DYOR — Should I buy from secondary market?
If you’ve been following this series and have read this and that, then you might understand why people who just start out in NFTs do not participate in secondary sales and instead only focus their attention on minting via whitelisting.
Minting and getting whitelisted is the easiest and risk-free method to earn money within the NFT space right now, and it will continue to be as long as minting and whitelisting exist. Not to mention, it’s a safe way to learn how the market works. However, if you have an initial amount, want to skip through the hustle of earning the whitelist, and do not want to fight in the public minting phase, then you will be like the ‘rich kids’ trying to participate in secondary sales.
Just to recap, secondary sales technically begins right after someone list the NFT on a secondary market (at the time of writing, OpenSea is the biggest NFT secondary marketplace). While textbook tells us that any sales that occur in a secondary market is called a secondary sales, all those who have participated in a secondary sale and exchange will know that for any particular NFT project, the secondary sales only start to gain traction once the project is fully minted out.
Participating in the secondary sales is a totally different ball game because you are subjected to the floor price of the NFT project, and you have to weigh out carefully it’s potential to bloom. It is a little bit like this post where I talked about long term success of a project, but today, we will explore the risk involved and how we can circumvent it.
Risk: Money, a lot of money
Consider minting an NFT at 0.05 eth.
The smart NFT trader who believe this is a normal project that will fly would likely mint as many as he/she can over whitelist and public mint — let’s say the trader buys 5. Wait out till moments before art reveal to sell them at 0.5eth, then re-purchase them back from the floor price at 0.4eth once the price dip post reveal before holding until it bloomed into it’s full potential.
Reference post on holding long term: here and here.
Also, quick segue way to floor price. Floor price is the current cheapest price of an NFT collection. Most NFT have some kind of rarity based on design, or the utility it provides, and/or also because it is a free marketplace, there’s often a price range on the secondary market. Most NFT traders would just make trading plays with floor NFTs.
Here, we’ll do some calculations:
Cost price: 0.05eth * 5 NFTs = 0.25eth, and you hold 5 NFTs
Initial profit: 0.5eth * 5 NFTs = 2.5eth
Profit after re-purchase: 2.5eth - (0.4eth * 5 NFTs) = 0.5eth, and you hold 5 NFTs
Give the project 1 month and indeed, it did fly. The floor price is valued at 1eth. But you still believe that it could still go for more, so you held on.
Now, introduce the rich kids. After the project flew at the 1 month mark, it caught the attention of the rich kids, they, too want to enter, and decided to buy 5 off the secondary market at 1eth each.
Cost price: 1eth * 5 NFTs = 5eth, and rich kid holds 5 NFTs.
Will the project do well after this 1 month? Only the team, the community, and the general public could decide.
Given that it does well, and floor price will continue to soar and let’s say it goes to 4eth. The minter would have profited 20.5eth while the trader would have profited 15eth. You might think that this probably isn’t looking good for the rich kids who purchased on secondary market, but here’s where the rich comes in.
In this example, the rich kid only bought 5. What if he bought 20?
Cost price: 1eth * 20 NFTs = 20eth, and rich kid holds 20 NFTs.
Profit at 4eth floor price: (20 NFTs * 4eth) - (20eth) = 60eth in profit.
It is a simple calculation, but you could see why rich kids who make the right play in secondary market could easily make a windfall out of a play. And with this, you could also appreciate better why less capital would encourage safer plays like whitelist minting and public minting because if your capital is not big enough to make big plays in the secondary market, it really is unnecessary risk for almost similar profit.
At these are good and exciting, but the reverse is also true. If the project ends up regressing to zero, the minter only stands to lose 0.25eth for 5 NFTs, but the rich kid will lose 5eth for 5 NFTs. High risk, high reward — but you need high capital to even begin dreaming about it.
How, then, could budding rich kids maneuver around these high risks?
Observe how information affects price over a couple of cycles
Not all information are the same, and not all same information generate the same effects. There are many things are play here, including the general market performance, community’s belief in the project, and hype. But it may be good to observe how often price-influencing information is released and how much it affects the floor.
The best way to get this sensing is from the project community itself — Discord. Hear what the developers are saying, how the marketers are relaying the information to the public, what how the founders are involved. Then, also keep a look out for external responses to it, else it becomes an echo chamber. Here what people who did not mint or hold their NFTs are perceiving the information and watch how it performs.
Go for short term margins on dips, and alpha
With these information, I would also encourage buying and selling on short term profit margins. Do not hold unto your NFT bags, unless of course, you are a lazy trader like myself.
Capitalize on dips that happen on bullish or established projects because of poor market performance. There will always be people who will rotate out of the illiquid NFTs into more stable plays like coins when the market is doing poorly, thus the price drop. These dips are good to enter, and exit when the general market performance improve.
Also, be on a look out for alphas, what we call exclusive information. Sometimes, owners like to make announcements on features or updates that’s about to be public soon, but the discord gets the first wind. If you believe this information to be bullish, you could buy in and wait for the pump. But exit quickly because information pump usually would die down after a few hours/days of inactive communications and updates.
Money you could lose and prepare stop losses
Like any NFT trading/investment, only spend the money that you can afford to lose. Especially on secondary markets, you must be prepared for your information and expectation to fail you, and have a limit where you would want to stop your losses.
There are two common train of thoughts. One, you are already prepared to lose the money that you put in, so it doesn’t matter if the value continues to drop, you will hold out for a miracle. Another is to have a limit where you will begin selling your NFTs even if it means you will lose money selling them all.
Only trade with the money that you can afford to lose.
So this concludes the DYOR series. In the next series, we will spend 3 weeks to zoom in to take a look at advanced NFT topics like contracts, transactions, and gas.
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