next deal.
The trick here is to find a balance between pricing your sales and always having ETH available. Whenever someone asks me "What should we price this at?", my response is always "When do you need it sold by?" In this game you can either price to sell fast or price to sell at fair market value, you usually don't get to do both. This strategy uses a mix of the two over time.
4. Resist the FOMO
How many times have you seen prices steadily rising and you think - “we should buy now if not it will only get more expensive from here?” This is FOMO talking. This is not the time to buy. It's almost always the wrong move - you’ll likely be locking up valuable liquidity or getting exposure to a poor R:R bet. A slight downturn in the collections floor price could burn you badly in the short run and you won't have any ETH available to buy the deals from the panic sellers on the inevitable retrace.
We get excited when we see the floor dropping because at this point we have the luxury of always being liquid enough to make a few buys. Our mantra - Buy fear, sell hype.
Figure 6 - A FOMO Trader’s Experience. Source: Forex Robot
5. Always Sell Pre-Reveal.
We almost always sell pre-reveal as identified in the above section and elaborated on later. Again, this is the time when prices are significantly higher and less spread out. The odds of getting a 1/1 out of a 10,000 collection is too low to consistently pay a 20 – 30% premium on the gamble.
If you wish to gamble, sell during the reveal when there is the highest volume, else you are either a longer-term investor or left holding the bag. Getting 20-30% more value out of every flip is always better than holding out for 1/1 at 0.01% odds.
Do this consistently and gain value, instead of gambling with odds that have poor asymmetry.
6. Leverage Discord.
Every project’s discord has a marketplace channel. You need to be posting and interacting here daily with other community members.
People in the community will start to know who you are and trust you for private deals which can save you around 6.5% on https://opensea.io/ fees. These savings quickly compound.
Raindrops make up the ocean. If you don't have a reputation to leverage, there are sites such as http://nfttrader.io that act as an escrow service for private p2p deals.
For NFTs worth <2ETH, you will most likely be better off using private escrow in the long run due to the compounded fees.
7. Accumulate In Silence.
Accumulate when there is no interest and prices are low. These are usually a few weeks after the initial launch and hype when prices have dipped.
Yes, prices may never go down, but they do so the majority of the time post-listing. That's when you can accumulate again. The worse play is buying into FOMO at a relative high, straight after the listing.
8. Invest In People
Most projects have no intrinsic value today and are fueled by hype and expectations for a bright future. Any roadmap you see today is 95% similar and 95% will likely fail in a similar manner to the wider crypto market or any new tech company/startup.
The people and team behind the project is generally the major differentiator. Art, utility, and price aside, we bet on people. That's the only reasonable long-term play.
9. Portfolio Management
Once you have an NFT portfolio, try to hold a good % of ETH. This is the building block and cement of the portfolio, the liquidity. You should be holding at least 25% in ETH at any one time.
When the price of ETH is increasing during phases of NFTs getting cheaper in relativity (with lag time) - it's time to buy. When ETH prices are dropping and NFTs are more expensive - secure profits. Rinse and repeat continuously.
10. Luck Is Key
If it seems like everyone but you is winning big, know that it's not because they are better than you.
A lot is dictated by luck in this game. However, we don't believe in luck being a standalone factor, one makes their own luck to an extent by putting themselves in the position to take the opportunities in the first place. In this way, luck can be broken down into nothing more than a cocktail of probabilities and statistics.
This is the art of taking asymmetric risk bets. This is why we are here – the asymmetry.
11. Other Strategies
Other strategies are advanced and may be more stressful in nature such as trait sniping - whereby a trader will specifically target NFTs in a collection with a certain trait or characteristic that gives this specific NFT a higher value.
Gas wars are another riskier strategy. NFT gas wars occur during a project launch or high-value sales when a large number of people compete to get their hands on a specific NFT. Essentially, the demand causes ETH transaction prices to spike due to network congestion.
To win a gas war, some end up paying insanely high gas fees. For others, their transactions may fail. To illustrate, one aspiring minter paid $430,000 in fees for a single failed transaction on Ethereum. Don't do gas wars - high-risk low reward. You need finesse and precision to win them, plus with the existence of bots - the odds are stacked against you from the get-go.
