How To Not Be An NFT Bag Holder
Let’s start the new year off on the right foot and get right into some content that is sure to save you from losing money this year. When it comes to NFTs there are many ways to lose money. In this article I'm going explain the single most common and difficult to spot mistake that makes most people incur losses trading NFTs.
With that said, unless you’re completely new to the NFT space, you probably have some understanding as to the wide range of scams that take place in this space. Every single day scammers come up with new and novel ways to take your precious JPEGs from you. Some methods are as simple as outright asking you for your seed phrase while some are much more complex and involve a whole social web of scammers working together to try and trick you into believing that they are someone else, such as a Discord mod or an influencer. However, a very small percentage of participants in this space actually fall for these ploys. Instead, you are statistically much more likely to lose money due to poor investment decisions. One specific investment decision is the focus of this article, and that is FOMO.
If you are not familiar, FOMO stands for ‘fear of missing out’. It’s that feeling that you get when you see everyone on Twitter talking about this new project that is rising in price and everyone is talking about how much money they are making. This feeling is actually a cognitive bias that all of us are susceptible to, and it’s generally characterized by an underlying feeling of fear when we think we might miss out on a profitable investment. In order to subdue that feeling of fear most of us make let emotions take over and make investment decisions that we otherwise might not have made. Sound familiar?
The thing that will make you lose the most money, undoubtedly, is FOMOing into NFT projects with little to no research during periods of massive hype.
This type of behavior exposes you to tremendous downside risk. Read that again and write it down somewhere else if you have to.
What you need to understand about the NFT market is that for every single transaction there has to be a buyer and a seller. So for someone to make huge profits on their NFT investment there has to be someone else on the other side buying it from them. The availability of both buyers and sellers is also known as ‘liquidity’ in crypto trading. The problem with NFTs is that it is a very illiquid asset, meaning that its not very easy to sell an item if there is no demand. The problem becomes worse in that if there is no demand, you really only have two choices: HODL and hope the price goes back up or sell at a loss. Both scenarios are undesirable as you are exposing yourself to a lot of downside risk.
But Demetri, everything is risky! That’s true, I never said that NFTs weren’t a speculative or a risky investment. However the problem arises when people expose themselves to too much downside risk in a trade. What do I mean by this? Lets consider this thought experiment.
Suppose you minted an NFT for 0.08 ETH and the project has a solid roadmap and the price slowly starts going up after the mint sells out. At this point you are sitting in profits and your downside risk is minimal. At worst, the project goes to near 0 due to some catastrophic screwup and you lose 0.08 ETH. That might suck but its not catastrophic. But lets say that same project is now worth 5 ETH and you keep seeing how there is an amazing airdrop coming up for all NFT holders. You see that tons of influencers on Twitter are talking about how awesome its going to be. Every single holder of that NFT you see on Twitter is raving about how the project is going to the moon and everyone will be rich. Suppose you buy that project at that point in time, say a day before the airdrop. Your downside risk at this point increases exponentially due to one important factor, supply and demand. You are purchasing at the point during which the demand for that NFT is at its highest. When demand outweighs supply the price generally rises. In NFTs this creates parabolic jumps in price which look amazing on paper but are very short lived. So what happens when all of that demand suddenly dies off after the airdrop? People rush to sell their NFTs as the airdrop has now been claimed. And that is where you become a bag holder.
In order to make sure this doesn’t happen to you, follow these principles. First, always check price trends before purchasing an NFT. There are ALWAYS periods of accumulation where prices are comparatively cheap to where the peak was. If you truly believe in a project these are the dips you want to buy. If you notice the project is very inflated in price or at an all time high make sure you ask yourself if you are prepared to expose yourself to that much downside risk. If the answer is no, then you are simply gambling if you spend that money. Second, take the time to understand why a certain project is going up in price and learn to evaluate projects for yourself. Just because a bunch of influencers are talking about how cool some NFT is, that doesn’t make it inherently valuable. What makes something valuable are things like cultural or historical significance, novel utility or something which clearly sets the project apart from others. Once you learn how to evaluate projects on what they bring to the table rather than how ‘popular’ they may seem you will become much more profitable.
Sell into greed and buy into panic if you truly believe in the long term prospect of a project. Finally, always make sure to assess the potential downside risk of your investment prior to buying an NFT in case the demand suddenly drops off. If you follow these principles you are instantly going to be a much more successful investor.
Talk soon.
