In the speculative world of NFTs, the term "alpha" is thrown around a lot. But just what does it mean and where did it come from?
- In the NFT world, the term "alpha" is information that can presumably be used for some benefit or profitable end. Alpha has the connotation that the information is not widely known and therefore has the nuance of being "intel".
- The term alpha was borrowed from the world of finance; however, alpha has a different meaning in that world. In finance, alpha is the excess return on a portfolio as compared to a benchmark such as the S&P 500. Alpha is positive if the portfolio returns "beat" the benchmark (assuming the same level of risk).
- Although the term alpha is also used in the general crypto world, it is used more frequently in the world of NFTs. This frequent usage suggests that information asymmetry is a major feature of the NFT market.
- In order to deal with this information asymmetry, individuals active in the NFT space form groups called "alpha groups" where individuals coordinate to gather information and stay ahead of the market.
What does Alpha mean in the NFT world?
In the fast moving NFT world, how do you get that edge to stay ahead of the market … that extra something that gets you into a project before it moons?
Maybe what you need is some "alpha"!
In the NFT world, alpha is information that you are able to acquire or act on ahead of the majority of people in the NFT market. This information gives you an "edge" in such a way that you are able to profit from it.
The term "alpha" is also used in the general crypto world and essentially has the same meaning, but in NFTs, the term is used more frequently.
The nature of the NFT market is not only highly speculative, but it is also a relatively small, illiquid market that lends itself to fast price movements.
Insiders and influencers can move projects from obscurity to blue chip with a few tweets and a show of support; celebrities can lend their name to a project or buy into them; whitelist "opportunities" can open up as quickly as they close.
These dynamics can lead to an "asymmetric information" situation where certain insiders and influences have far more actionable information than the average market participant.
In this kind of environment, where fortunes can be won and lost in a blink of a tweet, getting that extra bit of information ahead of the masses of NFT want-to-be-millionaires, has led some NFT traders to spend hours on Twitter and Discord hunting for that golden nugget of alpha.
Where did the term Alpha come from?
Alpha is not a new term.
It comes from one of the more traditional places: the old world of finance or, more specifically, modern portfolio theory.
In an investment portfolio, the "alpha" is the excess returns given a portfolio's risk.
Let’s look at a couple of situations (note: the situations below are extremely simple - so to finance people reading this: I know there is more to it and I’m using some terms loosely, but I am just trying to demonstrate a concept here 🙂 ).
- You have constructed a portfolio of various stocks that, over the years, has given you a return that is about the same as an index of S&P 500.
- You have constructed a portfolio of various stocks that, over the years, has given you a return that is lower than an index of S&P 500 .
OK, now for the third situation -
- You have constructed a portfolio of various stocks that, over the years, has given you a return that is higher than an index of the S&P 500.
(To be a little more accurate, here it is a better to say it: your portfolio returns beat the benchmark market, the S&P 500, given the same level of risk)
Sounds like the third one is the one you want, right?
It’s this third situation that has the positive "alpha" - a situation where you get an excess return given the risk.
(note, alpha is calculated after the fact. It is a number that is calculated against a benchmark with the same risk profile).
To be able to get that positive alpha, the portfolio manager needs to know more (or have a greater understanding) than the market knows as a whole - otherwise how would they be able to beat the market and get the excess return?
In large, regulated markets, it is very difficult to consistently (and legally) get positive alpha over a long time period. The reason is that all information should be available to investors so any new information should immediately get priced in (this idea is called the Efficient Market Hypothesis). In fact, “insider trading” (which is basically acting on information before it is publicly known) is illegal in regulated markets such as the stock market.
So the true meaning of alpha in the finance world is the amount of the return itself (and alpha is positive if there is an excess return). It can be calculated and a number can be put on it (such as a % of excess return over the benchmark market).
But in the NFT world, this is not how the term "alpha" is used; rather, it is the information itself (which may lead to higher returns) that is considered to be the "alpha".
Yeah, "Beta" is a thing too!
In the above examples, beta is the calculated risk (which is a measure of volatility) of the portfolio. Beta is a key concept when constructing a portfolio in the traditional finance world (think "diversification" and you’ll get the idea). But the term "beta" is not used in the NFT world.
How to Use the Term Alpha?
In the NFT world, "alpha" is the information that is not yet widely known by others in the NFT community and can, presumably, be acted upon to some beneficial end.
Therefore, when using this term on NFT Twitter or Discord, you should be referring to some little-known information that the community would benefit from.
Alpha Alert! I was on a Twitter Spaces and [famous artist] just said she would be collaborating with [some NFT project]!
However, sometimes you may see that the term gets watered down to the point that the "alpha" ends up being more of a tip or some good advice, such as:
Here’s some alpha for you: never share your seed phrase!
The above is not really alpha per se, but still something very important that people new to the NFT space might not know.
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And since the word "alpha" is a term that gets attention, sometimes it is used to highlight an important point or the express a strong opinion - something that you believe is so true, that is warrants the use of the term.
The point here is that alpha, at the very least, should be some valuable information to your audience.
What are Alpha Groups?
Between Twitter, Discord, YouTube, in-real-life events and much more - information overload is a part of being in the NFT space.
To deal with this overwhelming amount of information, people have been forming "alpha groups".
An alpha group is a group of people that help each other gather information on NFT projects, find and keep track of whitelist opportunities, and, in general, keep up with what is happening in the market. These groups typically communicate with each other via Discord and Twitter. The general aim of these groups is to maximize profits.
Some of these groups are more of an informal group of friends whereas others are more formally organized with paid memberships (usually through the purchase of an NFT).
Note: Beware of scammers luring you into alpha groups with the promises of riches. Always do your own research.
- Related: Forming an alpha group is often used as part of a flipping strategy.
There are even alpha groups that have longer term aims and are organized more like high-end professional networking groups.
For example, Proof Collective is an alpha group that was started by Kevin Rose, a long-time Silicon Valley entrepreneur and investor (as well as a regular guest on the Tim Ferriss podcast).
Early on, the group provided things like lengthy and well researched reports on what they considered to be the best NFT projects.
The group has since evolved into developing and building their own projects, including a PFP project called Moonbirds.
The original mint price for a Proof membership was 5 ETH. At the time of writing (April 2022), the floor price for a Proof membership is 89 ETH!
Alpha Groups and DAOs
Some groups take things a step further by starting their own investment DAOs, which is a way for these groups to collectively invest in higher-priced projects that they might not be able to afford as individual investors.
The fact that "alpha" is such a commonly term used in the NFT world says something about this space -
It suggests that information is key in this market where certain insiders (or those that can get information from these insiders) have a major advantage over the average participant.
That’s not to say that everything is wrong about this relentless pursuit of alpha.
The alpha traders have brought liquidity and interest into this nascent space; it’s changed the lives of artists and creators in ways that may have been unimaginable just a year or two ago.
Getting alpha also requires you to listen and learn, which is one of the most important things we all should be doing in this space.
About the Author
Ed is NFTska’s lead Editor and Author based in the Los Angeles area. He fell deep down the crypto rabbit hole starting in 2017. Ed actively participates in and follows the fast changing NFT scene. Learn more about Ed.
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