Written by Lesley, Footprint Network

After the narrative of blockchain enabling decentralized finance and easy cross-border transactions, the next major case for the technology has been that it empowers gamers to own their virtual assets and generate earnings from their in-game activity.

As a result, institutional and retail investors fronted $5.4B into the GameFi industry in 2022 alone, expecting it to be the next frontier of mass crypto adoption.

For long-term investors like institutional investors, the attraction lies in the expected sustainable growth of GameFi projects. The goal of these projects to revolutionize the gaming industry, an already lucrative multi-billion dollar global sector, presents a compelling potential for mass crypto adoption.

Notably, many individual investors are often gamers themselves, giving them an intrinsic understanding of the value proposition and future demand in the blockchain gaming space.

This article explores the opportunities presented by this trend and provides insights on how to effectively capitalize on them using advanced analytics and tools.

Web3 Gaming Analysis for Investors

Looking at the Web3 gaming market by the numbers, things could be better.

Monthly game volume has declined significantly since the peak of the bull market, and the challenge of bringing quality games to market is evident among developers.

Despite these difficulties, innovation in the Web3 gaming space remains vibrant, with developers continually refining their products and focusing on long-term trends.

Currently, the Web3 gaming landscape is vibrant with approximately 2,500 active game projects and a market cap of $567.19 billion as of July 24. This dynamic sector also boasts an active user base of 771.92k, showing the potential it holds. In addition, significant investment continues to flow into the industry, as evidenced by companies such as Sui and Mysten Labs, which has raised $300 million in funding and plans to offer high-end games.

As an investor, the GameFi ecosystem offers a wide range of opportunities, such as investing in game tokens, play-to-earn models and investing in the projects. However, it’s important to understand that each investment comes with its own set of potential returns and risks. Therefore, the use of robust on-chain analytics is essential to effectively analyze investment performance, market liquidity, and user engagement within specific projects.

Long-Term Investors: Conducting Due Diligence and Analyzing On-Chain Metrics

In the Web3 gaming space, the need for long-term investors to conduct thorough due diligence and analyze on-chain metrics is critical. This approach facilitates comprehensive understanding, risk mitigation, and more informed decision making.

Long-term investment requires a significant capital commitment, a higher level of patience, and a robust risk tolerance from investors. As a result, these investors often base their decisions on careful research and analysis. This includes scrutinizing the game’s (or the equivalent of a company’s) fundamentals, growth potential, competitive position, and other relevant factors.

In the realm of Web3 gaming, long-term investors target a wide variety of meticulously researched projects. By conducting rigorous due diligence and analyzing on-chain metrics, they can make data-driven decisions that align with their investment strategy. This methodical approach is key to navigating the complex, dynamic world of blockchain gaming investments.

Risk Mitigation

Risk management in the rapidly changing crypto market is critical, especially when investing in the web3 gaming space.

Risks can arise from macro factors such as market volatility and regulatory changes, as well as game-specific issues such as imbalances in a game’s economy or a declining player base. Monitoring game updates and community feedback is critical to anticipating and responding to these game-specific issues.

There are two key metrics to track for risk mitigation.

Liquidity

Liquidity, relating to the ease of buying or selling a game’s tokens without drastically impacting the price, is a vital consideration for crypto investors. High liquidity indicates a robust market of buyers and sellers, enabling efficient price discovery and reducing the risk of market manipulation.

However, newly issued tokens often face liquidity issues. They depend on active traders on exchanges for market liquidity, posing a challenge for small-scale currencies to convert into popular currencies at a market-driven exchange rate. Essentially, their isolation from the larger economy restricts their utility, limiting their value and adoption rate.

Key indicators to assess liquidity include on-chain metrics such as trading volume and the distribution of token holders. Furthermore, the game’s design architecture should be analyzed to ascertain if it encourages token liquidity. For instance, mechanics that incentivize regular trading of tokens can help maintain high liquidity.

Volatility

Volatility, a critical metric in the crypto space, represents the degree to which a game’s token price fluctuates within a given range of returns. High volatility means that the price of the token can change rapidly in a very short period of time, allowing investors to experience significant gains or losses.

By examining volatility — through daily, weekly or monthly price changes — and comparing it to similar tokens or the broader crypto market, investors can gauge the risk associated with their investments. This understanding helps them formulate sound risk management strategies, such as setting stop-loss orders or diversifying their portfolio to mitigate potential losses.

Long-term investors in the Web3 gaming sector often have a greater capacity to absorb risk. Because they believe in the long-term value of the project, they commit to the investment despite the high volatility, viewing temporary price fluctuations as opportunities rather than threats. They see the inherent volatility of the crypto market not as a deterrent, but as a feature that can lead to significant long-term gains.

Furthermore, in the dynamic landscape of the web3 gaming industry, it is essential to stay abreast of industry trends and developments. Regular research, analysis, and active community engagement can help investors stay ahead of constantly evolving risk factors and mitigation strategies.

