Blockchain gaming monetization. HODLing tips.
Passive income through HODLing. Is it possible to make a living just by buying gaming assets? How to avoid losses? Can you, and should you start chasing profits in the NFT gaming universe?
Disclaimer: this article is not an investment advice, nor am I an investment advisor. Read at your own risk.
Passive income. Holy grail of investing.
Tell me, honestly, how many times have you encountered the “passive income” advertisements while scrolling through the internet? They are everywhere! Investment gurus need your money in every corner of the web! Invest 1000$ and earn 50% a month, become a rentier at 30 years old. Marvelous benefits! Sounds awesome, everyone likes that. Have you ever wondered why these investment proposals are so popular? Passive income by definition seems like free money. Making profits while doing absolutely nothing? Dream life. Where’s the catch?
The catch lies within human nature. Passive income, due to verbal anchoring, presents itself as free money in peoples’ minds. All one needs to do is to come up with an initial investment, and then collect checks to the rest of one’s life. Does it look like this under the hood? As it usually is the case, it’s just sales people exploiting weaknesses of human mind. These ads appeal to our deeply rooted laziness. That’s all. There’s no passive investment holy grail. There are no free lunches. You always have to do the work. So let’s dig into why passive income isn’t really a passive thing, especially in gaming, which is very volatile and risky. You have to know that, before starting any investments in this area!
NFTs and tokens in web3 gaming. Can I make passive income while playing games?
Let’s start with some formalities. The Wikipedia’s definition of “passive income” is as follows:
passive income is, […] income that requires little to no work to produce and maintain.
To simplify, it is a cash flow generated by an asset that you own. Income that needs no effort from the owner to produce. With the growth of cryptography and blockchains new investment opportunities araise. Especially popular ones are gaming NFTs and tokens. In some cases, they are supposed to provide owners with passive income. Let’s buy and hold. It’s easy, isn’t it ?
Buy and HODL.
HODL is not an acronym. It is a legendary example of a misspelled word, very popular in the crypto community. What does it mean? It means, to hold the asset, not caring about its downfalls, because you believe that in the long run, you are going to profit, as the graphic above illustrates. At first glance, this is the easiest strategy to execute. Just invest upfront and lay back, what’s tough about it? As tricky as it sounds, HODLing is a real challenge. Especially if you are susceptible to mood swings. How to deal with holding crypto gaming assets? Let’s explore its nuances. The first thing to discuss is:
Awareness of an underlying blockchain.
Every crypto game is built on a blockchain. That’s how it works. If it wasn’t for the blockchains it would be just a regular game. Every blockchain has its specifics. Ones are faster, others slower. To be honest the quality of the game itself is not by any means connected to the underlying blockchain.
A certain degree of meticulousness is required to know which blockchain you should focus your investment on. For example:
- Sandbox game is built on the Ethereum blockchain (ETH). In-game NFTs use the ERC-1155 token standard. Remember that transactions on Ethereum layer 1 can be costly. A single transaction can cost as much as 100$!
- Gods Unchained is a game built on the Ethereum layer 2 called Immutable X to avoid high ETH fees. Fees are lower here and proportionate to the amount transacted. Last time I checked it was 2%.
- Ev.io is an example of a browser FPS game built on Solana. Solana trading fees are quite low below 1$, and the blockchain itself is pretty fast.
- Binance Smart Chain hosts BinaryX, a gaming platform that currently hosts Cyber Dragon MMORPG. The BSC is quite fast too, and fees are lower than cents at the time of writing this article.
I’m not going to list all chains and games, but I want you to know that blockchains and games built on them differ. Be aware of high fees that can kill profitability of your trades.
How to evaluate a crypto asset itself?
The main question is, how can you tell if an asset will appreciate in value over time? To answer this one, you need to have a deep understanding of the asset, the economy of the game, human nature, and some good understanding of how the project will develop in the future.
Does it sound passive to you? It is really tough to make good calls in the long run. The variety of skills needed to pick the winners is really broad. Ask yourself, “Am I qualified?” Be humble.
Before the price of the assets can increase in a healthy manner, they need to represent some value. Value that other users will be willing to buy those assets off of you. Here are a few examples of how your NFTs and tokens can make you some money:
Income generation.
