Another Solana-based competitor, Doodles (DOOD), suffered a spectacular collapse in value shortly after its Binance Futures listing. This unforeseen plunging change has raised some important concerns. What dangers are traders exposed to when trading NFT-related tokens, particularly when they’re trading with high leverage? FakeBollinger.com is all you need to understand what went down, why it’s important, and what to keep an eye on.

The Binance Futures Effect: A Double-Edged Sword

Crypto exchange Binance, the largest in the world by volume, recently revealed it would be listing Doodles (DOOD) on its new NFT futures platform. Usually, any such news would trigger celebration and bullish FOMO. In this case, the opposite occurred. DOOD price rose dramatically but then instantly dropped, and investors are highly confused. What went wrong?

Several factors could explain this phenomenon. For one, it’s the underlying volatility of NFTs. NFTs live under constant volatile market fluctuations. More importantly for most of us, they have a standard deviation of daily returns of roughly 11%, which annualized is an astounding 175%! This is much higher than natural gas or oil, or even the S&P 500. Secondly, the introduction of futures trading usually brings in a whole new class of speculators out to make a quick buck, and high leverage trading creates volatility in both directions.

The Perils of High-Leverage Trading with NFTs

With leverage trading, investors are able to control a much bigger position for a fraction of the capital. Platforms offer these gambler-like leverage ratios, sometimes even 2x, 5x and as much as 100x leverage, drastically amplifying both gains and losses. As with any risky investment, the potential for profit is alluring but the risks are just as great. A relatively modest market move of only 5% can either result in all your expected profits or returns being doubled or the entire position potentially heading to zero.

Here's a quick breakdown of the risks associated with high-leverage trading:

  • Amplified Market Movements: Leverage magnifies both profits and losses.
  • Volatility Drift: Compounding, rebalance costs (price impact, trading fees, and gas fees), and borrowing costs can erode your position over time.
  • Overnight Fees: Holding leveraged positions overnight often incurs additional fees, increasing the overall cost of trading.

With NFTs already some of the most volatile assets in existence, adding leverage opens up a dangerous cocktail concoction for inexperienced traders.

Navigating the NFT Landscape: Risks and Realities

Aside from leverage, the NFT market is rife with other risk factors that investors should understand. In fact, the NFT market exploded to an astonishing $41 billion in 2021. This figure almost surpassed the value of the whole global fine art market combined. OpenSea hit its highwater mark in May 2021. Since that peak, transaction volumes have cratered by almost 99%, showing the NFT bubble to be officially bursting. Median NFT prices have further fallen—median NFT sale price is down an estimated 87%, per NonFungible.com’s Q3 quarterly report. McMahon highlighted the speculation around “profile picture NFT collections” in the last 18 months. This deal-doing mania would have super-heated the marketplace, making the sudden collapse of transaction values all the more catastrophic.

  • Fraud and Scams: "Rug pulls," where creators abandon projects after raising funds, are a common occurrence.
  • Wash Trading: Artificially inflated trading volumes create a false sense of demand.
  • Market Manipulation: Large investors can manipulate prices, leading to losses for smaller players.
  • Liquidity Risks: NFTs can be difficult to sell quickly at a fair price, especially during market downturns.

Historical data shows significant price corrections. Similar events have caused price corrections of 70-90% from their all time high in today’s risk-off NFT market.

Lessons Learned and Future Outlook

The Doodles (DOOD) saga recently underscored the speculative perils of NFT-linked tokens. It should act as a warning to all of those thinking about doing futures trading in this arena. The Binance Futures listing had a somewhat euphoric impact initially. The recent price crash exemplifies the dangers of taking on significant leverage in the highly volatile NFT market.

Token growth fuels NFT value, and increasing NFT demand pumps the token. Combined with the airdrop of DOOD to community members, this could have a serious network effect. As the token appreciates, it will increase NFT value, and conversely, increasing NFT demand will appreciate the token further.

Be cautious of post-TGE price retraction. If DOOD does the same thing, the price could fall back to $0.05-$0.10 after TGE. Unlocks and low initial utility can trigger huge sell-offs. Yet, even with Azuki backing it, ANIME dropped more than 70% from its peak because of unlocks and low initial utility. Technical chart analysis suggests violent retracement after initial shock wave. Both tokens pumped in 12-48 hours, then retraced hard and continued to dump.

Before you buy NFTs or speculate on NFT-related tokens, do your homework. Know what you are getting into and know where your risk tolerance lies. As always, in the crypto space, do your research, stay informed, and play it safe.