Chainalysis analysis: What did those who profited from NFT do right?

Most successful NFT traders are also “rich” DeFi users.

According to the latest report of the research organization Chainalysis, the non-fungible token (NFT) market has surged to US$27 billion this year, becoming one of the most important segments of the cryptocurrency market. The report also reveals that the digital collectors with the most profitable heads and other waist-to-tail collectors are essentially different in their collection strategies.

This year, NFT defeated cheugy (G generation used to describe the old-fashioned predecessors) to become the “word of the year” in the Collins dictionary. Pandamic (Pandemic), Climate Anxiety (Climate Anxiety) and Metaverse (Metaverse) are also nominated candidates for “Word of the Year” along with NFT.

Now when people talk about NFT, they still mention the Christie’s art auction of 69 million dollars by digital artist Beeple in the first half of this year. However, the application field of NFT has already surpassed digital collections and works of art, and it has blossomed everywhere in fields such as music, games, and virtual real estate.

The rise of the concept of Metaverse has added weight to the popular NFT trading market. An ETF that invests in listed companies active in the NFT field has also been listed and traded, so that more investors can understand and be exposed to this field.

As the most popular NFT trading market, OpenSea has received more than 16 billion U.S. dollars worth of cryptocurrency in 2021 (as of the writing of Chainalysis’s report). The top traders active on OpenSea obviously have obvious tendencies and routines. This article will share the key data in the Chainalysis report to understand the preferences of NFT collectors on OpenSea.

Retail investors dominate the NFT trading market

Similar to most traditional financial transactions, institutional investors occupy an absolute dominant position in the overall cryptocurrency trading market. But NFT is an exception. As a special cryptocurrency product, retail accounts (with a transaction amount of less than 10,000 US dollars) are the most active market participants.

From Chainalysis’s data, among all NFT transactions, transactions from retail accounts account for 81% of the NFT market. As the NFT market is increasingly sought after by celebrities and wealthy people, the proportion of transactions of NFT collectors (with a transaction amount greater than US$10,000 but less than US$100,000) has increased from 6% in March to 19% in September. Large-value transactions are becoming more and more common, and NFTs are gradually getting rid of the label of “speculators’ self-interest game”. However, NFT institutional investors (with a transaction amount greater than US$100,000) still have reservations about it, and the number of transactions in the overall market is less than 1%.


Distribution diagram of the number of transactions in the NFT market divided by each transaction volume

From the statistical dimension of NFT market transaction volume, NFT collectors and NFT institutional investors account for the vast majority of the total transaction volume. Among them, NFT collectors have the largest transaction amount, accounting for 63%. Although the transaction frequency of this level of NFT traders is less than that of retail investors, the total transaction amount is the highest. In this data, NFT institutional investors accounted for 26%, ranking second. The volume of retail transactions accounted for only 11% of the market volume, ranking at the bottom.


Percentage of trading volume of NFT investors of different trading levels

The above two statistics show that, from a macro perspective, although the total volume of retail transactions is low, they have a large number of resale orders. This also shows that the NFT market is still in the process of exploring, the future direction is still highly unpredictable, and most institutional investors still maintain a wait-and-see attitude.

What do good NFT collectors have in common

NFT’s innovation in the arts, games, and cultural industries is clearly beginning to appear. But on the other hand, like other fast-growing investment markets, the most obvious reason why the NFT market attracts attention is not the desire to drive changes in the world with NFT, but the pure expectation that it can be obtained through trading NFT in a relatively short period of time. high Benefit.

But can every investor get a share of this new market at this time? The answer is definitely no, but we also found some commonalities among the most profitable investors.

It is different from what people might expect: According to OpenSea data, if NFT investors enter the market during the Minting (casting) stage, only 28.5% of them can obtain income through the resale of NFTs, but they can buy NFTs directly in the secondary market. 65% of investors who change hands can achieve profitability.

In addition to different timings leading to completely different investment results, the following will be based on Chainalysis’s data on how the most profitable investors in the emerging NFT market have adopted strategies to increase their returns.

NFT primary market strategy analysis

Joining the whitelist is the key to profitability of investing in new NFT projects

What is a whitelist? This term is not unfamiliar to NFT investors. When we review each successful NFT project, they will be encouraged in the Discord community or Twitter in the early stage to encourage active participants interested in the project to plan or plan the project. Promote a part. The project operator will whitelist eligible participants as a reward based on the contribution value of active participants. Participants who join the whitelist can mint (buy) NFTs at a lower price, and they are the first investors in these NFT projects.

According to OpenSea data, 75.7% of whitelisted users can make profits from subsequent NFT sales, while only 20.8% of non-whitelisted users can make profits. Obviously, just like in traditional financial market investment, investors who can enter the market in the early stage of a project have a higher probability of reaping profits after exiting the market. It’s just that the early entry threshold of the traditional financial market is evaluated by the amount of funds or resources, while the NFT market is measured by the degree of community contribution.

From the perspective of ROI multiple (return multiple), 78% of non-whitelisted investors lost money when reselling, and nearly 59% of them lost more than half of them. The whitelist investors have a high probability of obtaining a high return rate, and about 40% of them have obtained a multiple of 4 times the return.


Whitelist vs. non-whitelist investors’ income multiples from resale after minting NFT

Gas consumption caused by NFT casting failure is the reason for lowering the profit rate

Judging from the phenomenon we discussed above, if the return of NFT is equal to the price difference between the buying price and the selling price. Investors who enter the market from the primary market, that is, from the casting stage, are more likely to fail than investors in the secondary market, because the primary market has a success rate of 28.5%, while the secondary market has a success rate of 65.1%. The reason for this difference may be due to the transaction fees consumed by a large number of failed transactions.

Under what circumstances will the transaction fail but still require transaction fees? When a popular NFT project is in the casting stage, thousands of users compete to cast the NFT at the same time. The network congestion caused during this period caused many users to fail the casting after submitting the transaction fee. The survey also found that when experienced NFT traders use robots for NFT, they often ignore the scenario of transaction failure. This directly causes the robot to repeatedly submit transaction requests when the transaction has failed.

In the worst case, this robot keeps submitting transactions but fails, resulting in a loss of millions of transaction fees. If the transaction fees of these failed transactions are also included in the overall NFT rate of return, the average rate of return for primary market participants may be lower than that of other NFT traders.

In general, if NFT investors who want to enter the market from the casting stage, users who are not whitelisted are less likely to achieve profit during the NFT process.

NFT’s secondary market strategy analysis

The above introduced the different investment strategies leading to different investment results when the NFT project entered the casting stage. The following is a comparison of how NFT traders in the secondary market obtain profits through corresponding strategies. Compared with NFT sales in the primary market, sales risks in the secondary market are more complicated.

Overview of the secondary market

High concentration of NFT industry

As can be seen from the statistical picture below, the number of NFT projects sold in OpenSea reached 2000, but the sales of the top 250 NFT projects accounted for 80% of the secondary market sales, that is, 10% of the projects accounted for 80% of the sales Well, the industry concentration is high.

If the NFT industry has entered the mature stage of the industry, it should have a highly differentiated competition, and the industry concentration should be relatively low. However, the NFT market is currently in the exploratory stage, and market investors have far from forming a systematic standard for its judgment. Therefore, most investors follow the trend, and the head effect is obvious. When the NFT market matures in the future, it may be similar to the luxury goods industry and the art industry, with brand value and audience loyalty as the most important competitiveness.


OpenSea’s NFT project resale concentration

A few NFT investors made most of the profits

From the perspective of market behavior, a small number of people will always make money, and the NFT market is no exception. From the profit distribution chart below, 20% of OpenSea accounts account for 80% of the NFT secondary market transaction volume, and 5% of users make 80% of the secondary market sales profit. It is conceivable that although the NFT market is still in its infancy stage of development, the head effect has already formed. The remaining 95% of users are still fiercely competing for 20% of profits.


Comparison of NFT resale concentration and NFT resale profit concentration

Generally speaking, the NFT market is in a growth period, with more and more projects and fierce competition. However, it is believed that in the future development, the market elimination mechanism will retain excellent projects. Everyone is in this high-risk and high-yield period. NFT investors need more rational investment strategies to meet the mature development period of NFT.

Comparison of investment preferences in the secondary market

In addition to introducing the development of NFT’s secondary market, Chainalysis’s survey also grouped more than 23,000 OpenSea accounts. The grouping condition is the return rate of each NFT resale. In the chart below, group 1 is the most successful NFT trading group, and group 5 is the least successful. The relationship between group 2-5’s investment return multiples linearly decreasing is obvious, from 1.9 to 0.9. The group 1 is much higher than the other groups: each time the NFT changes hands, the group 1 can obtain an average return on investment of up to 2.9 times, which is twice as high as that of the group 2. The average rate of return for each resale of group 5 is 0.9, which is a loss. We can jokingly refer to Group 5 as the “Leek Group”.


