Talk about NFT liquidity: How to find the most frequently traded Collection

contents

 Liquidity of assets

 What determines the liquidity of an asset?

 NFT liquidity

 Advantages and problems coexist

 Why lack of liquidity

 “No guarantee” in NFT

 Non-transparent data

 How to judge the liquidity of NFT

 Find the most frequently traded items

 Determine the liquidity data of a specific project

Liquidity of assets

Liquidity refers to the efficiency with which an asset can be converted into ready-made cash without affecting its market price. The most liquid asset is cash itself. In other words, liquidity describes the extent to which an asset can be quickly purchased or sold in the market at a price that reflects its intrinsic value.

What determines the liquidity of an asset?

The liquidity of an asset is how easy it is to convert it into cash. In corporate finance, liquid assets refer to those assets that can be used to repay debts in a short period of time, and cash is the most liquid asset you can have. To some extent, the greater the trading volume of an asset, the stronger its liquidity. This is because the higher trading volume indicates that the asset can be traded at a fair market price.

NFT liquidity

After experiencing png summer, many people have accumulated a lot of NFTs in their hands. Some people like it very much and want to hold it for a long time, but some people face the situation that NFTs cannot be sold.

NFT collections, such as avatars and artworks, are generally considered to be less mobile. If the owner of these items meets a suitable buyer, they can trade at market value. However, if you want to get cash as soon as possible, you may have to sell it at a discount, which obviously reduces the liquidity of such assets. However, when the demand for a certain item suddenly increases (for example, the market’s enthusiasm for a certain Collection is high), liquidity will be reassessed.

There are several ways to measure the value of an NFT. One is the past transaction data, but a well-rounded buyer will consider many other factors, for example, the liquidity compared with other products of the same type, referred to as relative liquidity. The reason is simple. A higher number of transactions represents higher liquidity to some extent. This number is not from the perspective of currency, but from the perspective of productivity to prove the market size of the product. However, some markets with small trading volume (such as collections launched by well-known artists) can also be considered as a very unique and attractive liquid market, so they need to be discussed separately.

Advantages and problems coexist

Compared with the traditional market, NFT has many advantages, such as preventing copying and extending copyright. Each NFT is tied to a blockchain that proves the authenticity and ownership of digital art. In addition, when digital art is resold, the original author will receive a percentage of each NFT sale. Therefore, creators and artists benefit from all economic activities that occur downstream of the original sales. In this way, creators can get more due benefits.

For those buyers who use NFT as an investment asset, relatively low liquidity is a natural problem in the NFT market. Currently, NFT transactions are not an instant process, usually through wallet registration and other procedures, and buyers also face high gas transaction costs.

Currently, the NFT market is booming, and as a new and unique investment field, although there are many investment characteristics, if it is just a simple collection without financialization, the liquidity of NFT as an asset will decrease and become Challenges for further development. Compared with stocks, gold and other traditional assets, the global art and collectibles market is much less liquid. This problem is even more obvious in the nascent NFT market. It may take a considerable amount of time for buyers and sellers or lenders and borrowers to quickly conduct the best and mutually beneficial transactions.

When it comes to collectibles, resale is a major challenge. This can be attributed to the problem of lack of liquidity. For example, it is difficult for investors to buy one non-financial asset by trading another. Due to lack of liquidity, investors cannot easily exchange NFT for capital. This begs the question: can the NFT boom last? After all, in contrast, highly liquid assets will cause investors to make buying decisions faster.

Why is there a lack of liquidity?

One of the biggest obstacles facing the NFT market, at least in the world of digital assets, is the lack of liquidity and the ability to obtain a return on investment without selling NFTs. As demonstrated by DeFi, investors value liquidity and desire returns. So, why is NFT lacking liquidity?

“No guarantee” in NFT

After the works of well-known artists were auctioned at sky-high prices, NFT witnessed an influx of digital creators. Everyone hopes to become famous in the spotlight, but it is not so easy. New artists must jump over a few stumbling blocks before they can actually sell their NFTs. The first is to understand NFT and its operating system. Another problem is that, without knowing whether the artwork will be sold, creators must promote their work on social media and actively participate in community activities. But even so, there is no guarantee that the artwork will be sold successfully.

Non-transparent data

In the NFT market, some sales data are unknowable, and the other half of the data contained in the index, that is, the auction market data, also has selection bias. At the same time, many sales prices generated by online auctions have not been announced, and coupled with more and more private gifts, comparing prices may become more difficult, not easier. It can be seen that because the NFT market cannot be transparent and comprehensive, it is difficult to judge liquidity. In the NFT market that encounters similar difficulties, if you want to improve the ability to judge liquidity, the underlying data support can help.

Why is liquidity important for NFT investment?

For investors considering NFT assets, they will naturally be concerned about the low liquidity of NFT relative to most other traditional assets. Currently, NFT transactions are not an instant process. It usually requires a complicated process and high transaction costs.

If you have invested in a certain type of NFT, it is now popular in the market. However, if a market has low liquidity, it means that there are not enough buyers to pay the price. When this happens, you may have to sell at a lower price, or wait for more people to join the market, and then sell. If you choose to sell at this time, records show that someone sold it at a lower price, which may affect the value of your NFT in the market.

How to judge the liquidity of NFT

Users can check prices and look for opportunities on some data platforms.

Find the most frequently traded items

  • Liquidity indicators

After some people buy NFT, they always hope to change hands as soon as possible. Liquidity indicators can help buyers quickly understand the frequent transactions of NFT projects.

 

Talk about NFT liquidity: How to find the most frequently traded Collection

(Data source: nftgo.io)

Due to the uniqueness of each NFT asset, generally speaking, it is impossible to quantify the liquidity of NFT assets through a continuous trading model.

In the stock market, the turnover rate is usually used to measure the liquidity of stocks. The higher the turnover rate, the more active the trading of stocks. Calculated as follows:

Stock turnover rate = 100% of the trading volume in a specific time period/total number of issued shares.

On this basis, the NFT liquidity index can be: a specific category of NFT asset liquidity = the number of NFT transactions in this category / the total NFT liquidity of this category 100%.

Determine the liquidity data of a specific project

For those who do not plan to hold NFT for a long time and want to obtain income through NFT trading, liquidity indicators are indeed one of the data that must be paid attention to. For example, the liquidity of The Sandbox is slightly higher than that of Decentraland within 30 days , but the overall liquidity is lower and showing a downward trend.

 

Talk about NFT liquidity: How to find the most frequently traded Collection

(The Sandbox liquidity data, data source: nftgo.io)

 

Talk about NFT liquidity: How to find the most frequently traded Collection

(Decentraland liquidity data, data source: nftgo.io)

Of course, as the industry matures, there will be more liquidity indicators, such as BI Rate (Bought-In), which is analogous to the field of art, which measures the average share of the unsold NFT art category, indicating that art is being sold The level of difficulty and risk. Very low BI indicates high demand and proves that the industry is more liquid.

All of these indicators are useful resources, and people may focus on the results of the top 25, 50, or 1000 projects. But in the end, the long tail effect is unavoidable, and the craze seen is often concentrated on the best performing parts of the auction market.

In the future, as intellectual property rights are transferred to the blockchain as NFTs, trillions of digital content will be transferred to the secondary market. This will release huge illiquid value and become the largest asset class in the blockchain, giving NFT liquidity a deeper meaning. With the help of standards and smart contracts, NFTs may be divided, jointly owned and managed by multiple users or communities, and conduct fragmented transactions, crowdfunding, and release more value.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/talk-about-nft-liquidity-how-to-find-the-most-frequently-traded-collection/
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