The NFT market moves faster than any other financial market in the world—by a large margin. NFT prices have been known to shoot up 60x in a few days and then end up negative by the end of the week. These fluctuations can be caused by nothing more than a Tweet or two.
Knowing how to take advantage of this phenomenon is absolutely vital for the successful trading of NFTs. It can often be even more important than finding the best projects “on paper.”
Volatility in the NFT Marketplace
A few factors mostly explain the market’s volatility, the most important of which is likely the small size of NFT collections.
The NFT market is still tiny compared to the U.S. stock market or even the cryptocurrency market. Volatility is magnified because most collections have a supply of 10,000 or less. That means it takes far fewer trades to increase or decrease the floor price of an NFT than a relatively small cryptocurrency.
Some stocks are extremely volatile too, but a majority of those are penny stocks with low liquidity available. Some exceptions, like Tesla, are complete aberrations for reasons that would take far too long to explain.
However, in the general sense, the smaller an asset’s market capitalization is (simply its price multiplied by its circulating supply), the more volatile it is.
It only takes a nudge in trading volume to get an NFT’s price soaring. But what do those nudges look like?
Well, most of them are Tweets.
“Buy the rumor, sell the news” is a common phenomenon that persists in most financial markets. Nevertheless, most people don’t know exactly what it means or how to use it to their advantage.
The phrase means that most of the price action happens when a rumor starts to spread about something that could affect the price of an asset. Investors are always looking for an edge, so they often base trades on breaking rumors.
We can use one of the recent rumors around Yuga Labs’s upcoming land sale as a great example.
For starters, read up on everything we know so far about the Otherside, Yuga’s upcoming game-changing metaverse project in NFTimes 18 – A Billion-Dollar Metaverse Land Sale? We started hearing rumors about it months ago, but the talk started to drastically intensify in the last week.
One of the most popular rumors was that holders of every NFT collection shown in the trailer for the Otherside would be whitelisted for the land sale. The rumor took off when the NFT Twitter influencer @WillyTheDegen Tweeted with utter confidence that it was in fact true.
It seems unlikely that Yuga Labs would decrease the public sale from 70k land parcels to 20-30k to do this. However, the low likelihood that this was true didn’t matter, and the values of nearly all the collections in the trailer skyrocketed.
Cool Cats, for example, went from a 5.5 ETH floor to almost an 8 ETH floor in less than two days. Likewise, Cryptoadz went from below a 2 ETH floor to a 4 ETH floor in a day.
These pumps didn’t last long though. Some of the collections’ prices wound up falling lower than before the rumor because people realized that the rumor was likely false, pushing them to panic-sell.
This happens quite often in NFTs. The market is ridiculously quick, which can be a massive benefit or detriment, depending on an investor’s trading ability, knowledge, and luck.
Hold the Rumor, Hold the News?
NFTs are a wild rollercoaster of ups and downs where thousands or tens of thousands of dollars can be made in days, hours, or even minutes. It’s important to remember that NFTs can lose value just as fast as they can gain value—maybe even faster. However, investors don’t always trade all of these pumps and dumps.
Traders who spend a decent amount of time researching a project and understanding the market may prefer to stick with longer-term NFT investments. With enough work and research, it usually isn’t too difficult to find a few projects that are bound to do well in the future. This can prove safer than short-term flips.
Anyone who bought or minted a Bored Ape early, and held it until today, could have easily profited more than half a million dollars. Long-term, high-conviction traders usually don’t care much about short-term rumors and pumps.
That isn’t to say that frequent trading is a bad strategy. Short-term flips can be extremely profitable. However, it takes more knowledge of the market, its tendencies, and trends to turn a decent profit—along with some luck.
The high volatility in NFTs makes trading volume one of the most important metrics in NFTs. Volume matters in larger markets too, but its effect on NFTs is more concentrated due to its illiquid nature.
A popular and often successful strategy for short-term trading is to sell NFTs into volume. Spikes in volume usually happen before most holders of a collection notice and list their NFTs for sale. This can move the price much faster than if everyone was paying attention.
Once holders start to notice though, prices will often quickly pull back to a more reasonable level. Learning how to guess when the price hits its short-term peak can mean the difference between extremely profitable short-term trades and consistent losses. One of the best metrics for this is sales versus listings. Some paid NFT data platforms give you exact figures, but they aren’t necessary.
Usually, all you need is the collection’s activity page on OpenSea. Filter out everything but listings and sales and compare the sales to listings at or below the floor price. If sales are outpacing floor listings dramatically and consistently, that signals it has a decent chance of moving higher in the short-term. If floor listings start to overpower sales, the price may have reached its local top.
Buy, Sell, or Hold?
Even with the best strategies, NFT trading is still a crapshoot. The market’s immense volatility creates opportunities for both generational wealth creation and legendary destruction.
Learning the most successful metrics and strategies is likely the best way for traders to gain a significant edge to improve their odds.
Do you want to learn more about NFTs and keep up with the rapidly evolving market? Check out some of our favorite editions of The NFTimes:
- Read up on everything we know about the upcoming massive Yuga Labs land sale in NFTimes Volume 18 – A Billion-Dollar Metaverse Land Sale?
- Learn how Kevin Rose and Moonbirds changed the game in NFTimes Volume 17 – The Dawn of a New Era of NFTs
- Find out how easy it is to start your own NFT project in NFTimes Volume 16 – How To Start An NFT Project By Yourself
Keep up with Henry and NFTs 24/7. Join him in AlphaMint’s dedicated NFT Discord server.