Unlocking the Secrets of NFT Trading with On-Chain Data
One way to track the performance and sentiment of the NFT market is through on-chain indicators.
The emergence of NFTs or non-fungible tokens has taken the world by storm. With digital assets such as artwork, music, and other creative works now being sold for millions of dollars, it is no surprise that investors and enthusiasts are eagerly monitoring the market for potential opportunities. One way to track the performance and sentiment of the NFT market is through on-chain indicators.
In this blog, we will explore what on-chain indicators are, how they can be used to analyze NFTs, and the key metrics to watch.
What are NFTs and On-Chain Indicators?
An NFT, which stands for non-fungible token, is a one-of-a-kind digital asset that represents ownership of a unique item or piece of content. NFTs are distinct from other cryptocurrencies, such as Bitcoin or Ethereum, because they are not interchangeable with one another. This is due to the fact that each NFT is individually created using blockchain technology, which provides a secure and transparent ownership record. Among the benefits of NFTs are the potential for artists and creators to authenticate and monetize digital creations, and for collectors to own and trade unique, verifiable assets.
On-chain indicators refer to metrics that are derived from the blockchain. They provide insights into the behavior of users and the network, such as transaction volume, the number of active addresses, and the total value locked in smart contracts. On-chain data is immutable, meaning it cannot be altered or manipulated, making it a reliable source of information for investors and traders.
In the context of NFTs, on-chain indicators can provide insights into the health of the market and the demand for specific tokens. By analyzing these metrics, investors can make informed decisions about which NFTs to buy, hold, or sell.
Key On-Chain Indicators for NFTs
Transaction Volume
Transaction volume is the total value of transactions processed on the network. In the case of NFTs, it refers to the total value of sales on various marketplaces. High transaction volume indicates a high level of demand for NFTs, which could lead to higher prices.
Number of Unique Wallets
The number of unique wallets that are holding a specific NFT can be an indicator of its popularity. If the number of unique wallets holding an NFT is increasing, it could indicate a growing demand for the token.
Total Value Locked (TVL)
Total value locked is the total value of assets that are locked in smart contracts. In the case of NFTs, TVL refers to the total value of NFTs that are being held in various smart contracts. High TVL indicates that investors are holding on to their NFTs, which could lead to higher prices in the future.
Time Held
The average time that an NFT is held by an investor can provide insights into the sentiment towards the token. If investors are holding on to their NFTs for a long time, it could indicate that they have a positive outlook on the token's future value.
Average Price
The average price of an NFT can provide insights into the sentiment towards the token. If the average price of an NFT is increasing, it could indicate a growing demand for the token.
Market Cap
Market cap is the total value of all outstanding tokens in circulation. In the case of NFTs, market cap refers to the total value of all NFTs in circulation. High market cap indicates that investors have a high level of confidence in the NFT market.
How to Use On-Chain Indicators for NFTs
On-chain indicators can be used to analyze the performance and sentiment of the NFT market in several ways. Here are some strategies to consider:
Use on-chain data to identify trends: By monitoring on-chain indicators over time, you can identify trends in the market. For example, if the transaction volume for a particular NFT is increasing over time, it could indicate a growing demand for the token.
Use on-chain data to make informed investment decisions: By analyzing on-chain data, you can make informed decisions about which NFTs to buy, hold, or sell. For example, if the number of unique wallets holding an NFT is increasing, it could indicate a growing demand for the token, making it a good investment opportunity.
Use on-chain data to identify potential price movements: On-chain data can also be used to identify potential price movements in the market. For example, if the TVL for a particular NFT is increasing, it could indicate that investors are holding on to their tokens, which could lead to higher prices in the future.
Use on-chain data to assess market sentiment: On-chain data can provide insights into the sentiment towards specific NFTs or the market as a whole. For example, if the average time that an NFT is held by an investor is decreasing, it could indicate that investors are becoming more skeptical about the token's future value.
Case Study
Here are two case studies of successful NFT trading strategies that incorporated on-chain data analysis.
Case Study #1: Bored Ape Yacht Club
Bored Ape Yacht Club (BAYC) is a popular NFT project consisting of 10,000 unique cartoon apes. Each ape is tokenized and sold as an NFT on the Ethereum blockchain. In September 2021, a single BAYC NFT sold for $2.5 million at auction, demonstrating the potential for high returns in the NFT market.
One successful trading strategy for BAYC involved analyzing on-chain data to identify potential buying opportunities. By monitoring the number of unique wallets holding BAYC NFTs and the transaction volume for BAYC, traders could identify when demand was increasing or decreasing.
For example, if the number of unique wallets holding BAYC was increasing, it could indicate that demand was growing, and prices may soon rise. Conversely, if the number of unique wallets holding BAYC was decreasing, it could indicate that demand was falling, and prices may soon decline.
By monitoring these on-chain indicators, traders could make informed buying and selling decisions, taking advantage of market trends and maximizing their profits.
Case Study #2: Art Blocks Curated
Art Blocks Curated is a platform that features a curated selection of generative art pieces sold as NFTs. Each piece is unique and created algorithmically, with a limited number of editions available for purchase.
One successful trading strategy for Art Blocks Curated involved analyzing on-chain data to identify undervalued NFTs. By monitoring the transaction volume and total value locked for Art Blocks Curated, traders could identify which pieces were attracting the most attention and potentially undervalued.
For example, if a particular art piece had a high transaction volume but a low total value locked, it could indicate that the piece was attracting a lot of attention but was still undervalued. Traders could then buy these undervalued NFTs and hold onto them until prices rose, maximizing their profits.
By incorporating on-chain data analysis into their trading strategies, traders can make more informed decisions, taking advantage of market trends and identifying potentially undervalued NFTs.
Conclusion
On-chain indicators can provide valuable insights into the performance and sentiment of the NFT market. By analyzing key metrics such as transaction volume, the number of unique wallets, and total value locked, investors can make informed decisions about which NFTs to buy, hold, or sell. On-chain data can also be used to identify trends, assess market sentiment, and identify potential price movements. As the NFT market continues to grow and evolve, on-chain indicators will become an increasingly important tool for investors and traders alike.