Should you invest in NFTs?
Well, it depends
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Now onto this week’s post…
One of the prevailing narratives of 2021 was that NFT floor prices run counter to the price of ETH and other fungible tokens.
When ETH prices (in USD on the left axis) would drop, floor prices (in ETH on the right axis) of NFTs would rise, and vice versa. It almost became a truism that could be reliably counted on.
Yet, in 2022, this narrative has been flipped on its head, with ETH and NFTs now highly correlated:
What’s going on here and should it change how you think about investing in NFTs?
Let’s dig in.
Addressing the bear in the room
The most fundamental difference between 2021 and 2022 is the wider market downturn.
Nearly everything is down in 2022, and not just in crypto. Tech stocks have been pummeled. Index funds look bleak. Everywhere you look, there’s a lot of fear in the air. And whenever there’s fear, investors are much less likely to put their money into the riskiest assets.
Some NFT projects that were lauded in the past are beginning to lose their luster:
Cool Cats were once considered a “blue chip” collection—in the same conversation as BAYC, CryptoPunks, Doodles, and others—trading for an average of ~17 ETH back in January, to now having a floor price of just under 4 ETH (at the time of this writing). Still nothing to sneeze at for an NFT that originally minted at 0.02 ETH, of course, but now struggling nonetheless.
Crypto Covens were praised, with some even saying they may be the next BAYC. Yet they went from trading above 3 ETH in January to nearly a tenth of that amount now.
There are countless other examples, as well.
Critics will say this is the natural progression of highly speculative assets. And they may be right in certain—or even most—instances. It remains to be seen whether or not the less prominent collections will be able to recapture their previous value.
There’s no doubt that there’s been a slowdown in the NFT market:
But there is clearly money flowing into NFTs still.
Where is the money coming from?
There’s a concept in gambling called playing with house money. The idea is that people are more willing to risk winnings from the casino than their own funds from their bank account. It feels less risky because if you lose the winnings, you’re just back to even. No harm, no foul. And you had some fun along the way.
Crypto is filled with people who are playing with house money.
They bought and held crypto for years and it has appreciated so much in that time that it doesn’t feel like money they earned by working for it.
The vast majority of people who are minting, buying, and selling NFTs right now during this downturn are those playing with house money.
Should you invest in NFTs now?
The answer is mostly a personal one. You can begin to answer by asking other questions, such as:
How risk-averse are you?
What amount of money are you okay with losing if an investment doesn’t work out?
Are you able to play with some house money of your own?
Are you investing with short or long-term growth in mind?
Despite the overall bear market, there are still opportunities to make a profit in the NFT market.
The goblintown project (shown in the above tweet) seemingly came out of nowhere. It went from a free-to-mint drop of 8,999 NFTs on May 22nd to a current floor price of over 5 ETH two weeks later.
Okay Bears has leaned into the bear market by including it right in their name and sharing lots of bear-related memes and puns. To date, the collection has appreciated over 73x, going from a mint price of 1.5 SOL up to a current floor price of 110 SOL.
Last Thursday, I minted a relatively under-the-radar project called Streetlab. The entire collection of 4,444 NFTs sold out in less than two hours. I was able to recoup my minting costs in ETH a couple of hours later and two after that I sold another one to book a small profit. I’m holding my rarest NFT to retain my access to the community and future drops as I watch the project progress.
Another free-to-mint project called We Are All Going to Die, which plays off the wagmi (we’re all gonna make it) meme, showed up late last week. It was minted straight from the contract and has no website, no roadmap, and only a Twitter account. I was late to the mint, but I bought one on OpenSea at 0.105 ETH. I saw the floor price get as high as 1.44 ETH before it started coming back down to earth. I sold at 0.75 ETH and now the floor is headed back up over 1 ETH again.
Of course, not every NFT project is going to go so well.
Recently, Crypto Packaged Goods, a web3 alpha community, did a mint called CPG Pop. It was hyped up as being the next big NFT project, with a steep mint price of 3 ETH. The collection has since experienced a precipitous drop down to a floor price of just under 1 ETH.
Local Weather was another hyped project backed by NFL quarterback Russell Wilson and NFT influencer AJ Vaynerchuk. Its goal is to build a community—and raise funds—for a new, healthier sports drink. They struggled to get anything going with the mint and had to re-launch it with a lower supply. The floor price has remained essentially flat when compared to the mint price.
With fungible token prices down or mostly trading sideways (i.e. not really going up or down all that much), the trend I’m noticing is that the house money is flowing into new NFT projects, rather than more established ones. The hope is for them to become the next big thing or to appreciate enough to sell and lock in a nice gain before they move on to the next one.
There are certainly profits to be made in NFTs. You just have to find the right opportunities. It’s not for the faint of heart and it’s not always easy to locate them, but they’re out there.
Other Recommended Reads
The early history of NFTs: Curio Cards
Amy Castor and David Gerard take us back to an NFT collection that pre-dates CryptoPunks by six weeks
Metaverse Land: What Makes Digital Real Estate Valuable
Scott Duke Kominers from a16z digs into the details and nuances of digital real estate
Why was the Solana blockchain halted?
Stakewiz, a site that tracks Solana validators, writes a tweet thread about why the Solana blockchain was down for several hours last week
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Thanks again Lyle, I appreciate you sharing this info.