Analysis of the structure of the NFT market and the statistically most profitable strategies on it from Chainalysis.
- Share of retail players in NFT are higher than in the cryptocurrency market as a whole
- Return on Investment in NFT: What Makes the Most Successful Collectors Different?
- Whitelisting is a key element of successfully trading newly released NFTs
- Large investments, more attempts and diversification across collections correlate with the profitability of NFT trading
- Do unsuccessful minting buy transactions reduce profits from NFT trading?
- The NFT market is dynamic, but many will not make a profit
Over the past year, the popularity of NFT (from non-fungible tokens, "Non-fungible tokens") has increased dramatically.NFTs are unique, non-identical, blockchain-based digital objects - unlike conventional cryptocurrencies, whose units must be fungible. NFTs can store data on blockchains - most NFT projects are built on the Ethereum blockchain - and that data can be associated with files, including images, video or audio, or even, in some cases, physical objects. Typically, NFTs confirm the owner's ownership of the data, media, or objects with which the token is associated. These tokens are usually bought and sold on specialized trading platforms, which we will talk about in more detail here.
To date, users have sent contracts to ERC-721 and ERC-1155 - two types of Ethereum smart contracts associated with NFT collections and marketplaces - worth $ 26.9 billion of cryptocurrencies.
A notably significant increase in both totalthe value of the cryptocurrencies sent and the average transaction size, which suggests that NFT as an asset category gains value as new users are attracted. You can also see a noticeable surge since the last week of August, which appears to have been largely driven by the release of a new collection from the popular NFT creator group Bored Ape Yacht Club. We will also go into more detail on the growing investment in NFT in this report.
Most users buy NFT atspecialized marketplaces, in the same way as they could buy conventional cryptocurrencies on the exchange. Many NFT marketplaces, such as OpenSea, do not store user tokens, instead providing exchange directly between user wallets - in this aspect, their work is similar to decentralized or p2p-exchanges. Other marketplaces such as Dapper Labs store tokens on behalf of users. OpenSea is by far the most popular marketplace, having received over $ 16 billion in cryptocurrencies as of the end of October 2021. The diagram below shows the most popular NFT collections traded on specialized marketplaces.
CryptoPunks, established in 2017, well beforeNFT mania is the most popular NFT collection for the study period (March - October 2021), with a transaction volume of more than $ 3 billion. a steady popularity. For example, for Hashmasks in the first week of July, the value of transactions exceeded $ 380 million.None of the other weeks in the study period did the volume of transactions for this collection exceed $ 95.7 million, and the average weekly volume was just under $ 21 million. A similar picture is observed with regard to Mutant Ape Yacht Club.
From the web traffic data of popular NFT marketplaces, you can get an idea of the geographic distribution of their users.
There is no clear leader here, butit can be noted that the main sources of web traffic are Central and South Asia, North America, Western Europe and Latin America. The numbers show that, like regular cryptocurrencies, NFTs are widespread throughout the world, and since March 2021, no region has been gaining more than 40% of the total number of visits to NFT marketplaces.
Analysis of OpenSea data as the most popular ofspecialized marketplaces can tell a lot about the growth of NFT in general. More than 6,000 NFT collections on OpenSea have at least one transaction on their account, including purchases, sales or minting (release, "chasing" - from the English mint). This activity is on an upward trend: since March 2021, the number of active NFT collections, which we define as having at least one transaction every week, has increased significantly.
Data show that since July 2021, this increasesignificantly accelerated and persisted until October. The number of active NFT collections peaked at over 2,300 in the third week of October, up from 193 in early March. Analysis of web traffic shows that the United States has more OpenSea users than any other country.
The share of retail players in NFT is higher than in the cryptocurrency market as a whole
The vast majority of NFT transactions are in the retail category, meaning less than $ 10K.
However, as seen above, the percentage of largeNFT transactions are gradually increasing. As of the end of October, the share of NFT transactions of the collector category, that is, in the amount in the range of $ 10-100 thousand, in the total number increased to 19%, compared with 6% at the beginning of March 2021. With an average number of transactions of just under 500 in week, institutional category transactions account for significantly less than 1% of the total number of transfers.
However, if you look at it from the point of view of the dollarthe volume, not the number of transfers, collector and institutional category NFT transactions have accounted for a significant portion of the total volume of transactions since March 2021. In particular, collector grade NFT transactions accounted for 63% of total NFT transfers during the survey period. Institutional transactions (over $ 100K) account for 26%, and retail transactions 11% of the total.
The data shows that the share of retail players inthe NFT market is much higher than in the traditional cryptocurrency market, where transactions of the retail category make up a rather small fraction of the total volume. But what about the return on investment in NFT?
Return on Investment in NFT: What Makes the Most Successful Collectors Different?
Anyone who pays attention to the NFT market knowsthat investors flock here partly out of the belief that they can get a high return on the sale of NFTs previously acquired either through minting or in the secondary market from other users. The data, however, shows that NFT is hardly a safe investment. According to data from the OpenSea marketplace, only 28.5% of those purchased at the minting stage and subsequently sold on the NFT platform made a profit. At the same time, the sale of NFTs previously acquired on the secondary market brought profit in 65.1% of cases. Next, we'll try to dig deeper into the data to determine which tactic has been statistically most successful for NFT collectors.
Whitelisting is a key element of successfully trading newly released NFTs
More than anything else, NFTdepend on community growth and word of mouth. Take a look at just about any successful NFT project and chances are you'll find Discord servers and twitter threads full of enthusiasts promoting the project. This is done on purpose. NFT creators usually begin to build interest in their projects long before the release of the first tokens, creating a core of dedicated followers who will help promote the project from the very beginning. Later, creators reward these early adopters by whitelisting them, which allows them to acquire new NFTs when minting at a much lower cost than other users.
Whitelisting is not easysymbolic reward, it significantly increases the return on investment. OpenSea data shows that the subsequent sale of NFT in the secondary market by users who purchased tokens at a special price for the whitelist is profitable 75.7% of the time, versus only 20.8% for the rest of the users. In addition, the data shows that it is almost impossible to make significant profits from a minting purchase outside of whitelisting. In the diagram below, the sales of newly released NFTs are divided into baskets based on the profitability (ROI) of their subsequent sale, expressed in multiples of the initial investment; within each basket, purchases at special prices for the whitelist and at regular prices are separately taken into account.
Overall, 78% of tokens purchased from non-whitelistings are subsequently sold at a loss; 59% of tokens generate a loss of ≤0.5x on the initial investment. At the same time, 78% of tokens purchased from whitelisting are subsequently sold at a profit, and in 51% of cases the profit is ≥2x. The data clearly show that whitelisting provides a significant financial advantage for early adopters, encouraging users to contribute early in the communities around NFT projects.
If you are not on the white list, then you will be significantlyit is more difficult to make money by reselling NFTs purchased during minting. Of course, keep in mind that these numbers do not include NFTs that have been issued, purchased, but not yet sold. It is possible that some of these NFTs will eventually be sold at a profit and increase the current 28.5% value for NFTs purchased by minting by non-whitelisted users.
Large investments, more attempts and diversification across collections correlate with the profitability of NFT trading
On the other hand, reselling NFTs acquiredin the secondary market has a much higher success rate than minted tokens. As we mentioned above, according to OpenSea, this strategy was profitable 65.1% of the time. Trading activity in the NFT is rather highly concentrated. More than 2,000 individual NFT collections on OpenSea have a history of secondary sales, but only 250 of these collections account for 80% of all secondary sales.
A high concentration can be seen not only in collections, but also at the level of addresses involved in circulation.
20% of custom addresses on OpenSea account for 80% of NFT's secondary sales, with just 5% of all addresses accounting for 80% of secondary sales.
To determine what distinguishes the most successfulNFT traders from the rest, in the following charts, we will divide all 23,000+ user addresses on OpenSea that sold 10 or more NFTs on the secondary market into five quintiles based on the percentage (%) of the total revenues generated by these addresses from NFT resale. Group 1 is the most successful quintile, accounting for 85% of total NFT resale profits; group 5 is made up of the least successful addresses.
The first thing that attracts attention here is not surprising: the most successful NFT traders buy and sell significantly more NFTs than other investors.
Addresses in group 1 bought and resold on average105 NFT, more than double the Group 2 average (39 NFT). Interestingly, the direct correlation between the profitability of trading and the number of transactions is interrupted in group 5, the average number of transactions in which turned out to be slightly higher than in group 4 - 21 versus 18.
Evidence indicates that experience and practice canhelp investors better identify points of market inefficiency and find NFTs with high upside potential. Another reason for this conclusion may be that investors in group 1 simply have more capital - start-up, accumulated from successful deals, or both - which allows them to buy and sell tokens more often than other investors.
