Discover more from Economics Design Newsletter
EP 44: Economics of NFT Flipping with Kiefer Zang
Economics of NFT Flipping.
Welcome, premium subscribers! Thank you for subscribing.😘
TLDR below. This is not financial advice.
Catch the episode on YouTube
In today's article, we will discuss the topic of NFT with Kiefer Zang who will answer questions like NFT space around. One important thing that is emphasized for the NFT is supply. We understand if the supply is limited but such a great demand will cause any commodity to rise, but does the NFT really limit the supply? Today, we share the secrets to NFT flipping.
What is NFT?
NFT’s are verifiable ownership of a digital asset. The example I like to give is thinking about an item in a video game because most people have had some sort of interaction with it.
Let's say you have a rare sword from a video game and there's only 10 of them in existence and a bunch of players want them because they're super crazy special. In a traditional video game, you don't really own it and if you tried to sell it the game developer or studio would ban your account.
NFT really changes this and gives you total control over your digital assets because we're living in an increasingly digital world and having true ownership is a really important aspect.
How do you determine if NFT is investable or not
It is something that can vary a lot by the asset and by the specific project you're talking about but looking at it from a broad sense there's kind of the demand side and the supply segment.
On the demand side, you're really thinking about what is going to drive growth and interest. The big thing here is community. Is there a big community that's active and engaged around this game or this artist?
You also want to see if there's some kind of utility and this isn't necessarily a requirement but it is a major plus. I think this is where a lot of the growth is going to come in the NFT space especially on the gaming side. Once you have these items that people want to use within some really amazing games then there's going to be a lot of NFT demand-driven solely on the utility set. The next thing you want to look at is measures of height like are people chasing after it or are they all over social media talking about that certain thing.
On the supply side, you want to look at how scarce it is like if it is super limited edition but that's not necessarily the whole story there as you also have to look at the inflationary aspects of it but you just gotta look if the project has been putting out more and more NFT’s because if they're pumping out a whole bunch of them then that might kind of start to diminish the value of the specific NFT.
Economics of NFT: Supply-Demand vs NFT drops
Lisa: One thing I realized is that NFT releases are quite different from how other regular tokens are being released. Regular tokens have a release schedule and with other kinds of coins you have a different kind of liquidity mining or another kind of mining schedule to affect the supply side inflation whereas with NFT it's slightly different as in it's like special release dropping.
How are most of the NFT's released
Kiefer: There are a variety of types of NFT releases and I would categorize it into three main types so you have auctions, open editions and draws and you could see them for different types of NFT’s but we'll talk more specifically about art drops and these are the terms used specifically for nifty gateway.
There are a few different types of these so you have your classic ascending bid auctions then you have silent auctions where you don't know other people's bids until it's over and the top however many bids are then allocated the NFT’s according to the people with the greatest willingness to buy or pay. The last type of auction is Dutch auctions which start high and gradually lower over time until someone decides to buy it and so for auctions you have the price as the mechanism that will fluctuate to decide who gets the NFT. The NFT will go to the person with the greatest willingness to pay and with an auction you're going to generally get to an equilibrium with the rising price determining who gets the NFT.
This is where supply is the variable that's fluctuating instead of price so nifty for example would say that a certain drop will be sold for a thousand dollars and then whoever wants to for some amount of time can buy an NFT. There isn't a limit on supply and so in this case you also reach an equilibrium because the supply will increase whereas demand is satisfied at that given price.
Draws are basically where the NFT is raffled off so there will be some limited amount of NFT’s put up for the raffle and generally the demand is going to far exceed the supply for these. On the nifty gateway, it will be like 10 or 100 times as many people entering as there are NFT’s to give out and the price is held fixed.
Price is not a variable that can be used to allocate here and so you have a shortage and there is a consumer surplus created because people can get these NFT’s below other people's willingness to pay. If somebody wins one of these draws they have the ability to immediately resell for potentially a significantly higher amount because of that difference between what the real market rate would have been if the price were allowed to fluctuate so that can make draws really attractive for people looking for a short-term flip. You might not win but you don't have to put money up in case you don't and the opportunity cost is pretty low in terms of time to enter.
The Economics of Reselling — When is it profitable?
When you're looking to resell it's good to have a plan going into it in terms of if you're looking at short-term resell or if you have more of a long-term time horizon. If you're going for the short-term like going back to the last thing I said it's really good if you can get in on a draw where you immediately have buyers that are willing to pay more but obviously you're not always going to get in on those and you need to find some other things that you can do so sometimes.
You might go to an open edition that you think a lot of people are really gonna want like if you have a super high tier artist or something where there is a lot of hype around the project so you think that demand is going to increase rapidly in a really short period of time which can happen a lot as we're talking about the crypto space where you can have huge price fluctuations in the blink of an eye so there is definitely a lot of opportunities there for short-term price movements.
