How To Actually Make Money From NFTs

How To Actually Make Money From NFTs
Reda Farran, CFA

about 2 years ago4 mins

  • When you purchase an NFT, you’re either buying it directly from the creator during the minting process or from another user via a marketplace.

  • Getting whitelisted is key to success in trading newly-minted NFTs, as it allows you to purchase newly minted NFTs at discounted prices.

  • But when it comes to flipping NFTs in the secondary market, it’s large investments, more attempts, and a diversity of collections that lead to higher profits.

When you purchase an NFT, you’re either buying it directly from the creator during the minting process or from another user via a marketplace.

Getting whitelisted is key to success in trading newly-minted NFTs, as it allows you to purchase newly minted NFTs at discounted prices.

But when it comes to flipping NFTs in the secondary market, it’s large investments, more attempts, and a diversity of collections that lead to higher profits.

When you buy an NFT, you either buy the unique digital asset directly from the creator during the minting process, or from another user via a marketplace. But a new study from Chainalysis shows that only a small portion of participants in each scenario reap most of the rewards. So I decided to dig into the study to see what these successful investors are doing exactly, and how you can replicate their approaches.

How can you profit from newly minted NFTs?

NFT minting is when a digital file is turned into a digital asset on a blockchain. If you purchase an NFT during minting, you’re buying it directly from the creator, making you the first person to ever own that NFT. While that might sound nice, it’s not a good investment strategy: transaction data from OpenSea – the most popular NFT marketplace – shows that 71.5% of NFTs purchased during minting and then sold on the platform result in a loss. But there is one way to greatly improve your chances of success when trading newly minted NFTs: getting whitelisted.

Whitelisting is when NFT creators allow a certain set of followers to purchase new NFTs at a much lower price than others during minting events. To understand why, just know that creators typically begin promoting new projects long before the first digital assets are released, gathering a core of dedicated followers who help promote the project from the outset via word of mouth or community channels like Discord. These followers play a key role in an NFT project’s success, and creators reward them by adding them to the whitelist.

Making the whitelist translates to dramatically better investing results. That’s because whitelisted users can purchase newly minted NFTs at a discounted price, making it much more likely that they’ll be able to sell them at a higher price later. In fact, OpenSea data shows that users who make the whitelist and later sell their newly-minted NFT gain a profit 75.7% of the time, versus just 20.8% for users who didn’t. You can see this more granularly in the graph below.

Source: Chainalysis
Source: Chainalysis

Every creator has different criteria for how to get whitelisted, but the first step is identifying projects you’re interested in early on and joining their Discord channels. And if that doesn’t work, then best to avoid purchasing the NFT during minting altogether: the data suggests it’s nearly impossible to achieve outsized returns without it. But there’s another option…

How can you profit from the secondary NFT market?

If you’re struggling to get whitelisted for newly minted NFTs, don’t worry: OpenSea data suggests that buying NFTs in the secondary market and flipping them is also a successful investment strategy, leading to a profit 65.1% of the time.

But NFT flipping and its respective profits are quite concentrated, with the top 30% of OpenSea wallet addresses accounting for 87% of all NFT flips and virtually all the realized gains from them. Put differently, there are only a handful of investors frequently flipping NFTs and having lots of success with the strategy.

According to the OpenSea data, the most successful NFT flippers bought and sold significantly more NFTs than other investors. This suggests two things. First, experience and practice may be helping these investors become better at spotting market inefficiencies and finding NFTs that are likely to increase in value. Second, these successful investors may have more capital, allowing them to buy and sell more frequently than other investors, as well as to pay more for the rarer, more expensive NFTs.

The most successful NFT flippers also invest in a diverse array of NFT collections – groups of related NFTs usually belonging to the same creators, like CryptoPunks and Bored Ape Yacht Club. You can see this in the graph below: group 1 (the most successful quintile of NFT flippers) bought NFTs from 28 unique collections on average, compared to less than 10 for Group 5 (the least successful quintile).

Source: Chainalysis
Source: Chainalysis

In fact, the relationship between investor success and number of unique collections purchased is perfectly linear. That’s not too dissimilar to, say, a stock market investor diversifying his investments across multiple sectors and generating better returns as a result.

The last and most interesting finding is that the most successful NFT investors don’t actually have a significantly higher hit rate than others. That means the most successful investors separate themselves not by picking successful NFTs more often, but by flipping more NFTs at higher returns on investment – that is, unearthing the very best NFT opportunities. Simple, really.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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