Did you ever hear the phrase, ‘millionaires are made in recessions‘. Well, this applies to the NFT market too. When the market demand slumps, which it will, you will see projects floor prices collapse, sometimes as much as 70%, before rebounding. Take a look at this chart following the price of one of the safest NFT projects out there, CryptoPunks.
We can see the incredible fluctuations and then outrageous arbitrage opportunities at certain points in time – assuming you had the liquidity. The idea of intentional liquidity is to ensure that when the market is folding and hands turn to paper, you are there waiting to scoop up those NFTs that ever so recently felt so, so out of reach.
The NFT Liquidity Trap
Whilst you are actively trading and the market is doing well, it seems irrational to keep too much liquidity. Why keep Ether stored when NFTs are turning profits drop after drop? The thing is, the market is doing great until it isn’t. If you are able to perfectly anticipate the top, liquidate, and watch the market tumble whilst you are sitting pretty in liquid tranquility – then kudos. That is the ideal situation. You can then buy back in at lower prices and get back in the game.
However, attempting to time this = speculation.
Your aim should be to speculate as little as possible. If you load up on projects and miss the top, you’ll see prices tumble with your Ether locked in and then you’ll have two options;
- Wait it out until the market recovers and then sell to gain back liquidity.
- Sell on the down curve to recover some free funds in the short term.
Rather than risk having to sell short like this, you should always aim to hold a set % of your assets as liquid. Doing this means that you always get to sell at a price you are happy with whilst opening up a treasure trove of opportunity in those dark moments of NFT winter.
How To Play The NFT Liquidity Game
I believe that you should aim to have around 40% of your crypto in liquid form. However, your exact percentage may vary depending on how bullish you are on the industry as a whole and where you see it in the years to come. I consider myself bullish on NFTs, and think they are here to stay. I aim for a 40/60 split with this in mind.
The 60% you are holding in NFTs should be carefully allocated into short and long term holds. The majority here should be long-term. If NFT winter arrives, are these assets all going to be strong enough to recover?
To manage this 60%, you should be slowly re-investing profits into blue chip NFTs whilst also periodically trimming the fat. By trimming the fat, I mean, dive into your stack and if there are projects in there that you just don’t believe in anymore, take the loss and make your portfolio leaner. Don’t be afraid to sell at a loss if necessary. If you believe the expected value of holding Eth in that specific NFT is not going to improve, then you should be selling it.
With your other 40%, keep it liquid. You can use this for short term flips where you are unlikely to be out of liquidity for more than a few hours. For example, minting a project with the purpose of selling it pre-reveal.
If you follow this path, when the NFT winter arrives, you should be in a great position, with 40% liquid Eth and 50-60% blue chips safely stored.
When To Use Your Liquid Funds
It can be hard to maintain a balance. It can be tempting to over expose to NFTs and be holding a 90% filled bag – i’ve been there. But powering through and sticking to your convictions has its rewards.
- When the dip inevitably comes, you can buy up more blue chips at a fraction of the price.
- If you need money quickly due to emergencies, you have the liquid there without having to dump your NFTs below value in a bear market.
- You have much less stress and worry, knowing that you are not overly exposed in a crashing market without any idea of when recovery may come.
- If you catch a high value, underpriced NFT get listed, you have the funds to scoop it up and re-list at the appropriate price.
How To Form Your Liquid Wallet
Let’s assume you are very illiquid right now and want to make a change. Firstly, if you are in a bear market, I wouldn’t be selling anything unless you;
- Desperately need liquidity.
- Think a project is not going to survive the downturn.
- Seriously think the maximum expected value of a given NFT is not going to increase in the future.
Otherwise, hold on and wait for the market to improve.
Your plan should be to sift through your portfolio and decide what you want to hold and what you want to sell. Wait for that project to start pumping and then sell into the momentum.
Slowly trim down your portfolio like this until you are happy with your distribution.
As a closing thought, consider this; the ROI on liquidity is unrivalled.