NFT Trading Strategy – What Is It? (Backtest)

Last Updated on October 19, 2022 by Oddmund Groette

NFTs are currently making the headlines in the digital art and collectibles world. Imagine purchasing a piece of artwork online at a discount and then getting your initials stamped on it to show you are the intellectual owner of the artwork. Wouldn’t that be a great thing? This is similar to what you get with NFTs. But what exactly are NFTs?

NFTs stand for non-fungible tokens, which are unique cryptographic assets that exist on the blockchain and cannot be copied, substituted, or subdivided. Each NFT has a unique identification code and metadata that distinguish it from another, which is why they are non-fungible (not mutually interchangeable). Digital artists now convert and sell their artwork as NFTs.

In this post, we take a look at NFTs and potential strategies. At the end of the article, we make a backtest of the trading strategy.

What is NFT?

NFTs stand for non-fungible tokens, which are unique cryptographic assets that exist on the blockchain and cannot be copied, substituted, or subdivided. Each NFT has a unique identification code and metadata that distinguish it from another, which is why they are non-fungible (not mutually interchangeable). Unlike cryptocurrencies, like Bitcoin and Ethereum, which are fungible, NFTs cannot be traded or exchanged at equivalency. So, they cannot serve as a medium for commercial transactions.

NFTs can represent real-world items like artwork and real estate, as those real assets can be tokenized and become digitally identifiable. The tokenization of real-world tangible assets makes buying, selling, and trading them more efficient, with less chance of fraud. NFTs can also be used for verifying individuals’ identities (as in airline or sports tickets), property rights, and more.

Some notable characteristics of NFT are as follows.

  • Digital instruments. NFT is a digital security that represents collectibles such as music, art, games, and other forms of art with unique identifiers created on blockchain technology.
  • Unique. NFT cannot be duplicated, forged, or manipulated.At any point in time, any digitally signed token is owned by the owner alone.
  • Buying or selling. NFT can be bought with cryptocurrencies like Ethereum on a special marketplace like OpenSea.

NFTs also make it possible for many people to own parts of an asset. For example, many individuals can own different pieces of real estate as an NFT which is more reasonable than physically sharing the asset. Below are some examples of what NFTs can as exist today:

  • Domain names
  • In-game items
  • Games
  • Digital collectibles
  • Music
  • Photos
  • Essays
  • Sneakers and fashion brand designs.

Most of the NFT today exists on the Ethereum and Solana blockchains, which is a distributed ledger that registers transactions. They can be bought and sold just like other types of artwork. An NFT’s unique identifier makes it possible to authenticate and verify ownership and the exchange of assets between owners.

Which markets have NFTs?

As NFT keeps on making the big wave, a lot of money has flowed into the market. According to Chainalysis, the NFT marketplace has climbed more than $50B in 2021. The following are some of the popular marketplaces for NFTs:

  • OpenSea. OpenSea is one of the largest NFT marketplaces. It was launched in 2017 and hosts numerous arts, music, trading cards, and photography NFT. The primary cryptocurrency used on OpenSea is Ethereum, but others like Solana, and USDC are available though you cannot use fiats such as US Dollars or Euro. The perks of using OpenSea are that the interface is simple and can be easily navigated by beginners. Also, you can easily set up an account without the hassle and start buying or selling your first NFT. The platform charges a 2.5% fee on every transaction and also pays the gas fee for executing the transaction on the Ethereum blockchain. Some of the biggest projects by market capitalization on OpenSea include CryptoPunks, Bored Ape Yacht Club, Art Blocks, Sandbox’s LANDs, Cool Cats, and Vee Friends.
  • Binance. Binance is the largest cryptocurrency exchange by traded volume. It added the NFT marketplace in 2021. This makes it flexible for those who do not wish to switch back and forth from different platforms because you can trade crypto on its dedicated market and easily switch to the NFT marketplace right on the same app. It features the same types of digital assets such as collectibles found on other major platforms. Other platforms like Binance include Coinbase and Crypto.com. The most inviting thing about Binance is its relatively low fees. Compared to its peers, Binance charges only a 1% fee for the transaction. In addition, it is user-friendly and shares the same user interface as their crypto exchange. Additionally, it runs its own blockchain, giving it an edge in the market.
  • NBA Top Shot. If you love basketball, then the NBA Top Shot is the marketplace for you. It lets you buy and sell thrilling moments in basketball history. You can play highlights, and buy video clips for both the NBA and the WNBA. Although some of these moments come at a premium, you should be able to see one at a great price for you. The NBA Top Shot is created and managed by the NBA themselves, which means they have property rights to these collectibles. Moreover, since it is a great organization of high repute, there are lots of trading activities going on within it. Other marketplaces like this include the Associated Press and DraftKings Marketplace. As opposed to other marketplaces, a purchase can be made with your debit/credit cards or some selected cryptocurrencies like Bitcoin, Ethereum, USDC, and DAI. It should be noted that every transaction attracts a fee whether with a card or cryptocurrency.
  • Rarible. Rarible offers customers the opportunity to buy and sell collectibles with Ethereum, Tezos, and Flow in addition to a flat fee of 2.5% on every transaction plus gas fees. One good thing about this marketplace is that it has its own native token, which holders can use to vote on company decisions. Additionally, you can use credit/debit cards to transact via fiat currencies.
  • Magic Eden: This is the leading NFT Marketplace on Solana. It is home to the next generation of digital creators. The Solana network is known for cheap network fees, which is the advantage Magic Eden has over Ethereum-based NFT platforms. Top projects here include DeGods, Okay Bears, and Solana Monkey Business

What is an NFT trading strategy?

