How to Avoid Losing Money on NFTs

January 5, 2022 - 12 min read

This article breaks down 5 pieces of advice from famed investment manager Peter Lynch and how they can help you avoid losing money on NFTs.

How to Avoid Losing Money on NFTs

Introduction 

The NFT market is growing rapidly and is poised for another explosive run in 2022. The problem? Everyone is talking about how much money you can make from trading NFTs, but not enough people are talking about how to avoid losing money on NFTs. 

At StartWithNFTs.com, we highly encourage you to only spend money on NFTs and Crypto that you can afford to lose. The market is volatile and it is getting harder to profitably trade NFTs. 

This article highlights relevant advice from famed investment manager Peter Lynch to help you avoid losing money on NFTs. 

The contents of this article should not be considered investment advice. We encourage all of our readers to do their own research, develop their own convictions and be thoughtful in these markets. 

You can purchase Peter Lynch's book One Up on Wall Street.

Let’s dive in: 

(1) Know What NFTs You Own and Why You Own Them 

Perhaps his most famous piece of advice, Peter Lynch encouraged people to know what stocks they own and why they own them. It seems simple, but ask the average person what stocks they own and why, and you’ll probably get a blank stare. 

Start with knowing what NFTs you own: 

Knowing the name of the project your asset is from is a start, but you need to go deeper than that. 

Most NFT projects contain assets that have a different rarity. There may be different subsets of the project that attract different audiences. For example, Cryptoadz by Gremplin features assets with hoodies, Matrix backgrounds, cigarettes, etc. 

You may see people Tweeting “wow, Hoodie Toadz are popping off right now!” 

If all you know is that you own a Cryptoadz, will you understand the potential demand for the rarity type that you own? Could you react to the market quickly if Cryptoadz with Matrix backgrounds starts selling out fast after The Matrix Resurrections hits theaters? 

If you don’t know what you own, you might leave money on the table. You could hold for too long. You could overprice your item during the bull run. If you need help figuring out the rarity of your asset, check out our step-by-step breakdown, here

What happens if you own 12 NFTs, but you forget about 2 of them you bought months ago? A project may be sinking and you’re caught holding the bag. A project may be pumping and you forget to delist. 

You may get a whitelist due to holding another asset. 

It takes work to know what you own and what utility you get from owning the asset. Oftentimes, you’ll want to be in the Discord Groups of the projects you own to stay current. 

Does this sound like a lot of work? It is. But, the work is worth it because it forces you to be thoughtful about the asset you purchase. 

Now, let’s tackle why you own something. This is the most important piece of advice to avoid losing money in NFTs: 

If you own an NFT asset because an anonymous Twitter user said it would be the last time to buy a project before it gets out of reach, you are fully entrusting your hard-earned ETH (or dollars, Bitcoin, Solana . . . you get the picture) to their judgment, intuition, and analysis instead of your own.

My advice is to explain to a friend why you own an NFT. A normie friend might not grasp the concept at all, so pretend you are on a podcast and record a video of you explaining why you own a project. 

I’ll go first . . . with a written version. 

I own 1 Curio Card Apple

Curio Cards are the first art NFT released on Ethereum and pre-date CryptoPunks

I own a Curio Card Apple because it was the first art NFT sold on Ethereum. This has been validated by the blockchain, and I fully understand the total supply of the NFT. 

My hypothesis is that NFTs will continue to gain traction and their use-cases will evolve into our everyday lives. It likely won’t be in the form of more PFP projects, but in the form of ticketing, property ownership, etc. 

Many will look back and say they underestimated the technology, and there will be demand for projects that pushed the boundaries of NFTs early on. 

Curio Cards was the first NFT project to get digital artists paid for their work and will be valued in a historical sense. The Apple is the first card of the first NFT of its kind to sell and I believe it will hold value. 

It’s hard to move fast and be this detailed, but my bet is that it will pay off and help you avoid duds that lose you money. 

Note: Just because I like Curio Cards, does not mean you have to. 

(2) Behind Every NFT Project is a Creator — Find Out What They’re Doing 

Replace “NFT Project” with Company and this is rule #3 on Peter Lynch’s 25 Golden Rules for Investing and pretty closely ties in with knowing why you own an asset. 

Many (too many) NFT projects have been launched with anonymous founders. There have been multiple stories of a project earning founders millions of dollars only for them to disappear and leave buyers holding the bag. 

Don’t let the extreme case fool you into comfort knowing you bought into a project with a public founder. There are public founders who won’t be committed to a project in the long term. There will be founders who are committed in the long term but make mistakes that could potentially kill a project. 

There will be founders who don’t fully understand legal repercussions of how they deliver value through their project. There will be others who mislead buyers with utility in a project that wasn’t fully understood. 

Joining a project’s Discord group is a good first step. Do as much research on the creators as possible — Twitter, LinkedIn, Google searches. Gary V is often seen as someone calling successful projects early (although he strongly advises you do not follow his advice for short-term gains). 

However, you should take a page out of his book. He does his homework and even interviews founders to get a better feel for their ability, commitment and the project. He’s tweeted a few times that he does this on FaceTime privately as part of his due diligence. 

It may be easier for him to do that because he’s Gary V, but this is the mentality you should have when approaching a project. 

