BAT Primer

✍️ Author: Nestor
Hi, I’m Nestor. I’m an investment professional with 20 years of experience running proprietary public market strategies. I’ve written extensively on BAT (Basic Attention Token) in the past, but these have been mainly wasted on public fora & lost in the ether. I plan on publishing a regular series on the project here since it will allow for greater depth of analysis when I can refer to previous posts. I will also add more projects I will cover in the same way as I get around to them — it takes a while to build the analytic capacity to correctly model a project & easily update those models.

To begin at the beginning, I think BAT is a unique entity in Crypto. It’s a “real business” in the sense that it has a fully doxxed & long tenured team generating stable & predictable cashflows and is piloting a clear growth trajectory to try to capture a greater share of a relatively well-defined addressable market. As such we can use more traditional financial analysis here with greater effect than in many projects. I will make a case over a series of posts that BAT is an excellent long-term hold with a reasonable expectation of 10x and beyond from current valuations.

Here is a very quick summary of BAT mechanics.

1. Brave Browser blocks a huge swathe of embedded ads and trackers natively.
2. Some Brave Browser users can opt in to receive privacy-respecting Brave ads. Currently 20–25% of users opt in.
3. BraveCo sells ads priced in views/USD to appear in Brave Browser for these users & keeps 30% of revenue for itself.
4. BraveCo takes 70% of the USD revenue and uses it to buy BAT tokens to distribute to the users who view the ads. Occasionally the advertiser may deliver BAT to Brave instead of paying in USD, but this does not change the fact that the ads are priced in USD. The amount of USD per view that users receive is not affected by the BAT price, meaning that the number of BAT per view can fluctuate over time.
5. Brave users can use these tokens to tip registered creators, sell on the open market, or for potential future utility with the Brave/Browser wallet (eg swap rebates, or to pay for Brave Talk).

This is a simple game to play — the game is revenue growth and it’s easy to track. Brave reports every BAT purchase it makes shortly after it happens. This represents most ad buys because only a small percentage of advertisers will buy the BAT themselves and deliver it to Brave to be distributed to users.

We also get timely monthly updates on user growth, both DAU and MAU. Because of this we can decompose earnings growth into its constituent parts: Earnings Growth = User Growth + Earnings/User Growth.

OK, so given all that, how are the numbers looking?

Both users and rev/user have been growing at a ~100% annualized rate, meaning that total revenues have been growing at something like 300% annualized.

OK great. What does this mean?

The impact of this growth is twofold:

One — it puts continued buying pressure on BAT. Advertiser dollars must be converted to BAT regularly and they must market buy at any price. The upshot of this is that with a low BAT price — say $1 — by 2025 BraveCo is buying more than the annual supply of BAT in a single year. Every subsequent year this amount will grow even further. Unless users spend this immediately, this puts upward pressure on Brave that is relentless and not sensitive to market conditions. For those interested, I will go into more detail on the implications of future BAT purchase trajectory and some other details of my model in a later post.

Two — it starts an advertising vortex that will eventually take Brave’s market share well into double digits. This is, I think, the less appreciated part of Brave. The cycle is simple. As Brave browser MAUs increase, the more users will not be seeing legacy ads. More advertisers will be forced to spend on Brave ads, and Brave will be able to charge higher prices per ad because of increased demand. The higher user share of ad revenue will attract more users to the platform, which will further neutralize legacy advertisers and drive even more ad spend to Brave. Given current growth rates, Brave at nearly 50 million MAU will surpass Firefox’s 200 million MAU and their 5–10% desktop market share at some point in 2023.

How do we value BAT? Unfortunately, without some deterministic cash flow for BAT holders it’s not as simple as a DCF. The clearest path to valuation is estimating that the ratio of free-floating BAT / BAT inflows has some kind of floor. Here’s my latest calculation:

Using 80% of trailing growth and pushing it forward, we see FF/Inflows declining from ~50x to 12x by Dec 2022, 3.5x in Dec 2023, and 1x in Dec 2024.

What is the correct long-term equilibrium value of this metric? It’s hard to estimate. While many users will sell / tip their BAT immediately, many will retain it for speculative purposes. Additionally, as BraveCo adds more BAT utility to the Brave ecosystem, there will be more incentives to hold it. The more frictions between rewards and tipping/spending, the higher this ratio will go — and it’s already discounting the future by 10–50x.

I hope that was enough to whet your appetite on this specific project and my type of analysis. I will revisit and update key metrics for the projects I cover so that we can see how tracking vs forecast & valuations evolve. I hope you enjoyed reading.

laudetur XP

- Nestor

DISCLOSURE: The author is long BAT, and this is not investment advice