Figure 7 - Ethereum users suffer over 10,000 failed transactions costing $4 million in fees on 'Otherside' mint. Source: Finbold
Directional NFT Exposure
Another trading vehicle that many are starting to use with a much lower technical barrier for entry than holding and purchasing NFTs is the use of synthetic products. These novel investment vehicles represent the value accrual mechanisms of NFT projects, and participants can purchase these without holding the underlying NFT assets they represent. We have found strategies such as the ones listed below to be extremely effective if wanting to remain market neutral. Many of the derivatives or vehicles listed can be shorted.
Some traders may be bullish on NFTs and their future yet lack the time and knowledge to understand efficient wallet management or how to do thorough market research as the tenets for investment vary from traditional tokens. In this scenario, it is possible to bet on various uni-directional liquid tokens which benefit directly from the underlying NFT appreciating in value.
If you'd like exposure to the 1/1 market (we use this term to describe unique pieces), then you'll want to consider having exposure to $RARE. Owning/holding $RARE is as good as exposure to 1/1s. SuperRare is the premium 1/1 marketplace in NFTs. Therefore if 1/1s are a success, this means SuperRare is a success.
You could also consider holding $NFTX. "NFTX seeks to serve investors that want exposure to the NFT market. Investing in an index allows investors that do not have time or expertise on NFTs to benefit from the rise in NFTs’ valuation." $NFTX can be used as a market-wide bet on NFT strength over any desired time period.
The technology underpinning NFTs does not require a centralised operator such as OpenSea. LooksRare appeared in January 2022 and offered a community-owned decentralised marketplace for NFT trading. The trading and royalty fees went to the LOOKS DAO. $LOOKS governance token holders could then vote on how best to distribute them. As a result, holders of $LOOKS may actively participate in and benefit from the rise of cultural digitization, when previously users were just clients of a centralised entity.
In this manner, $LOOKS is essentially a call option on an uncertain future. The larger the volatility, the larger the intrinsic value of the option. This is a great asymmetric bet we are partaking in for the next several years.
https://fractional.art is where you can get exposure to a range of quality art and collections. Think of Fractional as the Uniswap of NFTs. Want exposure to a basket of Punks? Buy $PUNKS. Want exposure to a Hoodie punk? Buy $HOODIE.
When you use fractional, you are purchasing a % of a piece of art in a collection. As a result, when/if that item sells, you are entitled to the profit from your % ownership. You can use your $ETH for fractional ownership of some of the biggest ticket items in NFTs. The downside is that you don't fully own the jpeg. “Not your jpeg not your NFT.” The upside is that you get your share of the profit if/when the items sell. It’s essentially unallocated, synthetic spot trading without custody.
There is still limited scope for some of the more mature derivative products and offerings in the NFT space. To gain directional exposure, the majority of the time, one must purchase a basket of the specific blue-chip NFTs. This will change in time as the market evolves (at the blistering pace it is currently setting).
Just like the wider crypto market, more mature products will gradually be introduced into the space to diversify the breadth and depth of the NFT value accrual mechanisms and speculative potential. However, at present, there are plenty of opportunities due to various price inefficiencies and dislocations as we explore next.
Figure 8 - SuperRare, where the most expensive NFTs and 1/1s are sold. Source: Zipmex
Post-reveal - Capitalising on price inefficiencies
Before delving into this finding of ours as mentioned in the above section – it is first important to examine the definition of expected value (EV).
What is EV? In statistics & probability analysis, the EV is calculated by multiplying each of the benefits/utility/returns of possible outcomes by the likelihood that each outcome will occur and then aggregating all of the values.
For simplicity, imagine there was a random mint for a collection of 5 NFTs. Two commons, one above average, one rare, & one ultra rare. Now assume that the current “fair-values” of each respectively are 1ETH, 1ETH, 2ETH, 4ETH and 7ETH.