Statistics table of average investment return multiples of each group

Resale hit rate and diversified investment

At present, in the nascent NFT market, every project is in the angel round. Except for a few projects, such as BAYC, which has achieved a certain degree of commercialization, most of the remaining project value systems depend on the realization of the Metaverse. Such a brand-new business logic system is difficult to analyze based on existing value judgments. Therefore, judging from the resale hit rate of each group of NFT investors, the high-yield resale hit rate is not much higher than that of other groups. In other words, the probability that everyone successfully finds the next order after placing an order is about the same.


NFT transaction success rate (hit rate)

The reason why the high-yield group has a slightly better hit rate may also be related to the higher average transaction frequency of group 1. In the survey data, the average number of buy and sell NFTs for group 1 is 105. This is at least twice the number of group 2, and group 2 has 39. Groups 4 and 5 bought and sold less than 25, which is 1/4 of group 1.


Number of resales of NFT items

Although high-yield users have significantly more frequent transactions in small groups, they tend to put their eggs in different baskets. The average number of NFT projects (Uniques) invested by investors in Group 1 is as high as 28, while there are less than 10 in Groups 5 and 4. The number of invested NFT projects and the success probability of investment show a complete linear relationship. Diversified strategies of NFT investment projects can reduce non-systematic risks.


Number of NFT Project Participants in Different Groups

High-yield account investment preferences are relatively stable

Comparing the trading orders with the highest returns in the historical transactions of each NFT trader, it is found that in addition to the overall loss of group 5, group 1 is the most successful investment group, and their orders with the highest returns have the lowest return rates in each group. Combining contextual data analysis, it can be seen that high-yield groups tend to be more rational and seldom have the psychology of making small gains. The timing of entry and the selected items often consider whether the target has a certain value basis, so it can obtain excess returns. The probability is also low. On the contrary, the group with less overall investment income tends to obtain a higher excess return on the most successful single transaction.


Statistics on the average return rate of the most successful NFT transaction orders

High-yield teams also have high project costs

The more successful the group, the higher the average NFT purchase cost. The average NFT cost of group 4 is 0.375 ETH, while the average cost of group 1 is as high as 1.07 ETH. This also reminds us that in NFT investment, start-up projects are often more mixed. Don’t buy projects blindly because they are cheap, otherwise they may lead to low returns or even losses.


Average cost of NFT purchase

Most successful NFT traders are also “rich” Defi users

In Chainalysis’s statistics, the initial source of funds in the wallets of NFT traders in Group 1 is counted. More than half of the initial sources of funds are related to Defi. According to the report, it can be found that decentralized trading contracts closely related to Defi are the main source of funds for the group of traders, accounting for 34.1%. In addition, 9% of loan contracts and 14.8% of token smart contracts are also related to the use of Defi. In the asset portfolio of general wallets, most of the funds come from centralized exchanges.

Chainaylsis also compared the average amount of each transaction on a centralized exchange and a decentralized exchange, and the results showed that the average transaction amount on the central exchange was $12,431, while the decentralized exchange was $26,520. Obviously, the user population of decentralized exchanges generally has a relatively high investment amount and sufficient funds. Therefore, this group of people is naturally more confident when they have a lot of funds to invest in NFT relatively mature NFT projects.


Statistics of source of NFT investment funds for group 1

Final reminder

The Chainalysis report concludes that NFT, as the most popular virtual currency market product this year, has become a necessary choice for retail investors to start Metaverse or virtual currency market investment, but NFT market participants need to understand the shape of the entire NFT market.

The report explains that the concentration of NFT projects and the concentration of successful investors are both high. It shows that there are still a few NFTs that can profit in the NFT market competition. Participants need to maintain a rational and cautious attitude to reduce losses in the investment process. .

Investors entering the NFT secondary market have a higher probability of success than entering the primary market, provided that the funds must be sufficient. Users who enter the primary market need to invest more in contributing to the community to join the whitelist to gain a better probability of profit, instead of just grabbing more NFTs through robots, otherwise they may consume more invalid transaction fees. Reduce the rate of return. Traders in the secondary market need to formulate more rational investment strategies: value investment, diversified investment, and reduce systemic risks. Be wary of blindly buying low-priced items and excessively seeking excessive returns.

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