(NFT) Investors who survived the 2008 financial crisis know the importance of liquidity. As the recession began, deflationary pressures came on the market and buyers disappeared. Sellers are desperate to sell assets before their prices drop any further, but buyers want to eliminate risk and look to safe investments like government bonds and money market funds.
The lack of liquidity associated with unreliable assets is one of the reasons investors consider them riskier than cryptocurrencies. When an investor wants to sell Bitcoin (BTC), they can easily sell to an order book of buyers at various prices. If sellers don’t sell their bitcoins today, they could easily come back tomorrow and part with their bitcoins in favor of well-meaning buyers.
In contrast, unusable tokens (NFTs) are unique and are much more difficult to match sellers with buyers. Cointelegraph Research has analyzed what liquidity is for the NFT and whether some collections are trading more frequently than others. Cointelegraph Research will publish its first report on NFT in October to provide a detailed answer to this question and more information about the risks associated with NFT.
What does liquidity mean in the context of NFTs?
There is no market for “Mona Lisa” paintings because there is only one “Mona Lisa”. Likewise, NFTs have low liquidity compared to fungible currencies. One reason is that collectors often prefer to keep their NFTs rather than trade in speculative markets. Another reason is that NFTs trade bilaterally, with a small pool of potential participants for each sale.
For example, a particular player’s NFT sports card can only be claimed by a small group of collectors. In addition, not every NFT is a perfect replacement for another. For example, if Mike wanted a 1988 Michael Jordan NFT for his birthday but received a 2014 Lebron James, Mike might not be very happy. Because of the difficulty of comparing the various NFTs offered by sellers and the small number of bidders, the total number of transactions is small. This low conversion makes it more difficult to determine the value of each NFT.
For fungible assets such as stocks, liquidity can be measured by dividing the total number of stocks traded during a given period of time (e.g. a month) by the average number of stocks in circulation for the same period. The higher the stock turnover, the more liquid the company’s stock is. But how do you measure the liquidity of a single inviolable asset?
For markets with low volume per commodity, such as real estate or collectibles, the two most important types of liquidity metrics are “time in market” and “trading activity”. For example, real estate liquidity can be measured in terms of the average time between when a home is taken and when it is sold. In relation to NFT, this would be the “average time from the listing of the NFT on the secondary market to being sold”.
According to Gauthier Zuppinger, CEO of NFT data source NonFungible.com, market time is difficult for NFTs to measure because “Thousands of assets are quoted in the market at extremely high prices (some punks are quoted in the market at very high prices). ). On the other hand, many people don’t “list” real estate, but rather open bids. ”
The second type of liquidity measure calculates the level of trading activity. For example, NonFungible.com measures NFT liquidity as a percentage of total supply of a given asset class that was traded in the secondary market. This can be calculated by dividing the volume of unique assets traded in the secondary market by the total available supply for each asset class.
The answer to the question “Which collection of NFTs is least traded?” Is meebits. Meebits are one of the least fluid collectibles, with over 66% not even selling. Interestingly, the majority (57.7%) of CryptoPunks are only sold once or less.
Cointelegraph Research’s NFT report, released in October, looks at evaluating different types of NFTs and discovering interesting NFT collections before they go mainstream. The report also looks at the dark side of NFTs, including their environmental impact and lack of liquidity. The report is supported by projects including Enjin, OneOf, Nansen, Mintable, Alien Worlds, Animoca Brands, NFT Bank, The Sandbox and Pinata.
This article is for informational purposes only and does not constitute investment advice or analysis or a solicitation to buy or sell financial instruments. In particular, the material is not a substitute for personal investment or other advice.