Why NFTs Can Be a Riskier Investment Than Cryptocurrencies

Investors who survived the 2008 financial crisis know the importance of liquidity. When an economic recession begins, deflationary pressures hit the market and buyers disappear. Sellers are desperate to get out of assets before their prices continue to fall, but buyers want to ditch risk and turn to safe assets like government bonds and money market funds.

The lack of liquidity associated with non-fungible assets is the only reason investors think they are riskier than cryptocurrencies. When an investor wants to sell Bitcoin (BTC), they can easily sell to a list of buyers at various prices. If a seller doesn’t sell his bitcoin today, he can easily come back tomorrow and part with his bitcoin in favor of willing buyers.

Instead of this, Non-fungible tokens (NFTs) are unique, and it is much more difficult to match sellers with buyers. Cointelegraph Research examined the liquidity of NFTs and examined whether some collections were trading more frequently than others. Cointelegraph Research will publish its first NFT report in October to answer these and many more questions about the risks associated with NFTs.

What does liquidity mean in the context of NFTs?

Why NFTs Can Be a Riskier Investment Than Cryptocurrencies
Why NFTs Can Be a Riskier Investment Than Cryptocurrencies

There is no market for images of the “Mona Lisa” because there is only one “Mona Lisa”. Likewise, NFTs have low liquidity compared to fungible currencies. One reason is that collectors often want to keep their NFTs instead of trading in speculative markets. Another reason is that NFTs trade bilaterally in the markets, with a small pool of potential participants for each sale.

For example, a particular player’s sports card NFT may only be claimed by a subset of collectors. Also, not all NFTs are perfect replacements for other NFTs. For example, if Mike wants a 1988 Michael Jordan NFT for his birthday but gets a 2014 Lebron James instead, he may not be too happy. Because of the difficulty of comparing the various NFTs offered by sellers and the small number of offers from buyers, there is a small number of total transactions. This low trading volume makes it more difficult to determine the value of each NFT.

For fungible assets such as stocks, liquidity can be measured by dividing the total number of stocks traded during a given time period (e.g. a month) by the average number of stocks outstanding during the same period. The higher the share turnover, the more liquid a company’s shares are. But how do you measure the liquidity of a single non-fungible asset?

For markets with a low transaction volume per item, such as For example, real estate or collectibles, the two most important types of liquidity metrics are “time-to-market” and “level of transaction activity”. For example, real estate liquidity can be measured in terms of the average time between when a house is listed and when it is sold. In relation to NFT, this would be the “mean time between the listing of the NFT on a secondary market and its sale”.

Corresponding Gauthier Zuppinger, COO of NFT’s data source, NonFungible.com, Time-to-market is difficult for NFTs to measure because “thousands of assets are trading at extremely high prices (some punks are trading for billions of dollars), waiting for the right moment, or waiting for a whale to do this, lots of people Don’t “list” assets, but are open to offers. “

The second type of liquidity ratio calculates the level of transaction activity. For example, NonFungible.com measures the liquidity of NFTs by the percentage of the total supply of a particular type of asset that has been held in secondary markets. This can be calculated by dividing the volume of unique assets traded in the secondary market by the total supply available for each type of asset.

Thus, the answer to the question, “Which NFT collection is the least traded?” it’s meebits. Meebits is one of the least liquid collections, over 66% are not even sold. Interestingly, the majority (57.7%) of the CryptoPunks were only sold once or less.

Cointelegraph Research’s October report on NFTs explains how to evaluate different types of NFTs and discover interesting NFT collections before they go mainstream. The report also looks at the dark side of NFTs, including their environmental impact and lack of liquidity. The report is supported by projects such as Enjin, OneOf, Nansen, Mintable, Alien Worlds, Animoca Brands, NFT Bank, The Sandbox and Pinata.

This article is for informational purposes only and does not constitute investment advice or analysis or a solicitation to buy or sell financial instruments. In particular, the document is not a substitute for individual investment or other advice.

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