CRYPTO

Report why NFTs can be a riskier investment than cryptocurrencies


Investors who survived the 2008 financial crisis understand the importance of liquidity. When an economic downturn begins, deflationary pressures hit the market and buyers disappear. Sellers try to sell assets before their prices fall further, but buyers want to reduce risk and move to safe haven assets, such as Treasury bonds and money market funds.

Lack of liquidity associated with volatile assets is one reason investors may feel that they are more risky than cryptocurrencies. When an investor wants to sell Bitcoin (BTC), they can easily sell it to buyers’ order books at different price points. If a seller does not sell their bitcoin today, they can easily return tomorrow and participate with their bitcoin on behalf of willing buyers.

In contrast, non-fungible tokens (NFTs) are unique and much more difficult to match sellers with buyers. Cointelegraph Research analyzed what liquidity looked like for NFTs and whether some collections were traded more frequently than others. Cointelegraph Research is releasing its first report on NFT in October to answer exactly this question and look at the risks associated with NFT.

What is meant by liquidity in the context of NFT?

There is no market for “Mona Lisa” paintings because there is only one “Mona Lisa”. Similarly, the liquid level of NFTs is lower than that of fungi. One reason is that collectors often want to keep their NFTs instead of trading in a speculative market. Another reason is that NFTs are sold bilaterally in the markets, with a small pool of potential participants for each sale.

For example, a sports card NFT of a particular player may only be in demand by a subgroup of collectors. In addition, each NFT is not a perfect replacement for another NFT. For example, if Mike wants the 1988 Michael Jordan NFT for his birthday but gets 2014 LeBron James instead, Mike may not be very happy. Due to the difficulty in comparing different NFTs offered by sellers and being bid less by buyers, the total number of transactions is less. This low turnover makes it more difficult to determine the value of each NFT.

For camouflaged assets, such as stock shares, liquidity can be measured by the total number of shares traded in a given period (such as one month) by the average number of shares outstanding for the same period. The more shares traded, the more liquid the company’s shares. But how to go about measuring the liquidity of a unique ineligible asset?

The amount of transactions per item is low, such as for real estate or collection materials, the two main types of liquidity systems are “market time” and “level of transaction activity”. For example, the liquidity of real estate can be measured by the average time between the time a home is listed and when it is sold. In NFT terms, this would be “the interval between when the NFT was listed on the secondary market and when it was sold.”