Another data point that looks somewhatcounterintuitively, however, supports the idea that more initial capital is associated with more successful NFT trading: the most successful NFT traders, on average, pay a significantly higher price to buy tokens intended for subsequent sale.
With an average price of 1.07 ETH per NFT, investors fromGroups 1 pay significantly more than investors in any other group for the NFTs they buy for resale. Interestingly, Group 5 has the second largest average purchase price of 0.71 ETH per NFT. The trend is even more pronounced when you focus on the top 5% of addresses, which account for 80% of all NFT trading revenues.
Top 5% of NFT traders pay for purchases fortoken resale at an average of 2.2 ETH per NFT, more than double the average price of the most profitable first quintile. Overall, however, the data shows that capital alone is certainly not enough to become a successful NFT investor. While for top NFT collectors, high purchase prices appear to be correlated with success, this strategy has shown disastrous results for the least successful collectors in the group of 5, whose losses are compounded by the large sums they pay for initial purchases. Obviously, group 1 is better at assessing opportunities for capital allocation and much more often correctly identifies NFTs that will rise in value.
This conclusion is confirmed by our next comparison: below, the same groups of NFT traders are compared in terms of the number of acquired unique collections.
Most Successful NFT Traders Diversifytheir investments in a large number of NFT collections. Addresses in group 1 bought tokens from an average of 28 unique collections, compared with 17 collections for group 2. In contrast to the average cost of buying a token, the relationship between an investor's success and the number of unique NFT collections in which they purchase tokens is completely linear: the number collections is progressively decreasing for each next less profitable group, and addresses in group 5 bought tokens on average from only nine collections. This may be a natural property of successful NFT collectors who have more capital to use in a wider range of collections, but it may also suggest that they have better expertise in studying the market as a whole, which allows them to find more promising opportunities.
Diversification strategy across many collections,which the most successful NFT collectors adhere to seems to be paying off as their profits are fairly evenly spread across more trades compared to other investor groups.
On average, for addresses from the first group, the mostsuccessful investments accounted for 31% of the total profit, compared to 37% for the second group. In general, the less successful investors are, the greater percentage of their profit is accounted for by several of the most successful investments, and for group 4 this value is 52% of the total profit. Group 5 is generally not profitable, so its column in this chart goes into negative values.
Finally, perhaps our most interesting conclusion:the most successful investors in NFT do not actually have a significantly higher share of winning trades compared to the rest. The chart below shows the percentage of return on investment for each of the address groups.
For addresses in group 1, the proportion of profitable investmentsin NFT 72% of the total, for group 2 - from 70%, for group 3 - from 69% and for group 4 - from 66%. Only in group 5 there is a significant decrease in this indicator (only 50% of profitable investments), but between groups 1 through 4 the discrepancy is very small.
Success rates so high are notnecessarily surprising, as many investors seem to choose to hold NFTs further if they cannot sell them at a profit. However, these numbers indicate that the composition of group 1 is primarily determined not by the more frequent selection of successful NFTs, but by the turnover of a larger number of NFTs with approximately the same success rate as in other groups. The chart below shows the average return on investment (ROI) across all purchased NFTs for each group, and it also tells us that while groups 1-4 have nearly the same percentage of return on investment, in group 1 they add up to significantly higher returns. In other words, Group 1, on average, implements comparatively more lucrative investment opportunities.
On average, collectors in group 1 for eachthe sale of NFTs received an ROI of 2.9x on their initial investment, compared to 1.9x for group 2. For each subsequent group, this figure is consistently reduced, and for group 5 it is 0.9x of the initial investment, which means a loss.
But what else distinguishes the most successfulcollectors NFT? Let's try to go a little beyond NFT trading and take a look at the big picture of incoming transactions for addresses from the top quintile of NFT traders.
It doesn't look like a regular wallet.Since a significant portion of smart contract transactions are likely to be directly related to NFT contracts, we will ignore this category. Even so, the most successful NFT collectors transact with decentralized exchanges more often than regular wallets, which tend to interact more with centralized exchanges. We also see significant shares of the total for credit and smart contract token transactions commonly associated with the use of DeFi. That is, the data suggests that the most successful NFT collectors are much more likely to use the advanced DeFi protocols preferred by large investors (this topic is also covered in some detail in this geographic report). We can verify this by comparing the average transaction size for different types of platforms. For decentralized exchanges, for example, the average cryptocurrency transaction size is $ 26,520, compared to $ 12,431 for centralized exchanges.