In this scenario, during pre-reveal, you don’t know which one you will mint. But you have the following odds:
40% or 2/5 chance at minting a ‘common’
20% or 1/5 chance at minting an ‘above average’
20% or 1/5 chance at minting a ‘rare’
20% or 1/5 chance at minting an ‘ultra rare’
The Expected Value (EV) of ONE random mint would then be the following:
40%x1ETH + 20%x2ETH + 20%x4ETH + 20%x7ETH = 3ETH
Simply put, this means (if your odds are truly random), 3ETH is a fair price to pay for 1 Mint of this particular NFT set.
Why bother working this out? You have the chance to mint the rare or ultra-rare and get something worth 4ETH or 7ETH. Alternatively, luck may not be on your side (I.e. you mint a common), but it offsets your upside odds so it’s just the risk you choose to take. Again, depending on the specifics, this could be an asymmetric bet that fits your overall investment thesis and rationale.
‘Risk avoidance’ is the propensity for people to choose definite outcomes over those with high levels of uncertainty, even when the uncertain result's expected value (EV) is equal to or higher than the value of the more certain outcome.
‘Risk aversion’ is the contrary, the propensity for individuals to choose uncertainty over certainty when given a choice between two possibilities, even when the value of the more uncertain option is equal to or higher than the EV of the definite one. Even among degenerate gamblers, the typical NFT trader is one who is more likely to take risks that are above average.
Back to the above example - this means they may be willing to over-pay for the example mint by 0.5ETH or 1ETH above fair value to make the pre-reveal market value = 3.5ETH or 4ETH
Let’s assume now people are willing to pay 3.5ETH, which is the floor of the pre-reveal because all tokens are valued the same (due to fair odds). Once the reveal happens, two minters would’ve got the ‘common’ and assume now one minter lists one at the floor for 1ETH (fair value). Now instead of 5 pre-mint items being somewhat identically priced at 3.5ETH each, you have a much broader range of listings, with the floors for commons being really low (I.e. closer to 1ETH as expected).
The Alpha here is in you arbitraging the fact that people are degenerate gamblers and are willing to pay over fair value for a less than fair probability that they mint rares. You're essentially betting that they have not worked through a similar EV statistical model. This means, in theory, you should sell just before the reveal every single time.
@ethernaz helped in the worked example above - providing the framework and foundations from his Twitter content. Have a browse of some of his material.
The Law of Large Numbers
The sample mean (average) approaches the theoretical mean as the number of identically distributed, randomly produced variables grows. In other words, the house always wins because the "theoretical mean" triumphs over time. If you trade systematically, you should seek ways to exploit the psychological biases and logical errors that newcomers have in this market.
This will not be an amateur space for long, so take advantage while you can.
Capitalise before maturity and liquidity arrive in abundance.
Our Proposal - Shorting NFTs
As the market gains traction and liquidity we feel that there is one key piece of financial architecture still missing in its primitive form: The ability to freely short NFTs.
This is in direct contrast with our bullish outlook for the sector over the long term however, any mature, healthy market must have instruments for speculators of all shapes and sizes. This will be good for liquidity overall but it will also lead to even more ‘market manipulation’ as now trades on NFTs can be bidirectional.
Secondarily, the ability to short NFTs will make the market fairer. Unscrupulous or poorly developed products will have their value eroded in concert with the lack of utility or uniqueness they bring to the market. Currently, there are no fully-developed products that allow you to short an NFT. In theory, you could borrow someone's NFT, sell it at its current price, then buy it back once (if) it drops in price, return it to the original owner and keep the difference. On this note - NFT project-specific perpetual futures products will likely become commonplace in the near future on pioneering exchanges such as Binance, FTX and Deribit all of which are market-leading in offering novel trading tools.
The mechanism of shorting
Shorting is when you’re bearish on an asset and you want to capitalise on this bias. You borrow the asset from a third party and sell it at the current market value. You're contract-bound to give back that asset at a future date (with interest) — irrespective of the live price at that time.
The idea is if the asset goes down in value (per your bias), then you get to buy it back at a cheaper price in the future, subsequently pocketing the difference. You make money alongside the lender getting their asset back (plus additional interest). However, if the price increases and doesn’t drop – you still owe the asset back to the lender. In this scenario, you’ll have to buy it back at a higher price to pay off the asset debt.
