Utilizing market capitalization and cost basis to locate periods of trend exhaustion and undervaluation.
Analyzing the relationship of collections’ market capitalization relative to their cost basis is one of the most useful tools in NFT analysis. We will be releasing a series of blogs focused on interpreting certain useful analytics, but the first will focus on information that can be gleaned from analyzing the ratio of market capitalization to its cost basis, or Collection Profit Multiple (CPM).
Market capitalization is the floor price of a collection multiplied by the total number of pieces within that collection. The cost basis is the total sum for a collection of each piece when it was last transacted. For pieces that have never transacted, the mint price is used. Each individual piece’s cost is then summed to create the total collection cost basis.
One can use historical CPMs to help identify areas where trends may be exhausting themselves. During the initial bull market for NFTs during the summer of 2021, various large-cap collections saw extreme price gains. However, why did Fidenza peak at nearly a 300E floor while Ringers was 191E, when both collections are 1,000 pieces? Or why did Archetype peak at a 75E floor when a similarly sized collection like Construction Token peaked at 17E? The answer can be found via the CPM. Most successful collections during the bull market of 2021 followed the trend of seeing price peak exhaustion when its CPM multiple was 7–9x, with a select few collections reaching manic extremes of 10x+.
This does not appear to be a macro NFT bull market phenomenon as recent collections such as Gazers demonstrated similar CPM exhaustion multiples close to 8x prior to consolidating.
While collection floor values may peak at lower CPMs than 8–10x, it appears that each time it reaches those specific multiples it may be a manic top for a collection. The likelihood of consolidation in price seems to increase as either floor prices may fall down to meet the collection cost basis, or the collection continues consolidating sideways in price as the cost basis catches up from new buyers at higher valuations.
One may also be able to utilize CPMs to determine if a collection is becoming undervalued or at least identify where buyers may show up as floor prices decline. There appears to be a relationship for lower valued collections as CPMs approach 1 in ETH terms. While more valuable and larger collections such as Chromie Squiggle and CryptoPunks may be more driven by CPM in USD terms.
Looking first at collections potentially with ETH-driven effects we can see a relationship begin to form where market capitalization approaches cost basis, i.e. CPM falls to 1x from something >1x. This may be due to buyers that have begun showing up or sellers who are no longer listing. This appears to be driven by investor psychology for both buyers and sellers. Buyers may be more willing to step up and buy pieces from a collection as it has now returned to prices they have previously purchased or collectors who may have missed initial price appreciation may see this collection now as being a good value. Conversely, sellers could also be responsible for floor prices no longer falling as they wish to not sell at breakeven after seeing substantial prior gains.
Larger valued collections may be driven more on CPM approaching 1x on a USD basis, as collectors may be driven more so by pieces reaching milestone USD cost amounts such as squiggles bouncing at a collection costs basis that happened to be approximately $10,000 or CryptoPunks at $50,000.
CPM appears to be a useful tool for identifying important trend changes in collection values. The previous examples within this blog were useful for looking at collections typically residing in a profitable position; however, CPMs are also useful when looking at collections residing in a loss position. We will leave further analysis of this tool for you to discover!
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