Understanding the Importance of Liquidity and Volume When NFT Trading
Posted On January 20, 2020
NFT Trading or Investing is a new concept and thus as a community, us investors are still figuring out how the marketplace works.
For me personally, someone who has spent 1,000’s of ETH in the NFT marketplace and been able to cash out 1,000’s of ETH, two biggest things I’ve kept an eye on are liquidity and volume. In this post I’ll try illustrate why they are so important.
What is Liquidity and Volume?
Straight from Google:
“In business, economics or investment, market liquidity is a market’s feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset’s price.”
Bitcoin is great trading grounds for day traders because you can buy and sell $100’s of thousands worth of Bitcoin without effecting the price too much.
But if we take a look at the LUN/BTC pairing on Binance, particularly the sell orders, we’ll see this,
A lot of information but basically this is telling us,
Current trading price is 0.0001093 BTC, (going to say 1,093 Sats for simplicities sake),
Price will become 1,323 Sats if we buy market buy $100,000 worth, (~12 BTC worth at time of writing this post).
That’s a difference of around 20%!
That means, if you spend $100,000, you’ll pump the price up 20%!
How does this apply to NFT’s?
If you’re a large scale investor who wants to down 10s of thousands or 100s of thousands of $, you want to make sure you can cash this outat least the same price you bought in for.
It’s easy to put your money in on a project that might seem promising but if the community isn’t big enough to sell to once you want to cash out then you’re stuck with a bunch of digital items that no one wants to buy at the time you want to sell.
You’ll have to wait for a large investor like you in the space who also is confident enough to put in $100s of thousands.
That’s why I only invest in top NFT projects with proven market volume, (number and value of sales). The below image shows the top NFT projects by 7 day sales volume.
So if I put $10s of thousands in the top 3-4 projects, I know it won’t take me long to cash out as there’s plenty of people buying and selling.
Compare this to the bottom of the list where 7 day volume is peanuts! ~$10 to $30 for 7 days! If you have over $1,000 invested it’s going to be tough to sell unless you find a private buyer or price your items REALLY cheap. Or maybe it’s so bad that there’s NO buyers collectively big enough to absorb your items for sale which means you can’t cash out your money!
Consistent Buy Volume = Price Growth
Another reason why buy volume is important is because it indicates the direction of price for certain NFT’s.
A great example is Gods Unchained Genesis Rare Chests.
These chests contain 6 unopened original Gods Unchained Card Packs!
It’s exciting to open these as you can’t buy them any more and there’s only around 11,000 unopened chests out there currently. This number keeps decreasing as people open them.
These were original selling for 0.08 Eth but in less than 2 months have gone up to ~0.3 Eth!
If you kept an eye on how often these were being bought, you could have applied the ‘high volume = high gain’ formula!
Each dot represents a buy order, with some buy orders buying 10+ at a time!
You can see how consistent these buys are and it makes sense as people keep buying, the price will continue to rise for an asset with only a set amount in circulation right?
This has been the case for many Cards for Gods Unchained,
A lot of these started at ~0.1 – 0.15 ETH
Same deal with Decentraland,
Current cheapest land is 12,000 MANA,
Because buy volume has been consistent with 5-20 lands selling per day, this price has gone up from 6,000 MANA 2 years ago to 12,000 MANA today!
This is WITH another 9,300 Lands being introduced, (those that weren’t sold during the first auction), or this number would be more than 15,000 MANA by now.
Buy volume chart over the last 1 year.
The reasons above are why I usually skip pre-sales unless there’s a large enough community participating, (ideally 1,000’s of investors with $5-$10M invested.
This will make more sense with experience but it’s important to know especially if you want to be an NFT trader.
More volume = more opportunities to make trades and profit.