Asymmetrical opportunities: or, why contract killing is a bad deal
In any market, there are always asymmetrical opportunities. These arise when there is a significant difference between the investor’s risk and their potential reward. Asymmetrical opportunities often lead to enormous profits for the person taking advantage of them, with a lower level of possible pain to derisk the investment.
The example I always point to is contract killing (bear with me) — if you accept payment to take someone’s life, there is a significant risk of getting caught and going to jail. But the potential reward — no matter how high — is never going to be higher than the risk of sacrificing the best years of your life in a prison cell, preventing you from accessing any alternative opportunities. This is an asymmetrical opportunity, weighted towards the negative and away from any rational actor. The price point for a hit can never be worth spending every day of your life rotting in jail, and the odds of getting away with murder and enjoying the upside seem dangerously slim.
In NFTs, the risk-reward profiles are often entirely out of kilter, with the vast majority of projects offering minimal upside and a tremendous amount of risk. The promised utility is an uncertain value proposition, regulatory questions remain, and for most projects, there is no way to exit early if things go wrong, with assets becoming illiquid faster than market participants can act. As with contract killing, the asymmetrical opportunity here is weighted towards the negative. The odds of a project “making it” can only be derisked with a broader portfolio, but the costs of building that portfolio are high, and with the rising standard mint price, they are getting higher.
So how can you identify these opportunities and ensure you’re not taking on too much risk? Look for projects and entry points where the pain is outweighed by the upside, and don’t count on the upside of any mint being equal to BAYC or Moonbirds. Count on an upside of 1–2 ETH max, and be prepared to be pleasantly surprised if it eclipses that number. Count on a pain floor of decimals below mint. Count on a rug or a $34m lock up. At this point, that’s the downside.
I don’t want this to sound like a negative screed against NFTs — I’m an active and passionate investor. But it is meant to call attention to the imbalance the opportunity currently represents and serve as a reminder that we’re still in the early days of this market. As it grows and matures, I expect the opportunities will become more symmetrical, and the overall risk-reward profile will become more attractive. Until then, be careful out there.
What are some other examples of asymmetrical opportunities that you’ve seen in the NFT space? Let me know in the comments! And if you’re looking for more content like this, be sure to follow my Twitter and subscribe to Pizza Party.