10 math common sense you need to know about NFTs

On weekdays I love reading, writing and math, especially math. So I have summarized a few mathematical common sense, which may help you better understand the world of NFT (knowledge points are sorted by complexity). I feel like math, especially when your operations involve investment decisions like buying or selling, is a fundamental and inevitable tool whether you like it or not. Some of this hopefully also serves as an antidote to the hype, the messaging on Twitter, and the incredible noise that fills the market space.

A 50% loss requires more money to break even than a 100% gain (more money is required due to Opensea fees and royalties).

If a project has a fixed fee of 10% + 2.5%, then a 50% loss requires you to make a profit of 125% + 2 transaction fees (buy and sell) to just break even. While projects can take off after teetering, there are still plenty of projects that can just sit there, so that’s something to keep in mind, after all, it’s just basic math.

It is widely mentioned that 99.9% of NFT projects do not maintain their value for a long time.

This directly means that if you’re going to buy a lot of NFT projects, you should double most of them, as they simply can’t all hold their value for a long time. There are a lot of caveats to this, but it shows that those items you hold or commit to for a long time should truly have extraordinary conviction that even with price volatility, you won’t be scared off.

Active traders try to make two correct decisions — entry and exit — while collectors only have to get it right once on entry (and can better allocate time and money costs).

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Therefore, the more you trade, the more mistakes you make.

If you trade 10 times and fail twice, then if you trade 100 times or 1000 times (all else being equal), don’t expect to be wrong only twice. If you buy a large number of NFTs, they scale from 10 to 100 to 1000 or more, and it is unrealistic to expect a 100% or even 75% success rate.

A 1% improvement per day is useful.

 

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The human mind is not good at multiplication, and multiplication is the basis of compound interest. Some people may know what the product of 11×11 equals, and maybe 19×19, but few can blurt out what 11×11×11 equals, or even higher multiples. This is hard because (a+b)x(a+b) has a simple formula, we all start with elementary algebra, but (a+b)x(a+b)x(a+ b) was largely forgotten after the final exam.

Because multiplication is unintuitive, it’s less of a concern in a rapidly iterative NFT exchange market environment, but it’s the foundation for long-term success if you’re going to be around long-term.

Your disposable income = income – personal expenses.

Therefore, the maximum amount of NFT spending you should have should not exceed your disposable income (and know what those numbers are). In fact, your NFT spending should be significantly lower than disposable income due to taxes, unplanned expenses (like a blowout), healthcare, rainy day savings, 401(k), etc.

Wealth management is an extremely important topic (which I won’t cover here), but to say the least, NFT investing has similarities to managing equity bank funds, whether it’s separating personal and stock finances, or just using bank savings funds Games (sticking to a pre-set budget), etc., can avoid bankruptcy.

Probability is important, it helps to analyze and quantify events such as price rises and falls and weight them with rough probabilities.

This leads to the basic math why buying at a lower entry price is “safer”. If you buy an NFT at 0.05eth, not only do you have less to lose, this allows you to have an error rate that does well even if it has a high probability of going to zero. For example, as long as the probability of loss is less than 80%, and you think it might be possible to quadruple, then the trade has a positive expected value (“EV”).

a. Total downside loss x loss probability + upside gain 4 times x (1-loss probability)>0

b. -0.05 eth x loss probability + 0.2 eth x (1 – loss probability) > 0

c. 80% > loss probability

If you think the NFT could go up 10x, the probability of loss can be as high as 90% (ignoring royalties and gas) and you’re still a positive EV.

Obviously, you have to have some understanding of probabilities and expected returns, but even a cursory understanding of returns can help you think about ups and downs in a more quantitative way.

If you’re a long-term collector, a punch-and-buy approach might help you build a more efficient and concise project plan.

Take a punch card machine with 10 slots that represent all the NFTs you will buy in your lifetime and will hold for your lifetime. Every time you buy an NFT (or an NFT in your favorite collectible), you punch holes, and once you’ve punched all the holes, you can’t buy any more. As a result, you’ll be quite careful about what you buy and think pretty hard about it.

While this isn’t entirely realistic, the metaphor reflects that most of our NFT budgets and what we really plan to use in the long term are limited. I don’t think many of us seek to create our own museums like some giant whales, so as a personal collection, whether it’s 10, 20, or 50, there should be boundaries.

NFTs are likely to follow a power-law whereby the best NFTs or collections of NFTs have higher returns than the rest of the portfolio, followed by a fair amount of strong and mediocre (and then a large number of 0s, the so-called “long tail” “).

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(Image sourced from Wikipedia)

To some extent, many NFT projects have characteristics and risk characteristics similar to early-stage startups and venture capital investments. Due to the nascent NFT scene, many projects and teams are less than a year old, and these teams are also building and selling NFTs to attract current and future customers. And these teams are by and large startups: founded by a group of people (rather than a large organization), channel funding, and consist of a startup death squad-like existence. As such, it’s no different from an early-stage consumer product company or tech company. And some big winners (like RTFKT, which was acquired by Nike, or BAYC and Pixel Vault) are to be expected.

If you care about volatility, then quantifying/estimating volatility is more important.

As an advocate for early science learning/research, I have reviewed dozens of middle and high school science fair projects. Average results are shown for each panel. But not everyone will show the variance (or standard deviation, spread, or “volatility”) around the data points. If you don’t show variance, all the rich data/history is mixed into one point. As is well known, many people drowned while trying to cross rivers that were on average 3 feet deep.

NFT buyers often behave in the same way as junior high school science students, ignoring the differences in their portfolios. For example, everyone knows that NFTs are volatile, but if you had an NFT that could go up or down +/-10%, and another up or down +/-50%, would you feel the same way? What about the stock market? How much volatility can you take? If you prefer to trade and your portfolio has a huge difference, how does this affect your liquidity position (bank funds) for future projects?

Obviously, if you’re a collector, volatility should be a lot less of an issue. But it’s still quite distressing to see things drop by 50% or more, which is so common in cryptocurrencies. While volatility can be expected and even worshipped (otherwise things wouldn’t go up), whether you’re a collector, investor, buyer, or trader, huge volatility will help you better understand yourself and your own risk appetite.

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So band manipulation is important. (The whipsaws matter. )

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/10-math-common-sense-you-need-to-know-about-nfts/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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