Long-Term Potential

In the rapidly evolving Web3 gaming industry, it’s important to distinguish between hype and potential for longevity. Not all buzzworthy projects can sustain themselves over the long term. Identifying games with solid fundamentals and lasting potential is key to successful investment.

Long-term potential is often found in games that have a strong foundation, growing user engagement, and a track record of continuous innovation and updates. A vibrant and engaged community also signals longevity and could potentially offer significant returns over time. Therefore, long-term investors need to look beyond the current hype and evaluate the substantive characteristics that make a game promising for the future.

User Related Data

The user is the foundation of any gaming project, and this principle is super important in the realm of web3 gaming ecosystems. User behavior and their feedback not only shape the trajectory of the game, but also form the pillars that support the entire ecosystem.

In the early stages, it’s critical to carefully monitor the influx of new users. Tracking these early participants allows us to gauge the initial appeal of the game, which is a litmus test for its potential success.

Conversely, in the middle and later stages of the game’s lifecycle, our focus should shift to tracking active users. This shift is critical because it is these engaged users who define the momentum of the ecosystem, and it is through their activities that we can assess the impact of specific events and retention rates — the latter being a key metric for evaluating the effectiveness of our game design.

This careful tracking of active users gives us a strong signal of the game’s long-term potential. Games that successfully maintain or even grow their active user base have a greater chance of sustaining their success over time, underscoring the strategic importance of user-related data in the web3 gaming landscape.

Team

The team behind a game acts as its soul, driving both its design and development. The developers’ skills, backgrounds, and commitment to regular updates and innovation play a significant role in the game’s success. Their ability to stay attuned to community feedback and respond with quick and effective changes adds a layer of dynamism to the game experience, fostering player engagement and loyalty.

Gathering information about the team, such as their credentials, past accomplishments, and consistency of innovation, is paramount. This can be done through multiple channels, including the official game website, various community platforms, and professional networking sites such as LinkedIn. The team is not just a group that develops the game, but a key force in shaping the game’s path and its position in the competitive landscape.

Game Design

Game design — including overall gameplay, tokenomics, and ecosystem design — is a critical factor in the longevity and success of Web3 games. Usually, we can get an overview of the gaming design from their white paper.

Tokenomics, a unique aspect of blockchain-based games, shapes the economic interactions and incentives within the game and plays a critical role in player engagement and retention. This understanding of tokenomics empowers people to actively participate in the game’s economy, enabling them to navigate and adapt to dynamic changes in the ever-evolving gaming market. With tokenomics at the core, players are motivated to be an integral part of the game’s ecosystem, fostering a vibrant and sustainable gaming community.

In addition, rich and innovative game design adds to the game’s appeal, making it more enjoyable and engaging for users, thus increasing its long-term potential. The ability to deliver unique and immersive experiences is at the heart of any successful game, and in the Web3 landscape, its importance is amplified. Robust game design is necessary to take full advantage of Web3 capabilities such as decentralization, interoperability, and player sovereignty, which differentiate these games from traditional games.

Investor Protection

In the rapidly evolving world of Web3, investor protection often depends on a myriad of factors.

In addition to smart contract security and regulatory compliance, token distribution and project governance are the most important. Investors should remain vigilant, monitoring data shifts and examining token distribution patterns to avoid falling prey to market manipulation by “whales” — large stakeholders who hold a significant portion of the tokens.

Token Distribution

Token distribution is an indispensable aspect when analyzing the long-term potential of a game and the integrity of its economy. It refers to how the game’s native tokens are distributed among various stakeholders such as players, developers, and investors.

The distribution of tokens is usually determined by the team. However, we can still analyze the data and look at the overall distribution of tokens, not just separated by team ownership and user. Data analysts can determine the distribution of tokens based on each person’s wallet balance. For example, if 1% of people own 90% of the token, it would be super dangerous and the token price will change quickly because of a small group of people.

An ideally distributed token economy is one in which no single entity controls an excessive number of tokens. This not only ensures a level playing field for all participants, but also protects them from the risk of price manipulation by a single entity.

Governance

Another important aspect for investors to consider is the governance of the project. In the context of a Web3 project, governance refers to the mechanisms and processes for decision making within the project. In a truly decentralized system, token holders often have the power to vote on critical matters affecting the project. Information about a project’s governance model can usually be found in the project’s white paper or official documentation.

Projects with a decentralized and inclusive governance model are generally considered to be more protective of investors’ interests. This is because a decentralized governance model promotes transparency and fairness, and reduces the risk of decisions being made that benefit only a few.

Decision Making

Investing in Web3 gaming, an industry known for its high-risk, high-reward paradigm, requires extensive research and a deep understanding of the industry’s complexities. The speculative nature of this nascent industry requires careful decision-making, always in line with an investor’s risk tolerance.

