Realistic returns from NFTs

Posted on June 13, 2022

What sort of returns can we expect in the NFT space?

What’s realistic?

What about in a loooong bear market? Is there any chance of making big multiples now?

Is it time to throwin the towel, give up, lick our wounds, move on to something else?

I’m here to to tell you – you can expect substantial returns even in a bear market with no hype.

And you can’t, or shouldn’t, expect stupid high returns even in the bulliest of bull markets.

Not if you want to invest in real stuff rather than gamble on ponzis, anyway.

Let’s dish out a simple hard truth: The only returns that are realistic are those that are backed up by some kind of underlying asset that is actually growing at the rate that you are getting as an investor.

Sometimes the real growth and the investment growth disconnect. In fact, looking at the stock market, one might say that most of the time they’re only loosely connected, and each company has its own rules of how that works.

But a loose connection is still a connection.

NFT “investment” has gotten many people addicted to insanely fast, very high multiple returns in extremely short periods of time.

So addicted that every new hot project gets compared to the hottest projects of the past, to see if it’s doing well enough.

This creates an unhealthy fixation in ridiculously fast returns overnight.

The reality is, the only thing that can grow that fast is infectious diseases. And let’s face it, we have enough of those (no, monkeypox, we really don’t need you right now).

So let’s start with a simple perspective: 10+x returns in a few days are never a realistic expectation.

When you play the NFT investment game with that expectation, you’re just gambling.

And whilst you may gamble successfully for a while, it’s not sustainable.

If you managed to make those returns before (and you banked them in before the recent collapse), well done, but realise that it was luck, not “investment skill”, because you were not investing, you were gambling on your ability to sense where the hype was going.

Hype can grow overnight, and NFT projects have learned to leverage hype into high prices – for a time, at least. Eventually, they always seem to eventually drift back down. Yuga has been the exception so far but imho even that is just a matter of time.

Hype is not sustainable. Companies can harness hype sustainably, but for that they need to have awesome products to back the hype. Apple are masters of hype – and they are also masters of hardware, large scale manufacturing, software, design, etc.

Luxury goods companies can also harness a certain kind of slow-burning, long term hype, but they aren’t built overnight. Even big recent successes (e.g. Supreme) still take years of careful brand building and management. Supreme was founded in 1994!

Hype that appears overnight disappears just as fast. When it’s fuelled by ponzinomics, it can burn a bit longer, until the ponzi collapses and then the hype moves on. That’s happened to all the overnight hype projects so far, and it’ll keep happening imho.

“Yeah, whatever Daniel, I made huge returns buying cool cats, goblins, azukis, doodles, etc…” If that’s you, nice, well done you. Happy birthday. But even if that worked in the past, will it continue working?

What about if the market is bearish af for the next year? Wdyd then?

If the market turns super-bearish for the next few months or even years, as it well might, chances are the ponzi earnings will be pretty damn thin on the ground. Without new money continually flushing into the market, there’s no new suckers to buy your inflated bags.

So does that mean the end of big returns?

No, I think it just means the end of big returns that are backed purely by hot air.

But then the question is: is there something that can return big, even in a big market, that can be bought as NFTs?

(Spoiler: yes)

Regular followers might not be surprised to hear me start talking about startups now.

That’s because startups are one of the few assets that can deliver huge returns in relatively short periods of time.

But not 10x overnight.

My company, GrantTree (which I left back in 2019 but is still running), is a services company. Services companies are notoriously harder to scale rapidly – but easier to start with no capital, and I was broker than broke when I started it. I couldn’t even afford rent.

In the first year it made £80k of turnover, with just me and my cofounder. Second year? £300k. Third? Over a million pounds. Between 1st and 3rd year, that was basically a 10x.

10x in 2 years is an insane return. And that was a services company. Product startups scale better.

Instagram’s first round of funding was for $500k. Let’s say investors took 10-30% for that (probably closer to 10). That’d make its initial valuation something around $1.5-4.5m. In Oct 2010.

FB paid $1b for IG in Sept 2012, <2 years later. 222-666x return in 23 months.

I’m not saying your average NFT project is going to be the next Instagram (though I suspect one of them, some day, will be).

And even if your average NFT startup doesn’t make a 500x return in 2 years, good ones can still reasonably aim for, say, 10-50x.

“Only 10-50x? I made that in 3 days on Goblintown!” yes, but that was a ponzinomics, hype-fuelled return. That won’t happen in a deep bear and global recession.

Oh hey, you know what was going on in 2010? Oh yeah, we were just coming out of the “Great Recession”.

Successful startups that were started during that Great Recession?

WhatsApp ($19b!), Groupon (IPOed), Slack, Square…

Startups don’t stop just because of recessions or bear markets.

I see no reason why NFT startups would be any different.

Investing in this next generation of NFT startups is, imho, the way to make money as an investor if we do get an extended bear market (which I suspect we will, at the very least until the Fed policy changes, and that’s likely to take at least until the end of the year).

Up until NFTs, all these potential riches were locked away behind “accredited investor rules”, which meant that you could only invest in those startups if you were already wealthy.

But NFTs have opened up new value sharing models that enable more investors to participate.

If you want to read more about these value models, try this thread:

And yes, it is the wild west, there are fewer investor protections, and we are still working out how these value sharing models work. There’ll be broken attempts along the way.

I think we’ll work it out. I’m counting on us working it out. Everyone has an incentive to figure it out, because this is such a superior fundraising model for everyone involved, founders, investors, and LPs.

So I’m pretty sure we will work it out.

And in the meantime, I’ll be finding those early startups with kickass teams that are raising via NFTs and that “get” how to structure the NFTs so the value is likely to go up in time, without failing the Howey test… and I’ll be investing in them.

And even in the depths of the bear market, I do expect that, over timescales of 6-24m or so, I will be getting those 10-50x returns on my investments for some of them.

I think that’s realistic, if they deliver on their visions.

And some will.

TL;DR: 10x returns overnight are unrealistic and won’t happen in a prolonged bear that kills the hype. 10-50x returns over 6-24 months are realistic, though, if you invest in well-managed (and a little bit lucky) startups with the right vision.

gm & gl

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