An NFT trading strategy involves the buying and selling of NFTs for profit. Just like flipping properties, you buy when you think the price is at the discount and sell when it appreciates. There are many possible ways you can deal in NFTs for profit. However, you need to research a particular collection to ensure it is worth something in the market. This is necessary because people will only value something based on the worth they attach to it. To get a glimpse of this, you need to join an online NFT community on Twitter and Discord. Although this may take a lot of effort, it is worth it considering that you may get a higher reward if things go well.

How long should you hold NFTs?

NFTs can provide a lot of profit potential if you do the necessary work. The holding period of your NFT collections will depend on many factors and these factors will change from time to time depending on the current market situation.

As with most investments, a material value increases with time. For example, in real estate, flipping properties comes with a lot of ifs and whens. You only sell to the highest bidder and chances are the longer the bidding time, the more you hope to make of the property. This is all true if the property has many interests from potential buyers.

For NFTs, holding for weeks or months could also translate to more profits ,and the collectible increases in value though this will depend on the rarity amongst other factors. The rarer a piece, the more value it has and what better than to hold it for some time.

In the short term, some pieces may actually be worth more now than later because we live in a world controlled by sentiments. If an NFT makes it into the spotlight due to social media influence, chances are that it is going to be valuable as long as the hype lives, and when the hype dies, its value declines very quickly.

By and large, how long you hold an NFT will depend on what is driving its value — social media hype or utility. Context is key when holding NFTs.

How many make money trading NFT?

The NFT space has opened up a whole new world to artists, enabling them to reach more than ten million enthusiasts. This means that their works get more opportunities to be bought than when it was in the gallery. As such, a lot of people have made more money selling things in the physical world that would not pass for a couple of dollars for thousands and even millions of dollars.

Another category of people that make money from NFTs is the traders who flip NFTs. However, NFT flipping is a zero-sum game — a few make money, while many lose money.

Successful NFT traders

The following is the list of some of the richest NFT collectors in the world.

  • WhaleShark. WhaleShark is a popular British NFT collector living in Hong Kong. He started investing in Bitcoin around 2015 and is considered one of the richest NFT art collectors.
  • Justin Sun. Justin Sun is the CEO of BitTorrent and the founder of Tron, a cryptocurrency platform. He rose to fame during the artwork challenge ‘Everydays —The First 5000 Days at the Christie’s auction. He owns a variety of NFTs to his name.
  • Eric Young. Young became an NFT enthusiast when he saw the ‘Picasso’s Bull’ animation created by Trevor Jones. He has been in the crypto market since 2015 and now search for artists with extraordinary talents to buy collectibles from. His NFT collections are over 300 and are worth close to a million dollars.
  • Pablo Rodriguez. Rodrigues is an NFT collector who began his journey in 2017. He made news when he flipped the $67k Beeple’s “CROSSROADS” to $6.6 million months after purchase. He holds more than 2000 NFTs in his collection.
  • Metakovan. Metakovan is a Singaporean programmer and the founder of many cryptocurrency companies. He was known for his record purchase of Beeple’s ‘Everydays — The First 500 Days for $69 million which became the most expensive NFT ever traded.

Potential strategies for trading NFTS

Some of the most notable NFT trading strategies are as follows:

  • Buying the floor. This is a simple technique of buying NFTs that are trading at their lowest prices. This is because you want to buy at a discount and reap more rewards when the price appreciates.
  • Purchasing NFTs with few sellers. An NFT with few sellers means that more people are holding and are anticipating the price to keep on increasing.
  • Following social media trends. As said before, social media is your best tool for checking how popular a piece is and also a way of knowing the sentiment behind a collection.

How to pick the best NFTs to trade

  • Market Cap. Estimating the size and market cap of a collection is one way to know the best-performing NFTs with liquidity. Since the marketplace is not as liquid as the crypto market, you should be careful with this. Platforms like rarity.com can offer lots of insight into this.
  • Volume. Volume plays an important role in the market because it shows the number of transactions taking place. A high volume means that there is more demand for the project.
  • Scarcity. NFT collections feature different collectibles, and the rare ones are usually more valuable. As a project becomes popular, the rarer NFTs are usually priced higher than the rest of the collections.
  • Utility of the collectibles. An NFT with a real-world use will be more valuable than one without a real use case. Gaming NFTs are one of the most popular categories in the marketplace, and it is estimated that more people will come into the gaming community.
  • The reputation of the team. A reputable team builds confidence in the marketplace. They have established websites with a clear roadmap and objectives. BoredApe Yacht club is one of the popular NFT collections that have built a good reputation for itself.

NFT trading strategy backtest

A backtest of the strategy with trading rules and settings is coming shortly.

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