NFTs - Maximum Rewards, Minimal Risks

Hi everyone!

As most would know by now, NFTs have been the talk of the town as they are taking the digital world by storm. But with all the hype surrounding it, one may wonder if this is an alpha generator for your portfolio or a massive bubble about to pop at any time. In this Opinion piece, I hope to clarify some of your doubts and also share with y’all my strategy and experience with NFTs thus far!

None of this is meant to be construed as financial advice. NFT trading can be seen as rather speculative and is not meant for everyone. Do your own due diligence before investing in such projects.

What exactly are NFTs?

NFT stands for Non-Fungible Tokens, and the term Non-Fungible means that the token is unique and cannot be interchanged with any other asset.

E.g. Cash is fungible because there is a ‘fixed’ value that allows for interchangeability (a $10 bill represents the same value as another $10 bill).

A physical painting, on the other hand, is non-fungible. The Mona Lisa painting is one of a kind; there is only one original copy, and all other imitations are fake and thus cannot be interchanged with the original artwork.

However, with the pervasiveness of the Internet, an increasing number of artists have forsaken traditional art for digital art to broaden their outreach. But unlike traditional art like the Mona Lisa, digital art can simply be duplicated on the Internet as there are no checks for its authenticity and as such, no way of identifying the original copy.

This is where NFTs come into play, as owning an NFT represents exclusive ownership of a digital asset. This digital asset does not necessarily need to be art; it can be any type of digital file (artwork, tweets, GIFs, songs, domain names). Essentially, an NFT is a unique digital certificate of a digital file, and it is stored on a blockchain that guarantees immutability (cannot be modified). Since the metadata of this certificate is unique and cannot be altered, the signature of this certificate functions as a proof of authenticity for the digital file.

Common Criticisms

So an NFT is a digital file that can be authenticated, what’s the big deal? Anyone can just screenshot a jpeg NFT and use it as their own profile picture (PFP). Even though it’s not authentic, who’s going to check? Notably, most of these criticisms are targeted towards PFPs, which is arguably the most hyped sector within the NFT industry. Having seemingly little function, these PFPs and their sky-high prices are likened to a bubble.

Addressing these concerns, let’s identify parallels between PFPs and luxury watches.

Luxury watches, especially for the older generation, are seen as a means to flex their status. From 5-figure Rolex watches to Patek Philippe watches costing over $1 million, these statement pieces are viewed as testaments to one’s wealth.

But hey, my $300 smartphone tells the time too! And there are plenty of places to buy imitations of these luxury watches! Why pay 30k for a Rolex when you can buy a fake Rolex for $30 on Taobao?

Pretty similar to the criticisms against PFPs right?

Yet, there still exists a market for luxury watches. Why? Because the rich, older generation have this ingrained mentality (AKA pride) that they need to buy a luxury watch to show off their wealth. Oftentimes, they don’t even wear it! These luxury watches are merely added to their collection of luxury watches, stored in a fancy watch box to showcase to their occasional guests.

I believe PFPs convey the same concept as they are increasingly viewed as Gen Z-ers’ and millennials’ versions of luxury watches. A digital avatar with a unique PFP is the cornerstone of one’s digital identity in today’s and the future’s digital world, and this is the foundation that the future of PFPs and the broader NFT industry is built upon.

Personal Opinion

Contradictorily, despite my passion for blockchain technology, I am not interested in owning NFTs. While I do understand where the growing demand for NFTs stems from, I don’t see a point in flexing my status, be it through luxury watches or NFTs. If I do become wealthy in the future, I would much rather give back to society than show off some paraphernalia.

And yes, I admit that NFTs are more than just digital collectibles. There are tons of rapid advancements coming to the NFT space (yield-bearing NFTs, collateralized NFTs etc.) but for now, DeFi yields are more attractive (especially on Harmony), and as a social media skeptic, the narrative of digital identity is just not compelling enough.

But just because I don’t believe in owning NFTs for the long-term, doesn’t mean I can’t use this opportunity to generate some profits for myself!

Gameplan

Since I don’t intend to buy and hold NFTs for the long term, the gist of my plan is to trade these assets. I started trading NFTs in July, from Aavegotchi on Polygon to Bold Badgers and Aurory on Solana in August.

From my observations, the typical pipeline for a PFP NFT project is as such:

Usually, the moment an NFT project is traded on the marketplace, the floor price will be higher than the minting price due to one-time hype, and this spread is my short-term profit-making opportunity.

Terra NFT szn

To illustrate my strategy, I will draw on my more recent experiences with NFTs on the Terra Blockchain, which only began picking up steam this month.

4 NFT projects launched over the past week, of which I managed to mint 3.

Unlike Polygon/Solana NFTs, Terra NFTs are mostly minted on the marketplace instead of the project’s native website.

An NFT consists of several traits, each with its own rarity score. This affects the NFT’s overall rarity score, which impacts the selling price. The rarity score can be checked here.

If my minted NFT is rare, I will sell it at a premium, otherwise, I’ll sell it at the floor price. I typically aim to sell my minted NFT by the next day, disregarding future price action, because I want to free up capital to rotate elsewhere (Harmony farms). Luckily, my minted NFTs were rare and I have since sold all of them (cost basis of 19.83 LUNA) for 103.3 LUNA. More than 5x overnight – pretty decent!

For those who are interested, the next few Terra NFT projects that I have shortlisted are:

• Soulhunter
• Exo-Terra
• Hero
• Styllar
• AnubisClub
• no gods
• Astronorcs
• Terrans

Reflections

No one knows if the NFT industry is here to stay (like the luxury watch industry) or if it’s just a massive bubble, reminiscent of the tulip mania.

But what I do know for sure, is that people are willing to pay exorbitantly high prices for it right now. Returning to the 3 Terra NFT projects that I minted, even if your minted NFTs weren’t rare and you ended up selling at the floor price right after minting, you would have made a minimum of 76.9 LUNA, which is a reward of nearly 4x overnight.

Considering the downside, people view NFTs as ‘risky’ because of their volatile prices. If the NFT bubble were to pop one day, it will also be nearly impossible to cash them out as they are very illiquid. But my strategy of selling my NFTs right after minting it to lock in my capital gains means that I will be unaffected by such a crash.

With the risk/reward ratio skewed so greatly to the upside, this is perhaps the most asymmetric trade I have ever executed, and I’m looking forward to future NFT launches.

To the NFT skeptics, I hope this article addresses the concerns that you have, and it’s fine if you remain unconvinced as NFTs are not for everyone.

For the NFT believers who are unsure of where to begin, I hope my strategy outline is informative enough to get you started! Don’t be afraid to try – the more you experiment, the more you learn!

Cheers 😊