How To Profit From NFTs (Without Buying NFTs)

How To Profit From NFTs (Without Buying NFTs)
Jonathan Hobbs

over 1 year ago5 mins

  • NFTs have come down a lot in value this year, but big blue-chip collections like CryptoPunks and Bored Apes have held up better than most.

  • Buying and selling individual NFTs to turn a profit is hard work, and it's difficult to find the next big project before it takes off.

  • You don’t have to actually buy NFTs to invest in their growth story: you can buy into tokens of NFT marketplaces, or invest in the blockchains that house NFTs.

NFTs have come down a lot in value this year, but big blue-chip collections like CryptoPunks and Bored Apes have held up better than most.

Buying and selling individual NFTs to turn a profit is hard work, and it's difficult to find the next big project before it takes off.

You don’t have to actually buy NFTs to invest in their growth story: you can buy into tokens of NFT marketplaces, or invest in the blockchains that house NFTs.

The NFT (non-fungible token) market isn't dead, far from it. But in this environment, you might want a safer way to play. Here are two strategies you can use…

How is the NFT market still breathing?

Even though the value of NFTs being traded dropped 67% in the third quarter, the number of them increased by 8.3%, according to DappRadar. Over 21.9 million NFTs changed hands from July through September, amounting to $2.75 billion in value exchange. What’s interesting is that there were 8.78 million NFT sales in September – the most since February of this year – and that number’s been trending up since June. This suggests that despite rock-bottom prices, there’s still a growing market for investors and collectors.

Source: DappRadar.
Source: DappRadar.

Unlike much of the NFT world, blue-chip collections like Bored Ape Yacht Club (BAYC) and CryptoPunks have held their values quite well in the bear market. The BAYC floor price – the price of the cheapest Ape in the 10,000-strong collection – is around 75 ethers today, up from 59 at the start of this year. And as for CryptoPunks, the floor price has edged up from 63.7 ethers to 66.6, according to The Block. Mind you, they’ve still taken a beating in US dollar terms, given ether’s price is down about 65% over that time.

Source: The Block.
Source: The Block.

Here’s how much the top Punks and Apes were fetching last quarter…

Most expensive NFT sales in Q3, 2022. Source: DappRadar.
Most expensive NFT sales in Q3, 2022. Source: DappRadar.

DappRadar says that 46% of all the NFT sales value in September was concentrated among just four Yuga Labs projects – namely BAYC, CryptoPunks, OtherSide, and Mutant Ape Yacht Club. And it’s not surprising in a bear market: investors see relative safety in the most sought-after collections. When sentiment eventually picks up again, we’re likely to see that percentage come down, as more speculators step in to find the next diamonds in the rough. But let’s be realistic here: with millions of NFTs out there, it can be tough to find the gems.

Are there easier ways to profit from NFTs?

Most of us don’t have hundreds of ethers lying around to buy into sought-after blue-chip projects, and flipping NFTs on the cheap is a full-time job with slim chances of a big payout. So here are two alternative ways you could play this, each with varying degrees of risk:

1. Invest in NFT marketplace tokens:

NFT traders and collectors do their shopping on NFT marketplaces. These are decentralized applications (dapps) that plug directly into blockchains like Ethereum, allowing users to mint, buy and sell NFTs. Opensea is the biggest marketplace out there, raking in around $170 million in fees (gray bar) in the past six months. The current bear market has slowed business down, to be sure: Opensea collected just $33 million in the past three months (blue bar), with about $8.8 million of that in the past 30 days (green bar).

Source: DappRadar.
Source: DappRadar.

Opensea is a privately owned company, and that means you can’t invest in it directly. But up-and-coming competitors LooksRare and X2Y2 have their own tokens: LOOKS and X2Y2. They aren’t generating the same kind of revenue as Opensea, but they’re still pulling in decent chunks in fees: LooksRare has brought in $66 million in the past six months – that’s more than popular crypto wallet MetaMask, and more than Binance Smart Chain’s top DeFi platform, PancakeSwap (CAKE). And while X2Y2 might be earning less in fees than LooksRare, it had about eight times as many users last month, processing $74 million in NFT sales.

LOOKS tokens work a bit like a membership reward program for the platform: if you create, buy, or sell NFTs, you can earn the tokens as a reward. Users can also stake the tokens to earn a share of the platform’s trading fees. So all else being equal, the more people use the platform, the higher the demand for LOOKS, and the higher their value becomes.

X2Y2 tokens will also earn you a share of the platform’s trading fees, but unlike with LookRare, X2Y2 doesn’t reward users for trading NFTs. It argues that token reward schemes incentivize “wash trading”, where users game the system by trading NFTs back and forth just to get paid. And indeed, LooksRare has been clamping down on dubious sales since January for exactly that reason.

The total market value of all the LOOKS tokens is around $220 million right now, with each token trading for about 24 cents on the Bybit exchange at the time of writing. X2Y2 has a smaller market size of about $103 million, with each token priced at around 10 cents on BitGet. Keep in mind these are massively volatile investments, so you might want to pace yourself if you do decide to buy in. LOOKS was trading at over $5 at the start of this year – it’s now down 95% from its highs. X2Y2 has seen a similar decline, having traded north of $2 when it first listed on BitGet 10 months ago.

2. Buy the tokens of the up-and-coming NFT blockchains

Ethereum is the kingpin blockchain when it comes to NFT collectibles, recently accounting for 90.5% of all the value in the category. So an indirect way of getting exposure to NFTs would be to simply buy ether – it's the currency of the big blue-chip projects, after all. Every time a sale goes through or a new NFT is minted on Ethereum, people pay fees in ether.

Source: DappRadar.
Source: DappRadar.

Flow (FLOW), ImmutableX (IMX), and Ronin (RON) are the next-biggest players in the NFT market. They’re tiny in comparison to Ethereum when you look at trading volume – but they’re growing steadily, and each account for a big share in the total number of NFT sales.

Source: DappRadar.
Source: DappRadar.

These rival blockchains are more specialized in NFTs and NFT games than Ethereum, so they could offer a more direct way to buy into the next NFT growth phase.

With prices already down so much, buying into NFT platforms or blockchains could make for a sound contrarian play. Just keep in mind that crypto is still in a bear market until proven otherwise, so manage your risk accordingly.

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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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