To make informed decisions and minimize risk, it is critical to carefully consider all elements and details, conduct thorough due diligence, and analyze on-chain metrics. By taking these steps, you can ultimately make a comprehensive decision that maximizes profits while minimizing risk.

Track Smart Money

Tracking the smart money, provides valuable insights and can be a practical strategy for making decisions in the crypto space. This is important for investors in the gaming industry, but not so important for gamers. This method involves a number of steps:

• Identify your target token: Investors should look for and track tokens that are experiencing significant appreciation or those that are gaining popularity in the market, so that they can step into the violent market and make a profit. The first step is to identify the token you are interested in. Sites like Dexfilter can be very useful in this initial stage.
• Discover smart addresses: Once you have a target, the next step is to identify ‘smart addresses. These are addresses associated with savvy investors or ‘whales’. Uncovering these addresses can be accomplished through profit analysis over a period of time, which requires some data analysis skills. Alternatively, resources such as Nansen had already highlighted the ‘smart money.’

• Monitor their movements: Once smart addresses have been identified, their movements can be tracked using platforms such as DeBank or Arkham. These platforms provide key insights by tracking wallet activity, including trades, deposits and withdrawals. You can also do your own analysis and independently monitor the inflows and outflows of these addresses.

This approach can help investors anticipate market trends, identify promising tokens and make informed decisions as part of a comprehensive investment strategy. However, always be mindful of your risk tolerance and strive to diversify your investments to effectively manage risk.

Market Movements

The power of public sentiment cannot be underestimated in the rapidly evolving GameFi market. By applying sentiment analysis to social media platforms, investors can gain insight into the current reputation of a particular GameFi project and potentially anticipate future trends. For example, an unexpected negative shift in public sentiment could be a harbinger of upcoming issues that could negatively impact the project’s value.

It is equally important to be aware of notable changes in project management, policy, or overall behavior, as these factors can significantly impact the value of the project. It’s important to keep up with the project’s official channels-whether its website, blog, or social media profiles-and look for announcements that indicate significant changes. For example, if a project decides to pull out of a particular market, as Stepn did with China, this is a notable change that can affect its value.

Individual Investors: Navigating Risk and Capitalizing on Speed in the GameFi Market

While they may not have the extensive research capabilities of institutions, they can still make insightful decisions in the gaming market.

The limitations of funding and resources can naturally lead individual investors to speculate. This has its risks, as there is potential for high rewards as well as significant losses.

However, the direct control that individual investors have over their investments can lead to faster decision making. This agility can often be beneficial in the fast-paced and ever-evolving landscape of gaming. An individual investor’s ability to quickly adapt and respond to market changes is an advantage that can be leveraged for potential profit, although it requires careful management to mitigate risk.

Understand the Game and its Economic System

Investing in GameFi requires more than just financial acumen, it requires a deep understanding of the game’s underlying principles and economic system.

For example, a typical web3 game includes elements such as NFT, tokens, and other game props. This understanding can help investors determine which tokens or NFTs have the potential for appreciation.Moreover, you can also assess the sustainability and potential of this money-making opportunity.

Flow of the Assets in Game

Understanding the inflows and outflows of capital within a game can provide valuable insight into its economic health and potential. A healthy game economy typically has more capital inflows than outflows.

One must observe the buying and selling trends of game tokens and NFTs, both within and outside the game ecosystem. Tokens and NFT transactions provide valuable insights into the economic vibrancy of the game. However, it’s critical to exclude token and NFT transactions generated by the project team itself, as these may not reflect true market behavior. Thus, separating the signal from the noise in transaction data can reveal the true state of a game’s economic health and its potential investment value.

User Behavior

Understanding user behavior and their level of engagement in the game is an essential part of game’s investment research.

In addition, the behavior and activities of new versus veteran users can influence the game’s economic ecosystem. Therefore, keeping an eye on their activities can provide critical clues about the game’s direction.

In particular, the actions of “whale” users, who are often the main investors in a game, can have a significant impact on token prices and the game’s economic structure. Tracking their investment behavior, such as the amount of capital they invest, their token purchase trends, and their level of game participation, can provide useful insights into potential market movements and investment opportunities.

Conclusion

The emerging web3 gaming sector presents exciting opportunities for investors to capitalize on the growth of blockchain technology in gaming. However, this nascent industry also presents significant risks.

Learning more about the project, analyzing on-chain metrics, and tracking user engagement and market sentiment are key to making informed investment decisions. While institutional investors can leverage extensive research capabilities, individual investors should focus on thoroughly understanding the game’s economics and user behavior.

Overall, a measured, research-driven approach is essential for investors targeting the high-potential but volatile web3 gaming space.

This piece is contributed by the Footprint Analytics community.

The Footprint Community is a place where data and crypto enthusiasts worldwide help each other understand and gain insights about Web3, the metaverse, DeFi, GameFi, or any other area of the fledgling world of blockchain. Here you’ll find active, diverse voices supporting each other and driving the community forward.