What is Alpha?

In the NFT world, the term “alpha” refers to 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 “intellectual”. It refers to forthcoming statements that are kept secret in order to avoid price manipulation, such as insider information.

Users who discover “alpha” can invest first and benefit the most. The NFT community is frequently split between those who possess the NFT and those who do not (but who just follow the project). NFT owners receive information first and are not permitted to sell such secrets. The alpha almost always ensures a good return on investment.

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; and 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 the 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.

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.

An 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.

In large, regulated markets, it is very difficult to consistently (and legally) get positive alpha over a long period of time. 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).

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 percentage 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”.