Why capital efficiency is important for NFT investors and how to benefit from it.

or is it?

Even if you are new or experienced in the NFT market, we all have minor fundamental pillars of why we invest in a project. We want capital gains. I have yet to experience someone say: I’m here to waste money (y, if you are a nitpicker there are wash traders, but their goal eventually is to get even bigger gains) — so this article is based on this simple assumption.

One of the key ways to survive as an investor is to understand risk management and find your own threshold and style. I’ll not cover it in this article, and if you’re not familiar with it. I’d advise you to stop reading and go back to the basics before continuing this read.

So, if you’re still following: Let’s ramp it up a little now.

What is the main difference between fungible and non-fungible investments?
The power of freedom and efficiency.

If we isolated these aspects of those investments, any advisor would suggest buying fungible assets. At any time you can re-adjust your investments and be liquid to changes. But, if you’re reading this, you probably understand that a NFT is more than a jpeg and if invested correctly, you’ll diverse and ramp your investment portfolio massively.

To newcomers in this space, I often compare non-fungible assets as investments in stocks, real-estate, rare collectibles and utilities, such as a sailboat. If invested correctly, the value increases over time, but the downside is that it’s not as liquid as cash. So, if you have 1000$ to spare each month — you’re quite limited and locked.

Why is this a bad thing? We know that the crypto space is in a rapid development, meaning that for each day we wake up, we will be exposed to solutions / good investment opportunities. If your portfolio is locked into NFT’s you have mainly two options if you want to jump on an opportunity.

a) sell NFT at floor-price or b) deposit fresh fiat into your web3 wallet.

Depending on market conditions, both options could be a profitable move, but to make sure: an option

c) lend against your NFT — could make you capital efficient. Ill summarize with four assumptions below:

1. It fosters adequate decision making.
2. Better control over investment portfolio.
3. Stabilize ups and downs.
4. Tax-efficient.

(1) It fosters adequate decision making. Instant liquidity or freedom, gives headspace to evaluate and reflect on investments.You’ll be able to tweak and test hypotheses, dip your toes into projects without feeling the need of rushing to add fiat money when the $SOL price is above your threshold price or sell your winners too early.

(2) Better control over investment portfolio. You’ll be able to manage your portfolio better. You can list NFT’s at a reasonable price and sell to the right seller. A loan gives you liquidity to re-adjust your portfolio and leverage or de-leverage your position to the current market condition. You’ll be able to ride with the wave, not against it.

(3) Stabilize ups and downs. When the market is going up, you’re filled with endorphins and the feeling of euphoria. It’s a good feeling indeed, and a state many want to achieve. But, is it a good state for decision making? No. Most ppl don't realize its time to sell in this state. The same if we turn it upside down. The lows of a market crash makes you vulnerable to bad decisions. By being capital efficient and loan against your NFTs, could give you more control over the ups and down. There is a big “could” here, since if you’re misusing the efficiency and over-leverage yourself. This will be your worst nightmare. That’s why I have a big disclaimer about this later in the article.

(4) Tax-efficient. Many (me included) have overseen this (in my case, ignored it) but at some point, I have to tax my gains from selling a project with 10x gains. What have I done with these gains? Re-invested them into other projects. So, when the tax bill arrives, I’ll have to sell something and be less capital-strengthened. Most governments have 0 taxes on loaned assets, so if used wisely, you’ll grow your bag smart and faster. DYOR on behalf of your circumstances.

So many good assumptions, so why doesn’t everyone do this? There must be a catch?
Yes, indeed. It’s not risk-free, and ill summarize it into three main factors.

1. It’s pricey
2. Over-leveraging
3. Smart-contract risks

(1) In the Solana ecospace, we have seen many offspring's of protocols promising loans against your NFT. At this moment of publishing there is only one protocol issuing loans and it’s at 10% fee (interest rate) and a 7-day payment time. It’s still early and the ever growing competition will force the price and length. But, if you consider it, pricey is relative. Selling your rare NFT at fp < selling your rare NFT1.2 sol above fp with .3 in loan costs.

(2) Even the best analysis will fail. The market is like nature, an external force that can surprise you at the most unpleasant time. Always make sure that you’ll be able to cover costs. Always ask yourself: what do I do if my plan fails? Have a backup solution. Source of income. Which asset do I sell? It’s about stop loss. Biggest disclaimer from my perspective.

(3) Smart contract are generally the most vulnerable points for cyber-attack and technology failures. Like any other software code, smart contracts require robust testing and adequate controls to mitigate potential risks to blockchain-based business processes. This is why I would advice to research projects before aping into fresh protocols with your Taiyo.

I hope that you, as a reader, feel more educated about the powers and risks of being capital efficient through borrowing against your NFT’s. Even if you’re not comfortable about using the tools for yourself, I hope that you can see the value of protocols issuing these services. It might be a clever investment. Especially considering the assumption (4) about taxes.

I’d love to write more in-depth articles about topics covered in this article, so please comment on aspects you’d love to read.

Never ever have I had a dream to become a financial advisor. Therefore I am not a financial advisor and you should do your own research and not just listen to random people on the internet. Nothing contained in this publication should be construed as investment advice- its just for educational purposes.