The Pyramid of NFT Gains
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April 10th, 2022

In my first 100 days investing in NFTs, I've turned $4,000 into $40,000 and gathered some insights about flipping jpegs. I managed to do all of this while just about maintaining my relationships and keeping a decent grip on my day job.

Why should you read on?

In this post I will set out my key learnings to provide a simple framework (a pyramid) for maximising your money and saving your time (and sanity).

Key learnings

  1. The three most valuable resources in the NFT space are alpha, liquidity and time the focus of the post
  2. You are subject to volatility in both the NFT asset and the underlying network a focus for another time
  3. Demand is measured in volume and supply is measured in the percentage listed a focus for another time

Alpha, liquidity and time

These three things are the holy trinity of NFTs and make up the pyramid of gains. Gains refer to the returns made on your investments. Optimising these three things ensures astonishing returns without sacrificing one’s mental health.

Let’s start with some definitions…

  • Alpha is the excess performance of an investment over the performance of that asset in the general market, which is attributed to the investor’s skill or acumen. In NFTs it can mean this but more commonly refers to insights and tips that an investor gets access to which aren’t shared by the general market.
  • Liquidity is the amount of cryptocurrency that is ready to used for new investments and is not locked in another investment. The more liquidity available, the more free you are to bet big on a great opportunity or to make multiple bets in a short time span.
  • Time refers to hours in the day, hours in the night and —most importantly— attention. How much attention can you give to Twitter to check notifications, in the off chance that one contains a link to a closed Discord or a stealth mint?

The core idea of the pyramid is that you can’t succeed without all three of these things. If you have alpha but no liquidity, you cannot leverage hot tips and buy into projects. If you have liquidity but no time, the best opportunities will pass you by. If you have alpha and liquidity, but no time, you will likely get burned by scams or through investing in projects you haven’t validated.

Alpha

Good alpha provides confidence in a project, while excellent alpha is both the confidence in the project and guaranteed access to the mint or a great entrance price. Weaker alpha is difficult to distinguish from noise.

Ultimately the trade-off with alpha is price versus trustworthiness. The more you spend, the more confident you can be. The less you spend, the more you’ll have to think, filter and rank the information you get.

The three rough categories of alpha are:

  1. Free You find a core group of trusted influencers/investors on Twitter and you keep a close eye on what they follow and retweet. You spend a lot of time finding new projects and assessing whether your alpha group follows these projects too. Here’s an excellent list of influencers to follow:

    https://twitter.com/SkiddilyNFT/status/1497793442810044422

  2. Paid information You buy membership to an alpha group. There are numerous options for this. Skiddily (his tweet is above) started the A-List or you can go with my tried and true, Project Whitelist.

  3. Paid access You purchase access to new projects through existing projects. An extreme example of this is buying a blue chip NFT, such as a Doodle. Ownership of this token will be your ticket into many other projects. Alternatively you could purchase a pass (e.g. Coniun pass or Premint Collectors pass).

Liquidity

How much $ETH is sitting in your wallet, waiting to be invested? This affects the number and types of bets you’ll be taking. Less liquidity means that you can’t afford to be in many projects. It also means that you are less likely to take bets on secondary markets (OpenSea, LooksRare), where the entry prices will be higher.

  1. Low You have less than 0.5 ETH, are a little more worried about gas and your liquidity can easily be drained by minting three tokens from a project you are whitelisted on. Ultimately, you want to be confident that what you are minting will help you grow your wallet size.
  2. Medium You have somewhere between 1 and 3 ETH, you keep some of this in stable coins, ready to use. Gas isn’t so much of a worry, unless there’s a gas war going on. You mint the max when you’re confident in a project and you may even buy a couple more on secondary.
  3. High You have more than 3 ETH and are happy to lose some of it in pursuit of large gains. What even is gas? You won’t shy away from making purchases where the floor price is in excess of 1 ETH if you are confident that it will go up.

Time

When thinking about time, evaluate when you are available and for how long. This dictates how you should investigate projects and act upon insights. Depending on your availability and attention, you’ll prioritise the kind of information to seek out.

Regardless of anything else, invest time in being safe. Learn how to take care of your wallet. In fact, buy a hardware wallet (directly from the manufacturer.)

Let’s use three categories for your time:

  1. Spiky You probably work remotely some or all of the time and can keep track of notifications and act on them quite quickly
    1. Prioritise many sources of alpha
  2. Sustained You will carve out time in the evenings or over the weekend because when you’re working, you’re working
    1. Prioritise research
  3. Full-time NFT degen You are either a student and coasting through or you’re giving NFTs a full-time punt
    1. Prioritise grinding/vibing
    2. Then prioritise research and sources of alpha

Putting it all together

Low liquidity

Without much in the bank, you have to sacrifice time to build up your liquidity. Get as much alpha as you can. Spend whatever time you can grinding for the most promising projects. The alpha will often be noisy but spend time finding the signal in the noise and soon you’ll have the liquidity you need to pay for better alpha.

Medium liquidity

Time is money. You should spend a little more money in order to save time. You can afford to pay for good alpha so you should definitely consider it. You can also afford to buy on secondary markets so it is worth spending time doing research and generating your own insights.

High liquidity

You have to spend money to make money. You have the money so spend it on getting the best alpha and access to projects.

Ultimately, NFTs are incredibly time-consuming and can be fabulously lucrative. The dark side of the space is the toll it takes on one’s sleep schedule and mental health. If I am to pick one message from this piece is that —if you can afford it— spend the money to save your time and your sanity. It’s worth it.

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