Our world is changing at a rapid pace. NFTs (non-fungible tokens) are here, and it’s changing the way we think about business dynamics in the creative space. New asset classes create hype and exponential price growth. One can make a lot and lose a lot.

"With great risk comes great responsibility."

- Peter Parker (AKA Spiderman)

Let's discuss Risk Management...

Why is Risk Management important?

Gary Vaynerchuck, has stated several times that 99% of NFT projects are going to fail, so we know that the odds are not in your favor of picking a successful one, especially since there are thousands of new projects coming out every month. This means that it’s your job to do due diligence. Who is the creator? Are they active on social media and interacting with their followers? What’s the purpose behind the project? Projects without a purpose or mission are unlikely to survive. Whenever there is an opportunity to make a quick buck, there is going to be a flood of people who create NFT projects with the mission of only making fast money.

There is a lot of hype in the NFT space. It’s the wild, wild west and people are looking to capitalize. It seems that prices only go up, so you better get in quickly 😳. That’s the definition of FOMO (fear of missing out) and it can leave you making emotional decisions. Before buying your first NFT, it’s important to analyze your personal financial situation, so you understand how much you are able to risk.

6 steps when deciding how much you can afford to invest in NFTs:

  1. If you have debt such as credit cards and student loans, you should hold off investing any money into NFTs until those debts are completely paid off. Not all NFT investments are guaranteed wins, but paying off your debt is a guaranteed win.

  2. Calculate your net worth (assets minus liabilities). Essentially, what you own, minus everything you owe. Let’s say you have a 50K net worth and are comfortable using 4% of your net worth on NFTs, then you will only allocate $2000 towards purchasing NFTs. Think about how much you want to allocate towards NFT in percentages relative to your net worth, not in dollar terms.

  3. Know your risk tolerance. Does spending $5,000 on a single NFT give you anxiety and sleepless nights? You probably spent too much. Spend an amount that doesn't keep you in constant thought about losing those dollars.

  4. How long are you holding for? 10 years or 1 week? People who are holding for 10 years typically don’t care about price fluctuations and don’t need the money to pay their bills. 1 week holders are always looking for liquidity and are likely to make irrational, emotional decisions (and more likely to lose money).

  5. It’s inevitable that the NFT space will enter a bear market, in order to flush out all the crappy projects, and when it does, you will see prices drop sharply. Liquidity becomes an issue and if you are desperate for money, this may be a problem for you. Think about how you would feel when NFTs enter a bear market. Will it upset you? Will you be financially strapped? If so, it may be a good time to reexamine your portfolio and adjust.

  6. When selling an NFT, calculate your profits and remove the taxes you will owe at the end of the year. Every country has a different tax rate on capital gains, so figure out what yours are and keep a tax fund for year-end. If you don’t do this, you could be caught spending/losing money you owe to the government and putting yourself in a precarious position.


Thanks to Wassim Kanaan for writing this article!

Thanks to Glou for editing it!

Other resources:

https://twitter.com/OSFCollections/status/1426136863098785794