The lender of the asset assumes no counterparty risk. If the price goes down (per original bias), the max it can go down to is 0. Therefore your upside is capped. However, if it moves against you, then there’s technically no limit to how high the price can rise — so your downside is ‘infinite’.
Shorting is a tool that burns many inexperienced traders unfamiliar with how the product operates or functions. It is only advised for more experienced traders and positions require significantly more nurturing and tending than simply buying a spot asset.
Figure 9 - The Basics Of Short Selling. Source: Wikipedia
Closing Thoughts
The birth of a new asset class always brings an opportunity to those who are quickest to understand the market dynamics. The NFT space is no different, and with the various strategies we have outlined in this article you should now feel more confident to venture out into the unknown and start developing strategies of your own.
What we have outlined here is by no means a guarantee of success, and strategies we have found effective personally may very well not work for others. Be mindful of this, and know that if you choose to implement anything you have read that you do so of your own volition.
While trading NFTs has the potential to be profitable, there are potentially more effective ways to capture the upside. One such strategy is taking your analysis away from the charts and back to fundamentals. As NFTs are a new technology, we are very much still in the genesis stage of the evolution that will invariably take place. We wager that a significant part of that evolutionary process will be centred around the development of utility.
Though “utility” has become memetic in the NFT space, with many of the “utilities” being offered providing no real utility at all, there is always potential. The projects which get this right will be the ones that stand the test of time. To that end, we will be digging into exactly what utility is in the context of NFTs in part 3 of this series. Much like blockchain, NFTs have the potential to touch all industries. We will be showing you how and why that is the case in the next piece.
Until then, please find below a thorough list of resources that have helped us on our journey thus far.
Figure 10 - Explore utility NFTs on OpenSea here.
Our NFT resource list
Below is a non-exhaustive list of our favourite resources, tools and websites to use for implementing any NFT trading strategy or research. We have extensively used and tested the below resources and have handsomely profited from using them in conjunction with the broad trading strategy listed in the above section.
As with anything, when flipping and trading NFTs, please maintain caution, do due diligence and never trade out of fear or greed.
1. Marketplaces / Market Aggregators
https://opensea.io/ - The most commonly used NFT marketplace with the highest volume. ETH native.
https://rarible.com/ - A large NFT marketplace with good volume. ETH native.
https://solanart.io/ - Largest NFT marketplace on the Solana chain. SOL native.
https://genie.xyz – Marketplace aggregator to help with batch buying and flipping, also saves gas fees.
http://nfttrader.io - P2P NFT trading and private escrow service. Low fees.
2. Portfolio Management
https://zapper.fi - Full-suite portfolio management for NFTs, Dapps and DeFi. We prefer the UI/UX.
https://dappradar.com - Full-suite portfolio management for NFTs, Dapps and DeFi.
3. Project Rankings and mints
https://mintyscore.com - Minty rating system to help maximise profits.
http://whatsminting.live - Very useful when checking hyped projects that are currently minting
http://icy.tools – We recommend the premium version for a better user experience.
4. Analytics / Sales Data
https://nansen.ai - Best on-chain analytics tool available on the market.
https://compass.art - Shorten the learning curve and become a pro-NFT trader much faster with their analytics.
5. Rarity and sniping tools
http://sunspot.gg - This allows you to snipe items on the secondary market.
https://raritysniffer.com/ - View the rarity rankings of your favourite NFT collections seconds after they reveal.
https://traitsniper.com - Great UI and bot alerts on reveals.
6. Market volumes and health
http://dune.xyz - Check general market data (ETH only).
https://cryptoslam.io/ - Cross-chain view of NFT volume.
http://flips.finance - Real-time floor and volume data, getting accurate pricing across a wide variety of collections.
7. OpenSea Extensions and Add-ons
https://nonfungible.tools/supersea - Chrome extension to make browsing easier and more profitable.
https://twitter.com/ryzenlabs - Chrome extension for browsing with alerts. Great security.
8. Gas Tracker / Estimator
https://blocknative.com/gas-estimator - Live gas predictions to save you time and money. Great UI/UX.