What you need to understand about NFTs when you start!
“Where do I start” is the most common question I see asked, but probably the hardest to answer. What I won’t cover in this entry is the act of setting up your wallet and getting Eth; that’s covered in plenty of places. Instead, I’ll dive into where to start with thinking about the non-fungible token (NFT ) space. I’ll talk about some key pillars to think about, that’ll pave the way to having a look into different projects in the world of NFTs. I’m also going to continue to explore NFT trading strategies (but that’ll be in a future entry).
As you’ll work out after spending a short time trying to learn or understand world of NFTs… there is a lot to it! The only true recipe for success is to take time to learn. Sorry if you were expecting a silver bullet. I will share some shortcuts though!
Before we start the tour of what types of projects there are in the space and understanding the learning curve, I wanted to pause. Let’s take time to talk about some general principles that guide any new industry (as NFTs are no different). I feel it’s important to set the scene. There are 3 key pillars we’ll explore and then get into the ‘good stuff’.
Curve of adoption
When you look at the adoption of any phenomenon there is a curve associated with how many people want or use anything. The curve is one many might have heard about, the normal distribution or bell curve. It represents the statistical distribution where members of a population might sit. More people are located in the middle with less at the extreme ends. You might have heard of expressions ‘going with the majority’ or ‘being a sheep’? These come from the idea that humans naturally tend towards conforming to the norm with only a select few either being early to change or very resistant to it. Looking at the rough groups under the curve there are early innovators stage, early adopters, early majority and then late majority and laggers stages.
Why is this important? It informs the pattern we see for adoption of anything new. ‘Oh, like NFTs as an industry?!’. What we’ll see is there are always going to be people who are keen to try out something new. This is normally because they either see huge potential in it or it the technology or product fundamentally solves a problem in their life. Basically, it adds value to them and they’re willing to take a leap. Accepting that because things are early it’s not going to be perfectly refined or as established as it might be later but the desire to get in early and be part of it can be a powerful draw for some.
However as you’ll notice, not everyone has taken the leap into NFTs yet. That’s because we haven’t made it to the point where the majority of the population is willing to adopt it. At the moment, this is due to a combination of factors but put simply, it’s because the value-add isn’t directly accessible right now and the barriers to entry are too high. When we look at our picture of a curve, for anything to make it past the early stages there are a lot of people a new technology needs to appeal to. Basically meaning they need to see that the value is worth adopting or changing. They’re not going to just use it or change their ways ‘just because’. Bridging this gap and creating appeal to the masses is commonly referred to act of ‘crossing the chasm’. It is a challenge that lots of products, industries and even populations wrestle with when it comes to changing behaviours.
When we look at the NFT industry, and the projects within it, there are enough things that people still need to wrap their heads around. Lots of barriers to entry and kinks to work out that lead to it being described as it being ‘so early’ as an industry. When you look at all the people in the world who not just have crypto but have access to the internet, that’s the size of the potential market. So, even looking into NFTs now means you’re in the first few percent of the population. I think that’s pretty neat.
As it is early, this means there are lots of opportunities still too. It also means though there is a risk with the industry as a whole. There is no guarantee that’ll it’ll achieve the ‘chasm cross’ and become mainstream. It’s well on track for that certainly, but what the normalised state might look like is anyone’s guess. So it is risky at the moment because we’re still refining things as an industry and this has both upsides but also downsides.
Supply and demand
This is the underlying economic principle that runs a lot of the world. I’d define supply as the amount of something there is to distribute among a population. Demand being how much people want (or need) the item or basically how desirable something is. The result of the supply vs the demand is the price that something is worth. If there is lots of demand and only a few of an item, then its value goes up (and maybe a lot). If there are only a small demand for something and a large supply then the price will be driven down (assuming the seller still needs to sell). Yes, there are other factors that determine how the financial markets of our world operate but it’s a good rule of thumb to keep in mind.
To extend the adoption curve conversation from above there isn’t the same level of demand that there might be in the near future. As we are still building towards having a majority of the population interested in NFTs (and crypto) there are more people coming.
What does this mean? Well, right now because the number of people looking to buy projects is lower there might be less competition for assets and as more and more people find their way to the space the demand will increase. This means too when there are more people the types of demand that exist might change. Instead of just wanting ‘an nft’ the demand might shift to the more desirable or ‘blue chip’ (top tier) projects. So the competition for those might be high thus the value increases but the ‘average’ projects decrease as there is less $ or Eth to be spent on them. The fascinating part is though, and this is especially true with art, not every project will be desirable to every person. One person might not like the same projects as another.
