NFTs continue to explode in popularity and utility, attracting a broadening type of investor. Art, collectibles, music, gaming, sports, metaverses, and utility-based NFTs penetrate further into the social consciousness and draw increasing amounts of capital. For investors standing on the sidelines waiting to involve themselves, a number of questions must first be answered.
NFT or Non-Fungible Token, cryptographic assets that contain metadata authenticating ownership that is unique, hence non-fungible. These digital certificates on the blockchain include the history, provenance, and all activities related to the asset.
Fungibility refers to the ability of something to be interchangeable; an Apple stock is fungible because it can be exchanged for another Apple stock. In contrast, an NFT cannot be exchanged because it is individual, and this quality mandates a secondary market where investors can trade these digital assets. For a complete overview of NFTs, read this guide provided by Nansen: Everything You Need to Know About NFTs.
This article outlines the difference between the various methods for purchasing NFTs on the secondary market and which of these methods provides the best value for investors. It examines the different types of auctions available: Fixed Price, Classic, Dutch, and Reserve. The primary market, sales between content creators and collectors, ‘Minting’, remains outside this article’s scope, and this article presupposes a degree of knowledge regarding NFT trading. For first-time NFT investors, the following guides will provide all the necessary basis to begin their journey: How to Buy Your First NFT & How to Invest in NFTs.
What is an NFT Auction?
Building on the traditional definition of an auction which is the process of buying and selling goods through competitive bids, NFT auctions function in the same fashion. Auctions possess a particular psychological draw because participants, sellers and buyers both believe they will find an agreeable price, and the human element does make the event more intriguing. Participating in an auction is more exciting than making a flat purchase, which has driven their popularity in the NFT sphere.
In the same fashion as traditional markets, various types of auctions exist, with different parameters for sales, with different marketplaces specialising in contrasting styles.
In summary, NFT auctions remain the primary method for investors to acquire NFTs, with buyers and sellers interacting to agree on the settlement price.
Where Can You Auction an NFT?
DeFi offers hundreds of options for investors looking to buy or sell, and the best option constructs itself based on the investor’s criteria. With each marketplace specialising in differing niches and types of NFTs, the best place will vary from investor to investor. This guide provides a rough overview of the most popular marketplaces: Top NFT Marketplaces.
Most NFT trading happens on the Ethereum Network, so be prepared to pay gas fees, but other blockchains continue to gain traction in the NFT space. The attached guide outlines Ethereum’s most prominent competitors: Top NFT Blockchains.
The largest NFT secondary marketplace is OpenSea. Established in 2017, OpenSea witnesses the most daily trading volume and features the widest array of NFT collections. With an intuitive UI, this marketplace is an excellent place for beginners and seasoned NFT flippers alike.
A secondary marketplace that brands itself with a focus on premium NFT collections, with these collections highly sought after, Nifty Gateway angles itself more toward better-capitalised investors.
Rarible features a vast range of NFTs and is the only marketplace that accepts fiat (available only on selected items). Rarible also distinguishes itself by operating on multiple chains.
SuperRare takes inspiration from the traditional art world and features high-end NFTs in an ecosystem reminiscent of an art gallery. This marketplace is renowned for being highly selective.
A genuinely decentralised secondary marketplace for NFT traders experiencing rapid growth. The first liquidity-efficient secondary marketplace, SudoSwap uses an AMM (Automated Market Maker) model to make trading NFTs faster and easier.
Types of NFT Auction
The most straightforward method. The seller outlines a price, and buyers have the option to buy the NFT without taking part in any bidding. The item sells at the price which the seller sets if it sells at all. This style favours a larger scale listing of similar items and has become highly popular in Web2 marketplaces such as eBay.
Simplicity. The seller agrees on the price at the outset, allowing them to calculate profit efficiently, and there is no further investment of time on their behalf as the process is automated. Listings remain active until sold or the timeframe selected by the investor elapses.
Revenue limitation remains the central weakness of the fixed price method, with the seller capping the bidding level, subsequently limiting potential gains. The timing and competitive element constitute the enjoyment of partaking in an auction; it departs a sense of urgency, something lacking with the fixed price model.
The most common and familiar type of auction, this method follows in the footsteps of traditional auction mechanics. The seller sets a base price and period of time, the countdown begins, and prospective buyers make bids. When the time limit expires, the NFT goes to the highest bidder. If no bids have been placed the original owner retains the NFT.
