It's hard to miss not to hear bout NFTs if you spend a significant time online – the good, the bad, and the ugly. Perhaps you invested in NFTs because you've seen or heard about someone making a killing out of them. Or the ever-increasing numbers of people putting their money on NFTs as of late. It's fair to say that a considerable percentage or people are not diehard fans but are there because of the fear of missing out.
Now that you're in, though, it's time to take a step back and consider whether this is really the market for you. You must be comfortable with the risks involved before you can even think about profiting from this market. After all, an NFT can just as easily go from being worth nothing to everything and vice versa.
What Makes the NFT Market Volatile?
It's not all rainbows and butterflies in the world of NFTs. This industry has underlying problems that make it susceptible to wild fluctuations. And with any speculative asset, it will always be a double-edged sword. It's what drives the market forward but also causes it to crash just as easily. When people buy an NFT because they think it will go up in value, there's always the chance it won't. In other words, there's no guarantee that an NFT you buy today will be worthless tomorrow. So, adding any new NFT to your collection is and will always be a gamble.
Another reason why the NFT market is volatile is that it lacks institutional investors. Unlike the stock market, no big banks or financial institutions put their money in NFTs. Instead, it's mostly individuals with disposable income. This means there's less stability in the market since it's more prone to manipulation by whales (cough, cough Elon Musk!). But that's the essence of blockchain technology, which NFTs rely on – decentralization.
How to Succeed in the Ecosystem Amidst the Volatility
The key to navigating a volatile market is always being aware of the risks involved. Remember that you can lose everything you put in just as easily as you can make a killing. So, don't invest more than you're comfortable with losing.
But being aware of the risks is merely the "first step." You must commit yourself to understand every risk as if you see them coming from a mile away. That's how you'll be able to make sound investment decisions even when the market is crashing.
Of course, you can't do this alone. Fortunately, an entire community of like-minded individuals is more than happy to help each other out. Joining an active NFT group on social media is a great way to stay updated with the latest news and developments. It's also a gold mine of information and insights you can use to your advantage.
When in doubt, always consult with the community. They've seen it all and done it all. Chances are, someone has already gone through what you're experiencing right now. So, it makes complete sense to reach out and ask for advice.
The Warren Buffett Approach
Whether you're an artist, collector, or investor, keeping your emotions in check is the same rule. (As Warren Buffett often preaches.) This is easier said than done, especially when an NFT you're attached to starts losing value.
It can be tempting to sell an NFT that's not doing well in the market but hanging on to it, hoping it will rebound. Unfortunately, this is usually a recipe for disaster. The best thing you can do is to take the loss and move on.
The same goes for buying an NFT that's skyrocketing in value. It's easy to get caught up in the hype and FOMO but resist the urge to buy just because everyone else is. Instead, take a step back and consider whether the NFT is worth the price.
The most successful investors in any market are usually the ones who have the propensity to think with a clear head. They're not afraid to pull the trigger when they see an opportunity, but they're quick to cut their losses when things go south.
Diversify Your Collection
Another way to successfully navigate a volatile market is to diversify your collection. This means buying different types of NFTs from different creators. For example, you can buy an art NFT, a gaming NFT, and a utility NFT all in one go.
The beauty of diversification is that it allows you to hedge your bets. So, even if one type of NFT underperforms, you can still profit from the others. Institutional investors often use this strategy in the stock market, which can be just as effective in the NFT space.
Of course, you don't have to go all-in on diversification. You can start small by buying one or two different types of NFTs. The goal is to have a plan in place in case the market turns for the worse.
Trade Within Your Capabilities
In other words, don't get in over your head. Stick to NFTs that you understand and have experience with. Otherwise, you're just setting yourself up for failure. It's quite true when trading on decentralized exchanges (DEXs). DEXs are relatively new and can be challenging to use, even for experienced traders.
If you're new to the space, it might be best to trade on more user-friendly platforms like OpenSea or Foundation. These marketplaces are designed for NFT beginners and offer a much smoother experience. Once you get the hang of things, that's when you get to move on to more advanced platforms.
It's easy to get caught up in the excitement of trading and buying NFTs. But we've seen our fair share of people losing everything because they got over their heads. So, please trade within your capabilities and always remember to exercise caution.
Think Long Term
The final piece of advice is to think long-term. When investing in any asset, you should always have a plan for holding it for the long haul. This applies to both traditional assets like stocks and digital assets like NFTs. This one's crucial if you're an investor rather than a trader.
The concept of "HODLing" or holding on for dear life might be challenging in tough times like these, but it makes perfect sense. (Again, think of the Warren Buffet approach.) When you're planning to hold an asset for the long term, you no longer worry about short-term fluctuations in the market. You sit back and wait for the asset to reach its full potential.
Of course, this strategy only works if you have the patience to wait it out. If you don't, then you're better off trading. But if you have the patience, holding can be a very lucrative way to profit from the NFT market as blockchain technology and NFTs in general grow in popularity and the technology improves.
As much as we'd talk about the volatility of the NFT ecosystem countless times, it's something that we'll just have to accept as part of the territory. But there's no denying that the prospect of making money is just too enticing to ignore. However, as we have often preached in this blog, money should not be the main reason to invest in an NFT. You should do so because you like the project, the artist creating the art, and the community. If you think you’ll fund your retirement on NFT, you might want to reconsider. (Although anything is possible.) It’s best if you stick to the strategies that we've outlined above, and if you do, you should be able to navigate the market with confidence.