There is also a lot to be done around long-term investment so here you want to look at the factors that I was talking about before when you're looking for a good investment so you're looking at if there will be growth in the community or are you going to get increases in utilities so yeah just want to look at the long-term growth prospects of whatever you're looking at and if you think those have really strong growth possibilities then that can make for a good long-term investment.
In this case of reselling would it only make sense if you're going to do the draws method?
It could depend a little bit on how much demand there is for these draws and I guess how much patience you have for entering them because currently, it can be between half a per cent to five to ten per cent chance of hitting any draw on any particular day. I got lucky today actually and landed on an art drop so it does happen but if you're looking to really dive in and be investing all over the place you probably can't rely just on draws as a way to invest in NFT's.
What is substitutive inflation?
A lot of people when they're thinking about the supply side of NFT's will look at the number of editions of something like say you have an NFT and it's got 10 editions then people think that they have only got nine other sellers to worry about in terms of the valuation for their NFT and them it normally ends right there. It's really important to look at the rate at which new NFT's are being introduced because a project can create a new NFT that prospective buyers could see as a substitute and a potential buyer could look at your NFT and the new NFT and might think of spending money on the other NFT and so the existing pool of buyer funds is now getting split over a greater number of NFT's so even though the number of editions of your NFT is staying the same the market is still being diluted so watching the rate of inflation is really important in picking out a project for investability.
Crypto Punks VS Crypto Kitties
I think a good comparison here is if you look at crypto punks and crypto kitties because both of them have claimed to be kind of the original NFT's and they were both super early. Crypto punks are technically the first but crypto kitties were the first ones that really got people's attention. The key distinction between the two projects is that crypto punks have a hard cap at ten thousand punks but with crypto kitties, a big part of the whole experience was just breeding more and more kitties and increasing the supply. Even though each kitty is unique as the supply increases there are more and more NFT's for potential buyers to look through and overall that's making any specific NFT investment less and less attractive over time and I think that's a primary reason why crypto punks have really come out as the winner between those two as the classic original NFT for a long-term investment thesis.
Limited Edition vs Utility
Lisa: When it comes to limited edition it just feels like every single NFT is limited edition so the whole point of value from limited edition just gets diluted because of the inflation effect that everyone is limited edition
Kiefer: It's really important to kind of find out how limited is limited like what is the future expectations for other limits because as you said the more limited you have the kind of less limited the entire collection becomes.
What are the other kind of utilities that could be embedded in NFT's?
I think gaming is probably the biggest one that comes to mind so I came into NFT's actually from the gaming perspective. I traded game items before I ever got into crypto and so you have this consumption aspect of people who want to use it just because they're playing a game and you're just really looking at what kind of markets can be created where people want to use it regardless of any speculative aspect. I think that's going to be a huge area of growth coming up within even the next couple of months and I hear a lot of people just starting to think about how the utility can be brought into the NFT space. I guess ticketing was one that I've kind of heard bounce around a lot so with concert and event tickets historically people have had a lot of problems in terms of getting them to the real fans and not just giving them out to scalpers and making sure that tickets are the real ones and not just some fakes and so I can see NFT's being useful there from a utility standpoint.
How can anyone get started on flipping NFT's?
Well not to plug my content too hard but I have a website nftflipping.com which has got lots of guides out there for someone new to space and if you have some experience then we got some good strategies to up your game a bit but even if you don't want to read that my recommendation is just get involved in different NFT communities and go down the rabbit hole talk to people and learn about the space by interacting in a bunch of these different areas
How comfortable does one have to be with crypto to get involved with NFT's?
It's getting easier and easier so you don't actually have to have a metamask wallet anymore for a lot of these applications on the art side. If you look at the nifty gateway you can buy in with a credit card and on the gaming side, NBA top chart has done a really good job of onboarding kind of the mainstream users with again just a credit card, username and password. It's really getting more and more approachable and that's kind of a trend we're going to get overtime may be sacrificing a little bit of decentralization just to get those people on board who otherwise would not be willing to put in the effort to get involved in the space.
Advice to NFT Designers
Don't forget about scarcity when you're minting your NFT’s, space out your releases and keep edition numbers low because I know it's really tempting when there's all this money on the table to just keep pushing out NFT after NFT but if you put out too much then you hit the substitute inflation effects that we talked about before and it ends up just hurting your early supporters and you really want to care about the people who are investing in you so just keep that in mind and because we want to help make this a more sustainable space for the long run.
Listen on podcast if you prefer audio version.
We have seen NFT trends, and they will continue to evolve. It is important that the value of NFT, simply, supply and demand will determine the price of any good including the NFT, but the supply of the NFT is not always limited and we need to be clearly defined. Another important thing is the add-on value, NFT will be more valuable when adding utility functions. In the future, some utilities will be integrated into the NFT. If successful, it will take NFT to a new horizon.
Support us on Gitcoin donation to increase our video production and serve you better
Ps: Order the textbook "Economics and Math of Token Engineering and DeFi" today!