If you don’t have a strategy, you cannot successfully invest in or trade any asset – stocks, bonds, crypto, etc. The same rule applies to NFTs.
With the boom in the NFT market last year, we have witnessed more investors allocating capital toward NFTs. And with that, numerous NFT investment and trading strategies emerged that anyone could adopt for their portfolios of JPEGs and digital collectibles.
Read on to learn about what to look for when investing in NFTs and discover a list of popular NFT trading strategies.
What to look at when investing in NFTs
While buying and selling NFTs is a simple process, the case isn’t the same if you want to make a profit when trading your NFTs. It’s important that investors invest their time in researching future NFT projects before investing.
For instance, if an NFT is trending on Twitter, that’s not the best time to invest in it. Why? Because as soon as it starts trending, it means the prices have already gone up.
However, if you spend more time researching future NFT projects, you are more likely to find a good NFT project that you can invest in.
So, what exactly should you look at when investing in NFTs?
Considering an NFT’s market capitalization is a good starting point as it will show you how liquid an NFT is.
NFT market cap is determined by multiplying the total number of holders by the average price of a single NFT from a given collection. That way, you can gauge an NFT collection’s current value and see how likely you will be able to sell your NFT again once you want to exit your position.
Today, there are a plethora of NFT tools that can provide investors with the right data to help them make the right decision.
The NFT’s utility
More and more NFT collections offer some type of utility. The utility can come in the form of token and NFT airdrops, access to exclusive events, the rights to limited-edition merchandise, and more. There are also NFTs that give you a claim to an item or asset in the physical world.
If you are looking to invest in NFTs, look at their utility compared to similar drops.
Scarcity of an NFT
While each NFT is unique in itself, they usually come in NFT collections that vary in terms of attributes. For instance, an NFT collection may be made up of different items but some items may be rarer than others making them more valuable.
The rarer items tend to be more expensive. They also tend to be more popular and thus sell at higher prices and faster. As an investor, you can determine how rare an NFT is by using a rarity tool before investing.
Number of unique holders
The number of unique holders is another way of measuring the current value or potential future value of an NFT. This indicator can be used in determining the size of the community that supports that particular NFT project.
If you are looking to invest in a profitable NFT, one of the most important factors that you can not overlook is the community. The larger the community, the more word-of-mouth marketing will likely take place.
The team’s reputation
Before investing in an NFT project, you need to find out the team that’s behind it. A background search on who the developers are and past history are crucial as there have been multiple anonymous NFT drops that have ended in rug pulls.
So before investing your hard-earned money into an NFT project, do your due diligence on the developers. If they are anonymous, you know the risks.
Another metric that is very important when researching NFT projects is the trading volume. If a particular NFT collection’s trading volume is high or keeps on increasing, that’s indicative of the growing interest in the project. If volumes are declining, it may mean that interest in the collection is fading.
NFT trading approaches
During the NFT boom in 2021, numerous NFT trading strategies have emerged as more and more crypto-savvy investors “aped” into NFTs. Let’s take a look at five popular NFT investment approaches.
Buy the blue chips
The term blue chip is derived from the stock market and refers to the largest publicly-traded companies.
In the NFT world, blue chips refer to the top NFT collections, such as Bored Ape Yacht Club, CryptoPunks, and ArtBlocks. Buying blue-chip NFTs means that you are buying into an already popular and valuable collection that has the potential to increase in value and also not lose too much value in a market downturn.
Buy the floor
NFTs had a good run in 2021 and the momentum is expected to only increase in the coming years. With this in mind, you could purchase NFTs when their current floor prices are low.
An NFT’s floor price means the lowest price that you can purchase an NFT from a specific collection. While it’s not advisable to buy NFTs just because they have a low price, you should go for an NFT project in a category that is of interest to you instead of just focusing on the price.
Buying the floor is a popular NFT trading strategy as it gives for price growth should the NFT collection overall grow in popularity. In simple terms, buying the floor helps you secure a front-row seat in the NFT brand’s journey towards potential higher price growth.
Buy the ceiling
Conversely, another common NFT trading strategy is buying the ceiling. Buying the ceiling refers to buying the most expensive NFTs in a collection. These types of NFTs tend to be popular amongst investors with deep pockets. Although expensive, ceiling NFTs in popular collections are well-positioned for price growth as they are the most sought-after NFTs in the collection.
One major issue with ceiling NFTs, however, is that there’s only a small number of people that can actually afford them because of how expensive they are. As a result, should a ceiling NFT’s popularity diminish, holders may experience significant losses, forcing them to sell their NFTs at much lower price levels.
Buy the trend
It doesn’t matter whether you are a newbie to the NFT space or a veteran, you can still determine if the NFT market (or a specific NFT collection) is still a popular niche by looking at its trend on Google.
Google Trends can be used to measure the public’s opinion towards a particular keyword or topic with searches for the keyword being scaled in a range of 0 to 100. If the rating is high, it means that more people are getting more interested, thus indicating that it may be a good time to make a purchase.
However, if the rating is low or the trend is decreasing, it means that fewer people are showing interest in the NFT collection and you, therefore, need to proceed with caution.
Buy NFTs with few sellers
If an NFT collectible has many sellers or an increasing number of sellers, this could indicate waning interest in an NFT collection. Therefore, choosing NFTs in collections where there are few sellers is another popular NFT investment approach.
Start by examining the listed prices of the NFTs to establish whether they are higher than the most recently completed sales. Additionally, observe the space between the posted sale price to determine whether the sellers were impatient and willing to sell at just about any price.
While you may be able to pick up some NFTs for cheap from sellers, you have to be wary of too much selling pressure as it may mean that investors are allocating funds out of that collection.
Before you ape in
NFTs are a new, high-risk digital asset class. Therefore, only invest what you can afford to lose. Do your due diligence and choose NFT projects that have the potential for price growth. But remember that when the market turns, and the hype dies down, you may struggle to find a buyer anywhere near the price where you bought.