If you are a founder — make it easy for people to interview you at scale by hosting a spaces, a Q&A, etc. 

(3) If You Can’t Find Any NFT Projects That You Think Are Attractive, Put Your Money in the Bank Until You Discover Some

This shows up as Peter Lynch’s rule #9 and is an important one. There are lots of new NFT projects launching, and it can be easy to spend all your money because you don’t want to miss out. 

If you get too tied up in projects you only half-believe in and they aren’t liquid, you may miss the true winner. This goes back to having macro-patience (understanding that there will be more winners in 2022 and beyond) and micro-speed (be ready to strike). 

It can take up to 5 days for your Coinbase deposit to be sendable to your MetaMask wallet. If you aren’t a whale, liquid ETH is a precious resource that allows you to make moves that align with your convictions. 

If you have extra money that you can afford to lose, consider signing up for Coinbase and purchasing some Ethereum. You can check out our full how-to guide to buying and selling an NFT here if you are having trouble, but we personally use Coinbase and trust the platform.

Disclosure: The above link to Coinbase is an affiliate link and we receive a small commission if you sign up for their product at no cost to you. We only recommend products that we've personally used and well . . . we have used Coinbase a lot. You can read my full affiliate disclosure here.

I’ve also come across a lot of people who gamble on projects in hopes that it can help them flip to the one they really want. In some cases, if they patiently waited for a bear cycle on the project, they would have had enough money to buy the project they really wanted but spent it on a bunch of little bets that failed. 

(4) Your Edge Is Not Something You Get From Experts. It’s Something You Already Have. 

Rule #2 is your permission to trust yourself and be accountable for your decisions. It’s pretty clear that whales influence markets — if you are fast enough, you could copy their moves and likely do well. If you aren’t fast enough, you’ll be holding the bag when the pump dies down. 

If a pump dies and you only bought because a whale bought, how likely are you to sell for a loss and move on? This wouldn’t be such a bad thing (to avoid further potential losses) but if you don’t really understand a project, how can you make a good decision of selling or holding? 

It’s also worth mentioning that influencers and whales don’t always have your best interest in mind. 

The good ones disclose their holdings, but you can never really tell their true intentions. It’s important to follow and learn from smart people in the space, but even more important to make your own decisions. 

Don’t outsource your conviction. If you continually do this, you won’t be able to test out and measure the performance of your intuition. The data isn’t clean. For example, if all you do is trade-off of a whale’s moves, you won’t truly learn to trust yourself. 

(5) If You Are Susceptible to Selling Everything in a Panic, You Ought to Avoid NFTs Altogether

Rule #17 rounds out our list and may be the most important one: the safest way to avoid losing money in NFTs is not to spend money on NFTs. Plain and simple. 

It’s not fun advice and it certainly won’t make this blog any more popular, but I hope it serves as a reminder not to spend money you can’t afford to lose. 

A lot of money has been lost in the NFT space when buyers get FOMO (the opposite of panic), overpay, and panic sell when the hype dies down. The cover photo of this article is from the MekaVerse project, which traded for around 7 ETH in October and is currently at a 1.35 ETH floor. There was so much initial hype around the project, people far overpaid before the market corrected. 

If you end up panic selling, it’s probably because you spent more money than you can afford to lose. If you are intentionally selling quickly because you realized you overpaid and you want your liquidity back, that’s a much different (and better) scenario. 

To be clear: selling quickly for a loss because you see hype dying down and lose conviction in your project is a good thing. 

Conclusion 

There is no sure-fire way to avoid losing money in NFTs, unless you don’t participate in the market at all. If you decide to participate in the market and only spend money you can afford to lose, the losses won’t hurt as much. 

If you want to read the rest of Peter Lynch’s rules for investing, you can check them out here. If there were one takeaway from them all, it’s to put in the work before you spend money on a speculative asset. 

The success stories you see on Twitter and in Discord is rarely from a lucky mint. It’s usually from 50 hour weeks on Twitter and Discord. It’s staying up until 3 am reading white papers. It’s networking. It’s developing conviction. It’s pouring over data. 

If you follow these golden rules of investing, and you are more thoughtful about the moves you make, it can help you reduce the risk of losing money on NFTs. 

If you have extra money that you can afford to lose, consider signing up for Coinbase and purchasing some Ethereum so that you can buy NFTs. You can check out our full how-to guide to buying and selling an NFT here if you are having trouble, but we personally use Coinbase and trust the platform.

Disclosure: The above link to Coinbase is an affiliate link and we receive a small commission if you sign up for their product at no cost to you. We only recommend products that we've personally used and well . . . we have used Coinbase a lot. You can read my full affiliate disclosure here.

We also strongly encourage our readers to consider purchasing a hardware wallet, which starts at $59. I've been using the Ledger Nano X since last July and it helps me sleep better at night.

Hardware wallets like the Ledger S or Nano X are the most effective ways to protect your NFT assets from scams. The links to the Ledger product suite are affiliate links and we may receive a small commission if you choose to make a purchase. You can read my full affiliate disclaimer disclosure here.

If you want to protect yourself and your NFTs from scams and hacks, you can shop for Ledger Hardware wallets by clicking here

James KIllick

written by

James KIllick

Jimmy Grow | Product Wizard