Dividend of some kind, in crypto it is usually acquired by staking tokens. What is this staking thing? Staking is a lock-up of your assets to support the blockchain and verify transactions. As a reward you get a percentage of the tokens staked back. It basically works the same in every crypto project. So staking in gaming projects is no different from regular crypto staking. The APR (Annual Percentage Rate) fluctuates all the time, so it’s hard to provide exact numbers to work with. Just remember that the APR and token price can both change overnight! To be safe, you have to monitor them on a regular basis. Before the initial investment you should define the intervals in which you will be checking the condition of the assets. Don’t do it too frequently because it can be really absorbing and psychically exhausting to check the price charts multiple times a day.
In your investment journey search for clarity and quality communication.
A good staking example would be the AXS Staking Dashboard. The Axie Infinity team provides all crucial data without a need to log in and search for the details.
On the other hand, we have projects like Chain Z Arena. Here I couldn’t even find any real numbers about it, so check out this quote from their home page.
You will receive drops everyday based on the number of SOUL tokens you stake compared to how many are staked in game.
Does it sound like a good investment idea?
Value growth of the GameFi assets.
I’ll repeat: remember that tokens are not money! Tokens represent partial ownership. With this firmly in mind, we can explore further. Imagine a scenario in which a game is growing fast. So is the daily users count. Players are excited to use the game’s platform. All looks good so far, and you might expect prices of the tokens and the NFT’s to go up. But you need to act quickly. In a scenario of rapid price action, it is better to buy early than late. But still be careful, because you might be left with some overvalued NFTs in your pocket. I will elaborate on the timing later. As you can see in the chart below, the price of AXS (Axie Infinity governance token) skyrocketed as the volume of trade in the Axie Marketplace grew. Folks that bought it in the end of 2021 are still licking their wounds. Usually a decline in sales is followed by a decline in prices of tokens. Embrace the statistics!
Demand. Speculation.
Have you ever heard of “pump and dump” schemes? They rely on fake demand, generated by project insiders. When the prices and the attention to the particular projects rise, the fraudsters start to sell, leaving wannabe investors with worthless assets. If you are not a sophisticated trader, you should stay away from shady and risky projects. Projects in early stages of development are more susceptible to these scams. You need to realize that some crypto endeavours are just created to profit certain people, who have massive advantage over you. Individual investors are just cash providers. Development teams have the most significant edge over you — the knowledge advantage. Don’t get excited when you read marvelous reviews of projects online as they’re likely sponsored. As famous Warren Buffet said:
If you’ve been in the [poker] game 30 minutes and you don’t know who the patsy is, you’re the patsy.
How to evaluate the risks to protect the investment.
Again, not an easy job. It includes digging into a development team, its previous achievements, history etc. In the end, you never know what is going to happen. I will provide you with a few examples of how to go about doing it.
- Read the white paper. If the project has one! Start your education with reading documents of failed projects. As your research continues, you will get a better understanding of how the scammy docs are structured. Look for the token/NFT allocation structure. If you see abnormally big (>50%) team/dev/investors allocation, it’s a red flag.
- Dive deep into the team. Check if all their relevant information is public. Research their background. Have they ever been involved in any crypto projects? If yes, how did they do? Check their social media activity. Start from Twitter, Linkedin, then hop into their project’s Discord server. Don’t get jumpy when you see hundreds of users on the server. Sit there for a few days and see if there is any activity, and who is active.
- Check the exchanges that the tokens are traded on, as well as the volume of trade. Compare it with other crypto projects you are interested in. Generally, if a token is listed on the leading crypto exchanges, it has gone through some kind of a validation process. That doesn’t mean it is safe to invest!
- Verify the Non Fungible Tokens. As the acronym states, these have unique determinants that distinguish them from every other asset. To verify NFTs use blockchain explorers such as etherscan.io, Solana Explorer etc. Look for the NFT’s metadata, this will help you verify its authenticity. Check the mint date, the address that minted it, and compare it to the official game announcements.
- Check the trading history of the NFT if possible(it won’t be possible if you are minting the NFT for the first time). You can use Opensea, Immutable x, Solsea and other NFT marketplaces. Every NFT has its trading history recorded.
The more data you get, the better. Don’t get excited, don’t rush. There are plenty of projects out there, nothing will happen if you miss the “opportunity”.
Does the project have a whitepaper?
