In the short run, the market is a voting machine, but in the long run, it is a weighing machine - Warren Buffett
Buffett theorizes that supply and demand are the dominant forces in the short-term, and I would tend to agree. Thinking about investor psychology, particularly with the supply and demand in the short-term, these themes become very apparent. In researching a number of projects for quantifiable metrics, there are some obvious trends:
Social media followers: more discord followers generally equals more twitter followers which generally means more hype and anticipation behind the project. There is a 10:1 ratio of discord to twitter followers typically, although I doubt that number has any significance in the long run.
Quantity minted: Empirically, there is also about a 10:1 ratio naturally between discord followers and items minted. Quantities that varied significantly from 10:1 were concerning as it raised questions as to whether the followers were “bought”. Again, not a trend that I expect to stick given the variety of marketing methods and project styles.
Whitelist alpha: In getting early access to the project, when the demand exceeds the whitelisted supply, the whitelist could then mint multiple items and quickly flip them on the secondary marketplace for a profit. As non-whitelisted members can gain access to the project in the secondary market, the price skyrocketed, and the whitelisted members clipped a quick profit.
Revealing a common item: Over the next few days come the public sale and then the reveal. Here you will see an increase in price as the hype continues to grow. Newcomers see the price appreciate since the mint and extrapolate the profits from the mint price. The hopes of revealing a “rare” item is at its peak. After the reveal, the price almost certainly drops as the majority of hopefuls unveil their common item. The expected value of their items sink along with the price.
Mass exodus: Owners will rush towards the exits, undercutting the floor price to rid themselves of the terrible experience they just had. New holders will enter at the discounted price and hold for the long-term.
Long-term hodlers: The depressed price rarely increases for any significant period following the sell off and often bleeds slowly over time. I found that things that can help price in this stage include projects with extensive roadmaps and projects with doxxed members or famous artists/celebrities.
In a public market, the point where supply meets demand is the market-clearing price. This is only partially true for a 1/1 market, like NFTs represent, but lets assume that only the rare items are considered “art” and all other items are equally invaluable.
If we analyze the life cycle of a project’s public offering, one will see the quick swing in emotions. See it enough times and you’ll notice a pattern and hopefully can extract some alpha. In stock markets, I will typically sell on the hype and buy on the dip if I truly believe the security (see Buffett’s friend, Mr. Market). This is easier said than done, of course, but requires a strong will power to do so. Unfortunately, this market doesn’t have the same vehicles as the stock market does, and so extracting any alpha may be difficult for the average person while the current architecture exists.
We will look at the emotional biases in markets next week.