In general, the above figures indicate thatthat the most successful NFT collectors benefit in large part from diversified investments and "breadth of coverage" of the market. By investing more capital in a wider range of NFT collections, these collectors increase their chances of finding more “big wins” and make more returns on almost the same success rate as other groups of NFT traders, with the exception of the bottom quintile. showing significantly worse results compared to other groups.
Do unsuccessful minting buy transactions reduce profits from NFT trading?
So far we have discussed profitabilityNFT trading strictly through the prism of the initial buy price and the sell price. Within this framework, we determined that the subsequent sale of NFTs acquired on the secondary market was more profitable for collectors than the sale of tokens purchased during minting: 65.1% versus 28.5%. But in reality, investing in newly released NFTs can be even less profitable due to the poorly understood aspect of the minting process: commissions for a huge number of unsuccessful transactions.
Purchase on minting new NFTs from popular andPending Collections is an extremely competitive process with thousands of users trying to purchase a limited number of NFTs at designated minting times. These attempts are not always successful. Many users try to buy tokens either too early, before the actual minting starts, or too late, when the collection is already sold out. Unfortunately, they still have to pay fees to Ethereum miners processing transactions - with both successful and unsuccessful attempts to acquire NFTs. When these gas commissions are included in the profitability calculation, buying new NFTs while minting becomes a much less attractive investment than originally thought. It also appears that some users are using minting-activated bots to buy NFTs, which further increases the number of failed transactions - in some cases for the bots themselves - making it even more difficult for the average user to trade profitably.
In September, a vivid example could be observedthis when minting The Sevens NFT collection. The Sevens is a 7000 NFT collection that started minting on September 7, 2021 at 7pm UTC. Within just an hour after the start of minting, users made more than 26 thousand unsuccessful transactions, the commissions for which amounted to more than $ 4 million.
Most of the users whose transactionwas unsuccessful, no repeated attempts were made. But interestingly, multiple addresses have undertaken many failed transactions - some more than 100 - while paying more than $ 100K in commissions.
A logical question arises:Whether these addresses were controlled by living people or whether their owners connected bots to automatically place high-frequency purchase transactions. While this is suggestive of a bot malfunction, we have no way of knowing how many bots have successfully acquired NFTs from the collection ahead of less sophisticated users. However, a report from Caviar suggests that one user has successfully minted 1,000 NFTs from The Sevens using bots, becoming the largest token holder in the collection.
In total, users who bought NFT fromThe Sevens minted, earned $ 20.5 million on their subsequent sale. But if we take into account the $ 4 million in commissions for unsuccessful transactions, then the total profit will decrease by about 20%.
One way to solve this problem is toFor NFT issuers, it would be to minting on second-level protocols - that is, on NFT marketplaces or other specialized services built "on top" of the main blockchain - with the subsequent recording of successfully acquired NFTs on the main blockchain. Ethereum co-founder Vitalik Buterin described what such a solution might look like here, but today we do not know of a single large NFT project whose tokens would be issued on a second level protocol.
The NFT market is dynamic, but many will not make a profit
NFT is an exciting and fast growing areathe cryptocurrency market, which has gained quite a lot of popularity among retail investors. However, those who are going to collect and trade NFTs should understand how competitive this market is.
The data shows that a very small grouphighly qualified investors receive most of the profits generated in this market. This is especially true for minting purchases, where whitelisting provides early adopters with access to collections at lower prices, significantly impacting the profitability of the subsequent resale of these tokens. We are also seeing evidence of bots being used to massively buy NFTs on minting, which further reduces the chances of less sophisticated users and can increase the number of failed purchase attempts and losses on network commissions. All this should be understood by potential investors before entering the NFT market.
However, there are also somestrategies appear to be correlated with NFT investment success. For example, many investors with sufficient capital often invest in a wide range of collections, and this provides them with the greatest return. Of course, this strategy is also fraught with risks, it requires a responsible selection of projects and tokens and careful planning so as not to go beyond its real capabilities.
BitNews disclaim responsibility for anyinvestment recommendations that may be contained in this article. All the opinions expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading on crypto markets involve the risk of losing the invested funds. Based on the data provided, you make investment decisions in a balanced, responsible manner and at your own risk.