Investopedia definition says:
“whitepaper”, is an informational document usually issued by a company or not-for-profit organization to promote or highlight the features of a solution, product, or service that it offers or plans to offer.
As you can see, a whitepaper is a basic source of information about the project itself. It is totally crucial that the projects you are willing to invest in have whitepapers ready. Reading the paper will provide you with key information. A good whitepaper will contain the following:
- Main concepts of the game.
- Project type.
- Game mechanics.
- NFT standards and utility.
- Roadmap.
- Tokenomics.
The quality of the whitepaper will give you an idea about the condition of the game itself. Sloppy, short papers, without too many details, are usually scams. This kind of document must be written in a way to really help you understand the game and its mechanics. If you don’t understand the game documents, feel free to skip the investment.
Tokenomics. How the game economics are designed.
This aspect is important, especially if you are willing to invest in the game token. Usually gaming projects have two kinds of tokens. Governance tokens and in-game currency. I wrote more about those in the Web 3 gaming ownership article. Tokenomics need to specify few things which are:
- What is the status of the tokens? Who issues them? What kind of role do they play in the game, and how are they created?
- What kind of ownership do they provide? Are the tokens connected to the ownership of the game itself, a DAO, land parcels? There are multiple options, read carefully.
- How is the issuance handled? Will the tokens be airdroped? Can the community mint them? What percentage goes to the community and the insiders?
- Does the dev team, and investors have any lock-up periods? Lock-ups are good for you. Knowing that the insiders can’t sell the assets within a speific time frame is a an advantage.
- Token economy. Mint/burn ratio. It’s important especially for the in-game tokens. Well designed token mint and burn ratio is crucial to maintain a sustainable game economy.
- Game activity connected to the tokens. How are the tokens awarded? Can players get them simply by playing the game? Or do they need to participate in more challenging tasks?
When to buy or sell the tokens to maximize profit?
Everyone can buy anything, at any time, it’s easy. The real question is, when to buy to reap the biggest profits? There is no straightforward answer. There is a wide range of options. Primary sales directly from the development team, secondary markets, peer-to-peer. It all fluctuates. Pick your timing wisely! When it comes to selling, it’s not easy too. What will you do when the prices fall? Prepare yourself for the upside, and for the downside, so you won’t get surprised. There are money investment strategies, and I will not cover them in this article. Build one on your own, measure it, analyze, and adjust. Be mindful, and flexible.
There is a famous quote by Paul Saffo from his blog post, which has been popular in the investment circles. He describes his investment mindset as:
strong opinions, weakly held
It means that going into a trade you need to have a high level of confidence about the trade. The longer into it, the greater the inflow of data you have to embrace. Don’t hesitate to question your first assumptions.
Eventually your intuition will kick in and a new hypothesis will emerge out of the rubble, ready to be ruthlessly torn apart once again. You will be surprised by how quickly the sequence of faulty forecasts will deliver you to a useful result.
How to deal with emotions while holding crypto?
Price fluctuation can really affect your emotions. Trading is addictive. Period. Prepare yourself for it. If you have any history of addiction, you should stay away from it. Find safer heavens to allocate your resources than crypto! If you are sure that you are ready and you want to start HODLing within the crypto space, here are some tips for you:
- Invest only the money you can afford to lose.
- Formulate your strategy.
- Start small.
- Learn.
- Do your research before buying into a project.
- Stay away from price charts after taking a position.
- Ask yourself, “am I scared?”. If yes, then don’t do it.
Is HODLing a passive income stream?
As you’ve already read, it’s not that simple to HODL. Every topic I explained in this article is interconnected with each other, creating a spicy blend, that is not for everyone. Keep in mind that this article was just a simplified explanation of the HODLing strategy. You have to research it further on your own. But as you can see it only seems easy at first glance. Holding assets is an investment strategy that requires a lot of devotion and skill which probably a regular gamer doesn’t have. Gamers just want to have fun, they don’t care about the ownerships, etc. So why are these NFT gaming projects marketed so heavily amongst gamers? Are they even gaming projects, or just another form of DeFi?
Summing up, HODLing is not for everyone. It requires a lot of effort to pick the right assets, and there is no guarantee of a positive outcome.
Remember one thing, always be cautious, and embrace the basic crypto rule: “Don’t trust. Verify”.
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