Auctions provide greater efficiency compared to fixed price markets as auctions match products to buyers with the highest valuation in the market. Auctions attract greater numbers of investors because they are exciting, increasing the potential for revenue generation. Another key strength of the classic auction model is familiarity for both buyers and sellers. They recognise the format, and this method remains highly reliable for selling NFTs.
Unbidden auctions remain a common occurrence, and there exists no guarantee that the item will sell. By their nature, buyers drive classic auctions and the right buyer participating or knowing about the auction is outside the seller’s control.
A Dutch auction or a descending price auction. The seller indicates a starting price, typically high, and a reserve price. The price is lowered incrementally across a set period until the item sells, and in this descending model, the first bidder wins.
This auction style may appear counter-intuitive initially but exhibits a fantastic ability to keep buyers engaged. It is a great way to discover the best asking price. And is popular in TradFi IPOs (Initial Public Offerings) due to its proficiency in price discovery. The Dutch auction involves more game theory than other auction methods. This uncertainty often results in better prices for sellers as buyers sometimes pay a higher price, uncertain of what others are willing to pay and want to achieve closure. Another key benefit is that items sold in this fashion almost always sell.
This auction style results in greater winner regret than other auction methods (the winner believes they overpaid), and the same elements that make the Dutch auction method exciting also make it emotionally demanding for participants. With a heavy focus on doubt and uncertainty, typically it increases prices for buyers.
Reserve auctions function identically to classic auctions, except the seller implements a minimum price they are willing to accept, the reserve. Bidding typically starts below the reserve price to encourage buyer participation. If bids meet the seller’s threshold, this auction runs similarly to a classic auction.
The seller’s reserve price protects their interests. If buyers fail to eclipse this price, the seller maintains ownership of their NFT and is under no obligation to execute a trade.
This style suffers the same weaknesses as the classic auction style and relies heavily upon the seller’s valuation of their NFT. For example, if they set the reserve too low, they will lose revenue; if they set it too high, the item will not sell.
Arguably the highest risk strategy sellers can employ for an auction. A no reserve auction means exactly that; buyers can bid what they want to pay and may walk away with a bargain, which the seller must accept.
A no reserve auction remains the best way to discover the true value of an item. Typically drawing large crowds looking to obtain a cheap NFT. However, this increased interest, in many instances, often ends up increasing the price for buyers.
For the seller, this style carries significant risk. Before the auction, they must accept that potentially their NFT may sell at a meagre price.
Buying NFTs at Auctions vs Fixed Price
The reader must understand that the NFT itself determines a considerable part of the buying strategy. Luck also comes into play. But the way to maximise the possibility of buying at a solid price is to utilise Nansen. A blockchain analytics platform which curates and distils vast amounts of on-chain data and enriches it with millions of wallets to build a clearer picture of the blockchain space.
Using Nansen’s NFT Paradise Dashboard, investors can monitor price swings within the NFT space, easily recognise market trends, and even follow the movements of Smart Wallets- consistently profitable NFT traders. And once they have selected an NFT collection they want to purchase, Nansen’s NFT God Mode shows the current listings and a total breakdown of the collection, displaying the marketplaces where it is listed, trades, and even price estimates.
But broadly speaking, if the investor remains patient, auctions will yield a better result than the fixed price model.
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Tips on Buying NFTs at Auctions
Lots of parallels can be drawn between trading and participating in an NFT auction. Investors should prepare themselves mentally before participating in an auction, understand their goals, set entry and exit rules, and, most importantly, understand the collection/ piece they want to acquire and for what reason. Establishing and understanding these factors first aids investors in controlling their emotions during an auction and reduces the potential for human error.
Patience will serve investors well. NFTs trade hands often, and even if the investor misses their desired NFT at the current auction, it will likely sell again at some point. With the prevailing market conditions and NFTs classification as a risk-on asset, floor prices steadily decline. Now potentially represents a brilliant time to purchase NFTs that may have been out of the investor’s reach during the bull market.
But by far the most helpful tip for investors is to keep their pulse on the market- persistence. Luck plays a significant role in auctions, and sometimes a combination of arbitrary factors comes together for the investor and leads them to walk away with a winner. However, they must be ready to participate.
NFT auctions are exciting, and the potential to snipe a good deal continues to attract investors. Given NFT’s unique characteristics, they naturally lend themselves better to the auction format than a fixed price. Above all, buyers looking for the best value should employ patience, understand their reasons for wanting to own the NFT and persevere. By leveraging these behaviour patterns, investors can dramatically increase their potential to seize a prized NFT at a lower price.