NFT Economics – Supply And Demand
When I was in college, I made thousands of dollars flipping concert tickets. Besides the easy pocket money, the best lesson it taught me was about supply, demand, and pricing of tickets.
You see, the arbitrage was possible only because demand far outweighs supply. But between different tiers of tickets, there exists varying levels of demand and circulating supply, which affects my pricing strategy. I could get the cheapest tickets and made a quick 30% to 50%, and I wouldn't be able to make more because there are more resellers there. Or I could get the scarcest tickets (usually the most expensive), and easily get over 100%, although I will have to be more strategic in finding buyers and in my negotiation tactic.
Little did I know that this experience will translate so darn well into the world of NFTs. And it all boils down to supply and demand.
Before jumping in, we need to make the assumption that you're interested to make money by reselling an NFT. It can be a short-term flip, or a long-term HODL, but most of what we discuss here will be more applicable for the short term. By "short term", we are referring to a period of three to six months, and ideally less than a year.
Supply Is Relative To Demand
The first thing you need to know is that there is always scarcity baked into the supply. Whether it's 10,000 pieces, an even smaller quantity, a limited 1/1 collection or perhaps a limited-time mint, it's always around a fixed and limited supply.
But it is futile to gauge value based on supply, because the reason anyone will want to pay more for something is because he wants to own it ahead of others. Therein comes demand, which should ALWAYS be considered relative to supply.
The short version: When demand exceeds supply, an NFT or a project will command higher prices.
Although all NFTs have limited supply, it's useful to ask why limit the supply? For artists, they create limited 1/1 because the limiting factor could be their production capacity. For games, they may want to reduce the total number of players at the start to reduce server costs and to play-test before scaling it up. For ALL projects, it's about creating some form of exclusivity.
The problem is, if being exclusive is the main pull – what is it about a project's exclusivity that makes it desirable? Punks are exclusive to the rich or the crypto-early. BAYC are exclusive to NFT earlies, and these exclusiveness is what drives their prices. However, with more and more imitation projects gaining traction e.g. Phunks or Cool Cats etc, the overall supply of NFTs is burgeoning – is there any value then to this supposed exclusivity?
There projects can start to be creative in generating demand. For example, BAYC has been a fine example not only at expanding their supply with MAYC, but also in creating events and partnerships to have renewed and sustained demand.
Genesis Kongz was one of the first to pioneer an on-chain token, BANANAs, to breed Baby Kongz, therein creating their own ecosystem. Mutant Cats and Heads DAO have created their own DAO to create community co-ownership of other NFTs. There are also gaming NFTs, access NFTs, alpha-sharing NFTs and each of them have their own pull.
The challenge is that in an increasingly open and transparent ecosystem, the best practices can easily be copied and adopted by other projects. What was once unique in BANANAs is as common as $MILK, $FISH, $CHEETH etc.
For many projects, demand also comes in the form of hype – whether it's genuine partnerships or innovative methods, or it could be pure and worthless hype generated by NFT influencers. Regrettably, while the first is beneficial and the latter detrimental for the ecosystem, it's hard to tell the two types of hype apart.
Evaluating Supply And Demand Surrounding Different Project Phases
One other thing about supply to note is the circulating supply. If a project garners enough holders who are not selling regardless of price, be it through staking mechanism or some upcoming airdrops, the circulating supply gets lesser and prices can either pump or drop more.
This is also when you might hear some people suggest to look at how "thin" or "thick" a floor is. Thick floor means that there are many items being sold at the floor price, which means that prices are unlikely to rise. On the other hand, thin floors mean that a whale can potentially buy up all the items sold at floor price and prices will then skyrocket because of the illiquid supply.
So how do these play out throughout the lifecycle of a project?
Phase One: The Launch
This is when the hype is usually the strongest. When people are dying to get into Whitelists, or buying the projects before their reveal. Given a fixed supply, this is also when prices usually see their first high.
Phase Two: Post Launch
Immediately after launch, hype might still sustain if the project is not revealed. But the moment after the reveal, you'll see all prices crash. A bulk of the reason is because the common NFTs are quickly being let go of, while value is being accrued in the rarer NFTs. This redistribution of value nonetheless causes floor prices to crash.
During this period, you can expect prices to continue to head lower or stay at a low unless the project gets new hype. This is when there is pretty much nothing for collectors to do. And most dopamine-seeking, impatient collectors would rather jump to the next big thing, while flippers alike would take a hit and get liquidity to enter newer projects.
Phase Three: New Hype
The new hype usually kicks in with new announcements. It can be a partnership, a new implementation in the game or mechanics, or most commonly an airdrop. Because most people think of airdrops as free NFTs that they can resell, and assign some value to it.
Depending on how major the announcement, and how long the hype can sustain, prices can hit a new high, or taper off after a while. Some projects also get short-term spikes from notable influencers talking about their project, although this is often short-lived.
In conclusion, the best time to get in a project is before the hype i.e. before launch in the whitelist, or before a new announcement. And the best time to sell is at the highs– immediately after launch, or immediately after a major announcement.
Investing For The Long-term
Of course, if you're investing for the long-term, many of these factors would not matter as much. Yes, the local highs and lows in prices can fluctuate, but if a project is genuinely building for the long run, you can expect prices to go up in general.
If that's the case, rather than trade in and out of a project, why not pick a project where you can actively participate in the community events and discussions. This is also how I choose to buy my NFTs, because being involved not only incentivises me monetarily, but also in spirit to be hands-on and be part of the community.
Through my short time in the space, I've spoken with many incredible people with great minds or extremely talented skills that I can work with. That is something I would have never gotten if I was just in for flipping.
Nevertheless, you do you. I'm just offering another view that there's always something more beyond just financial gains of NFTs (: