NFT Trading Strategies: What To Look For Before Investing In NFTs
NFT trading is here to stay, regardless of the current bear market, so it’s important to understand effective NFT trading strategies.
Some dissenters argue that non-fungible tokens (NFTs) fail to provide underlying value, and as such, will fade in value over time. However, NFTs have use cases that transcend “overhyped monkey pictures” and will continue to expand beyond the hype created around them.
NFT s offer a robust market that can provide users with significant opportunities for profit with the right trading strategies. As a relatively new market, NFTs have had a fair share of Ponzi Schemes, exit scams, and rug pulls, and it’s also generally volatile.
Like any other form of investment, a successful NFT trader should employ carefully evaluated NFT trading strategies.
Why You Should Invest in NFTs
The NFT market is a fast-growing sector with a number of advantages, including
A Robust NFT Market
The NFT market boomed in 2021, despite their existence dating back to 2012.
The market has since gained traction in the mainstream as a mode for artists and organizations to expand their audience in the virtual realm.
Despite trading volume collapsing from the previous bull run, the NFT market has the potential to burgeon over the next decade. As a fast-growing industry, early investors are set to reap massive profits in the future.
Consequently, as NFTs continue to gain popularity, their prices are likely to rise in value. NFTs also continue to expand their use cases, showing a widening market.
Recently, post offices in Austria and the Netherlands adopted NFTs to reinvigorate the art postage stamp collection.
Profit Opportunity NFT
Crypto influencers and public figures are publishing their profits from NFT trading, which typically leads to fear of missing out FOMO in the general population.
This process tends to create an uptrend in the market as market sentiment shifts, and increasing profits for early investors.
Promoting Original Creators and Artists
NFT marketplaces facilitate the tokenization of digital content and minimize copyright infringement threats, which protects the respective works of content creators and owners.
For instance, artists like Tory Lanez, Don Diablo, and King of Leon, have already released music albums as NFTs.
Purchasing these NFTs means that you directly support your favorite content creator’s works. However, users should always verify the legitimacy of content creators before making an investment.
What to look for before Investing in NFTs
Investing in NFTs goes beyond buying and selling NFTs. A few factors to consider before venturing into NFTs include:
NFT Market Capitalization
It is crucial to check the market capitalization of an NFT before investing in one.
The market cap is the aggregate value of an NFT collection, represented by the number of holders of the specific NFT project and the average price of a single NFT.
Look for a growing market, since the market cap of NFTs may be difficult to calculate due to their less liquid nature.
A high market cap implies that the NFT collection has more owners, with some willing to purchase NFTs at a higher price. One tool to use in verifying an NFT collection’s market cap is rarity.tools.
The Team’s Reputation
Who is behind the NFT project? Asking this question can help you avoid rug pulls and exit scams. Find the team behind the project, their reputation, their past projects, etc.
Avoid investing in a project with a team with a sketchy or questionable past. When in doubt, Google them.
Trading Volume
Another essential metric is trading volume.
Consider an NFT collection with an increasing or high trading volume. It depicts that the collection is solid and has an increasing demand. However, users should verify the trading history to ensure the trading volume is not artificially generated.
NFT Utility
NFTs with no real-world utility, or providing no value to holders are likely to disappear once the hype declines.
Similarly, projects that seem “too good to be true” most likely are. Since the utility of projects may be daunting to assess, you can look at the community enthusiasm, active updates, and roadmap.
The recent popularity of NFT utility is in the gaming sector and the integration between NFTs and Decentralized Finance (DeFi).
Number of Unique NFT Holders
The number of unique holders can be used to measure the size of the community supporting the project. The greater the community is, the higher the chances of reaching a wider audience via holders marketing the project.
Scarcity and Rarity
Everyone considers a rare item more valuable than an abundant one.. The rarity and scarcity of an NFT make it pricier and give it a higher chance of being bought in the NFT marketplace.
Hence, NFTs with higher rarity scores are often more valuable than those with a lower rarity score. This is the simplest way of determining the value of a collectible.
Top NFT Trading Strategies
Any trading activity should always result in a return on investment. However, the profitability of any investment depends on your approach.
It’s important to have a trading strategy that is tailored to your goals regarding NFT trading, whether you are pursuing a short-term flip or long-term venture. Some trading strategies include:
Purchase Trending Collections
This strategy involves waiting for an NFT collection to be released on a secondary NFT marketplace, like OpenSea. You can catch on to a collection that is hot in the market by looking for those trending on NFT Twitter or Google Trends.
However, some NFTs are often overhyped. Following which influencers or experts are backing the project can be instrumental in making the right investment choice amid the trend.
Purchase Fractional NFTs
The best trading plan is to purchase the most valuable NFT, but affording a single Bored Ape, for example, may not be viable to everyone.
Hence, you can purchase a fraction of an NFT from protocols that facilitate fractional NFT purchases. This process, however, limits you from purchasing an already established collection.
Participate in NFT Lending
You can earn passive income by lending your NFT to NFT holders in a NFT Liquidity Marketplace.
You can also borrow against your holdings.
Buy the Floor and/or Buy the Ceiling
The market floor price refers to when a NFT’s price is at its lowest, while the ceiling is when it’s at its peak.
Not all affordable NFTs will guarantee you positive returns. Hence, buying low and selling high is a practical approach that increases the likelihood of profit.
If you believe an NFT is underpriced, or selling lower than its original value, it could be an opportunity to buy low and sell high. Purchasing the top is a great choice if you have enough capital, since many NFTs priced high are sought-after and quite rare.
This sets them up to increase in demand, and hence value. The downside is that you could suffer significant losses if the NFT price dips. As a general rule, never invest more than you are willing to lose.
Closing Thoughts
There is no one-size-fits-all strategy that will guarantee you significant profit from your NFT investment. The best NFT trading strategy is the one that works for you. Each trader or investor should assess and utilize the strategy that suits them best.
