Hello Bubble Riders!
This week, you and I are going to examine just five images. They tell a curious story. A bit like Schrodinger’s cat, they suggest that NFTs both are and are not in a bear market.
We’re going to unpack that and seven lessons that follow for investing and trading in the broader crypto landscape.
For one of those lessons, I’ll explain in a bit more to subscribers on Discord and in their weekly newsletters. But everyone can learn from this, so let’s get into it.
The 5 Images
For what follows, I’m using Nansen.ai’s data. Here’s a referral link should you want to use it (I think it gives us both a free month). If you love data, it’s helpful.
Role of NFTs in a Bear Market
Let’s start with Nansen’s NFT-500, which is their attempt to recreate the S&P500 for NFTs.
If you compare the year-to-date (YTD) change in ETH to the YTD change in US dollars, you’ll find the paradox.
- NFTs are in a clear bear market relative to US dollars.
- NFTs are performing on a par with Ethereum (their native cryptocurrency).
This yields Lesson #1: everything is still highly correlated in the crypto market.
There was some hope (I had it too) that NFTs would prove in some measure uncorrelated with the broader market, but that’s just not true.
Next, let’s look at another predictable dynamic. Here are the top 10 NFT projects as Nansen calculates that.
You’ll notice that Blue Chip’s in crypto fare better than the broader market in a downturn. This is true of BTC and ETH and apparently true of the broader NFT market.
That’s not surprising since blue-chip stocks perform in exactly the same way in the stock market. Whenever the TradFi market crashes, you see a shift away from growth to value, and that’s what you’re seeing here.
In a nutshell, here’s Lesson #2: the NFT market also experiences a flight to safety in a market downturn.
Now, let’s look at some use case NFTs. The first of these covers the performance of Metaverse NFTs–basically, land.
These NFTs, and the top two projects are Otherside (from BoredApe) and SandBox, have performed even better than Bluechips.
Let’s look at another use case NFT–social NFTs. These are NFTs that give you access to something because you own that NFT.
These have performed as well as metaverse land. Their improvement over ETH isn’t mind-blowing, but it is something.
That gives us Lesson #3: NFTs that people actually use tend to outperform in a crypto winter.
Finally, let’s look at an ugly image. *trigger warning* This is what’s happened to gaming NFTs.
Ouch! They have experienced a massive sell-off even in terms of Ethereum. At first, I thought this was the result of the Axie Infinity implosion, which did have a chilling effect on the GameFi world, but that’s not true.
The best performers (and they actually made money) over the past 30 days in this space are:
- Troverse Planets
- Mavia Land
I think this gives us Lesson #4: emerging NFT markets, such as GameFi, underperform in the crypto world just as they do in the TradFi world.
How To Make Money With This
Now, just owning a BlueChip NFT isn’t a terribly smart way to outperform in a crypt winter, even if you are a crypto maxi (i.e. someone who wants to make as much crypto as possible and is unconcerned with 1 – 3 year sovereign currency valuations).
The reason is simple enough: none of these are outperforming an automated process such as StakeDAO’s ETH option.
That 31% on ETH won’t last forever (it was in the 20% range last week), but it illustrates the point. There are other automated strategies in existence that will outperform that 11% premium on ETH that you can get with NFT blue-chips or Metaverse land.
That gives us Lesson #5: if you just want more ETH in a crypto winter, use a strategy like StakeDAO or other yield farming opportunities. They typically outperform owning blue-chip NFTs.
But you can do something else: buy “insurance” through the use of out-of-the-money put options on ETH. This is a bit advanced, so don’t try it unless you understand options.
The basics are this: a put option gives you the right to sell a stock or crypto short at a certan price at a certain date. Basically, you make money if the price goes down.
The way that the price for options is calculated turns on one of the most complex equations in all of finance: the Black-Scholes model. The way that this gets resolved in practice is that it discounts prices that are more than 2 standard deviations (2 sigmas in stats jargon) away from the present price.
Here’s an idea visually. You see those bands around the price of ETH. They represent the 2 sigma deviation from the price over the past 30 days.
That’s using Time Series data for the moving average, btw. It’s a feature you can choose on Finance.Yahoo.
It shows that if you had bought put options below that orange band price, at a fraction of your original NFT value, you would have more than made up for the money lost in ETH’s declines.
That’s Lesson #6: You can “insure” your NFT blue-chips with some options purchases on ETH (because they are so highly correlated).
A related idea is to use NFTfi to stake your NFT, borrow against it, and use that money to purchase such insurance or go use the Covered Call ETH strategy on StakeDAO.
Alright, so there you go. So far we’ve got 6 lessons from an analytics “deep dive” on NFTs. In summary order they are:
Lesson 1 – Everything is highly correlated in the crypto world (still).
Lesson 2 – The NFT market also experiences a flight to safety in a downturn.
Lesson 3 – The NFTs that people actually use outperform in a bear market.
Lesson 4 – NFTs in emerging markets (e.g. GameFi) underperform in a bear market.
Lesson 5 – A better way to grow your ETH during a crypto winter than buying a blue-chip NFT is to use a yield farming strategy.
Lesson 6 – If you do buy a blue-chip NFT, you could hedge your NFT positions through 2 sigma puts on ETH and that’s likely to prove quite resistant to price declines.
I said there were seven lessons contained in those images, however, and there are. Here’s the last and most obvious one.
Lesson 7 – The best time to go bargain hunting for NFTs is when the main chain coin they are minted on (e.g. ETH) drops in value.
People are still transacting these NFTs as always and (apart from GameFi) they’re holding their crypto-related value. I’d stay out of the GameFi market, but the trends are showing which projects are persistently growing in worth.
This week I wrote a number of pieces that are related to this post, so you might want to have a look if you’ve missed them.
That’s it for this week. Remember to join us on Discord if you haven’t already.
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