So weirdly, more people can also mean more projects can succeed (and also probably be made). Generally though, I’d argue only the best ones will thrive and create that supply and demand trade-off which results in prices going up.
Time horizons and price volatility (support & resistance)
As we are early in the adoption cycle, and with the nature of crypto, the markets at the moment are very volatile. So let’s bring in the final bit of economic theory (and I’m not an expert) which is to look at how markets behave over time. Price of assets or shares or stocks change in value over time, shocking I know! Within an established market at any point of time there is a bunch of people looking to buy and a bunch looking to sell (assuming the market is healthy). There are always cycles in a market, sometimes it trends up and other times it trends down, there is a whole field in economics that explores this very concept and you can learn lot more about it if you search for ‘technical analysis’.
I won’t get into the whole theory behind it (because honestly I only started learning about it in May 2021) but the general thing to keep in mind is when assets spike upwards (and sometimes this occurs aggressively) there will always be a point where it stops comes back down again. How far it rebounds and normalises depends on how the market is viewing its value.
There are these things called lines of support and resistance which are points which the price of something struggles to move through. Support for something that is falling in value and is a point where committed buyers will buy up any assets that are being sold. Resistance is where buyers are hesitant to buy for more than this price, due to thinking the asset is overvalued.
At a theoretical level this is simple enough. Where it gets complicated, and this is especially true when looking at NFT projects, different people have different time horizons. The assumption is that everyone is looking to invest and make some money from a market (if you’re not it’d be fascinating to talk to you, reach out). Assuming this, there are going to be different strategies to get returns. As with other markets and stocks, NFTs and Crypto are governed by roughly the same behaviours. Some people are looking to day trade (they want to take instant profit or losses), others are in it for a 20 year investment (they’ll buy and hold ). You may have heard the term hodl (hold on for dear life) as a common crypto term for not selling and riding it out. Others sit in the middle buying and selling when make sense for them. It all depends how much you want to risk and how actively you want to trade.
As a general rule people don’t like losing money, that might be obvious, but how this plays out depends on what ‘losing’ looks like. For a day trader if they buy in late and see the project and start going down in value they’ll panic and rush to sell to cover their losses, this can snowball with lots of selling and under cutting of prices. [reword] The trend towards lower prices will continue while people want to sell until they either can’t and are forced to hold or the longer term focussed believers kick in. The belief that the project is undervalued will act as resistance and buyers will start ‘snapping up deals’ which can make it stabilise. When you compare that to a longer term investor who buys into the project because they believe in it long term and don’t really care about the fluctuations knowing they’re making decisions over a longer time window. The thing to think about is; over time, where will those lines of support and resistance fall? How long are you willing to wait for a profit to yield and how confident are you in the project to return that value?
At a practical level, price increases occur and they’re likely to flatten out a project’s growth and then start dropping again. In my experience, the more aggressively the project goes up, the more likely it is to fall again soon and find its new normalised price point. The projects that have a more sustained growth and increase gradually over time, have a better chance of returning longer term value. While others that spike aggressively can tell you that they have lots of attention right now but might lose that just as quickly and crash out. Some recovery but many don’t.
The real point I wanted to highlight with this concept is that the market unpredictable and goes through ups and downs. What is important to think about is what your time horizon is like for buying and selling. As it is ‘so early’, it’s hard to know which projects are going to be around in a few years time and what you’ll be able to retain your value with. A caution I want to repeat is you should only invest money where you’ll be okay if everything goes to zero. As things are unpredictable and can go from being ‘the latest hotness’ to not being worth anything in the space of a couple months, it’s important to not over-leverage yourself. The last thing you want is to be left holding the bag because a buying risk you took didn’t play out.
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Alright, to recap these key conceptual pillars
- Adoption curves are important when looking at take up of a technology. In NFTs we are so early which means there is lots of change and innovation
- Supply and demand drives the price action of most thing, with more people hopefully coming the value of good projects will grow
- Timelines and price volatility play into how people decide to trade and view projects. There is lots of risk and people will be unpredictable but there is also chances to get some great deals if you see value where others haven’t yet.
Although I haven’t talked too much specifically about what you need to look for in NFTs, the main theme I’m attempting to highlight here is know what your goals are for the space and appreciate what ‘being early’ means. It’ll impact how you should think about playing the game and where you place your bets for future investments.
If you like what you’ve read here there will be more coming very soon! I’m going to dive into the different types of projects that exist (or at least the way I see it) and try and give some tips when it comes to ‘doing your own research’ (DYOR) and different trading strategies.
