Modeling Token Price Series- NFT Collection to Fungible Token Launch

At Horizen Labs, we eat, sleep and breathe tokenomics. We helped design and coordinate the successful launch of $APE in March 2022 and have a pipeline of several new fungible token launches that we’re working on. As we explore the dynamics and details of a fungible token launch with our partners and clients, one issue is always top of mind — what do we expect the price of the token to be on Day One?

Unlike valuing a company at an IPO (which is no easy feat), valuing a token at launch is in fact much more difficult. There are less historical data points, less information on the underlying entity holding the offering, less regulatory standardization, less consensus on method of valuation from analysts, and vastly more volatility. That being said, we’ve been getting better and better in modeling Day One price discovery for fungible token launches.

We wanted to share some of our learnings in a series of articles. In the same way, you would have a different valuation model and assumptions for a small retail company vs a megacap tech company, we also look at different inputs based on the type of fungible token launch. Today, we’re digging into an offering we know quite well, NFT Collections launching their own fungible token.

We’ve identified 10 inputs that we think most clearly drive fungible token price for an NFT collection. The actual spreadsheet dynamics and weightings of each of these dynamics is up to the analyst (or weekend crypto enthusiast…DYOR), but we’ll expound on why your model should include these following factors:

1. NFT Collection Valuation: How do you value something that has not previously been valued extensively? What the last person paid for it is an obvious metric. With the valuation of an NFT collection or collections’ fungible token, it is no different. A collection that is more valuable, all else being equal, will lead to a more valuable fungible token. Adding in metrics such as NFT collection floor price and past 90-day average selling price are essential in building an fungible token valuation model.
2. NFT Collection Volatility: Similar to how a more highly valued NFT collection leads to higher value/pricing in a fungible token, an NFT collection that has a more volatile price will lead to a wider disparity of potential valuation for the fungible token. High volatility suggests a lot of trading and shorter investment horizons. This will follow on with the fungible token launch itself. Floor price and 90-day ASP volatility should feed into the valuation model through the range of possible Day One prices.
3. Beta: One thing many valuation models in the crypto space overlook is the currency pair their models are using. While most people think in US Dollars, there are major macro overlays that affect the price of the broad cryptocurrency market that should not be in the valuation model. In Finance lingo, the broad cryptocurrency market would have a high Beta to other asset classes. We want to adjust for this. The model needs to predict price based on an ETH or BTC pair. For example, we might value $EXAMPLE at $4.50 from our model inputs, but if the cryptocurrency market is hit with a crash due to an outside macro event, the actual price at Day One might be $2.25. This does not mean the model is not accurate. In fact, it might have been highly accurate in predicting $EXAMPLE’s price in, say, ETH. So while building out the model, accounting for Beta both from the asset class perspective and to a degree within the crypto market itself (a wider pricing range for a more volatile underlying NFT collection vs ETH) is warranted.
4. Popularity: While the price of an NFT collection is driven by multiple factors, popularity is an undeniable key driver. The largest NFT collections have tens or hundreds of thousands of Twitter followers and Discord community members. This engagement drives demand for a fungible token that is often at a far more accessible entry price than the floor price of the underlying NFT collection. Therefore, there is a clear correlation between the popularity of an NFT collection and the Day One price of its fungible token. In addition, trends matter and if volume is trending down or the increase in Twitter followers is slowing it could lead to a more disappointing launch, all else being equal. Both the popularity level and popularity trend should be included as inputs in the valuation model.
5. Ownership concentration: NFT Collections as an asset class have a highly concentrated value disparity. Very few NFT holders hold the vast majority of value. While that creates potential systemic risks for the asset class, some of these worries will dissipate as new entrants dive into NFT ownership and the market becomes more democratized. However, within NFT collections ownership concentration is also an issue. The holding amount distribution and the unique holder-to-number-of-NFTs ratio are integral in a valuation model. High concentration leads to more volatile price discovery and less certainty on Day One price predictions. This needs to be adjusted for in a valuation model.
6. Utility: This attribute has a straightforward logic, but is difficult to quantify into a model. Of course, if a fungible token is useful in acquiring a product or service, there will be a higher demand for it. The knowledge that $APE would be the currency used for BAYC’s upcoming metaverse, The Otherside, drove more demand to purchase the coin than if it had no clear use case. Clear and quantifiable metrics to analyze the value of utility don’t exist, but we would recommend building out a utility spectrum and placing comps on to the spectrum to create a quantifiable input. Once that is done, you can use that 1–10 score (or however you choose to build the spectrum) to add into your valuation model.
7. Airdrops: A common method of launching a fungible token is to offer some percentage of the token’s supply as claims or airdrops into the wallets of the NFT collection(s)’ holders. This method is a way to reward people that are active participants in the community. However, it can also lead to a surge in the underlying NFT prices as this new expected value gets added into the NFT value pre-token launch. This period from announcement of that method of distribution to launch should be corrected for when using NFT collection valuation and volatility statistics in your model. In addition, as more data comes in about what percentage of airdrop recipients immediately sell vs hodling, that should also be included as an input into the model.
8. Potential Customer Segment: NFTs, for better or worse, are an asset class of hype at the moment. Of course, Utility, Design, Roadmaps and the rest add to valuation but the social prestige of brands like BAYC, CryptoPunks, or Moonbirds are a main driver of valuation. That social prestige is a luxury good. And as we know when we compare nearly identical t-shirts, one unbranded and one with a Gucci label, the luxury t-shirt carries vastly more value beyond its minimal quality improvements. While not easily quantifiable, measuring an NFT collection’s social prestige can be done using a spectrum of comps similar to utility. You could also look at Twitter PFP counts to see how many influential Twitterati rep the NFT Brand. The result should be added to the model — the higher the social prestige, the higher the expected Day One value of the token.
9. Tokenomics: Ultimately, there is no input more important to the price of a token than its economic system. If you launch a token with an unbelievably high inflation rate that outpaces any possible new demand for the token, there is little chance it can hold its value. Beyond that simple example, tokenomics can be incredibly complex as it deals with the minutiae of incentives within a token’s ecosystem. Each small choice can have a large impact on demand, supply and their intersection — the market price. Fully understanding the tokenomics of a new token launch and adding those dynamics and risks into your model is essential.
10. Insider/Outsider Ratio: A final input that we view as important in the valuation model is the Insider/Outsider Ratio for the initial launch of the fungible token. As any crypto enthusiast is well aware, the market is ripe with rug pull scams. So, you might expect a lower Insider/Outsider ratio would be advantageous from a token demand perspective. But on the other hand, knowing that the people (developers, creatives, business managers, etc.) are involved and plan to continue to be involved in a project due to economic incentives is also vital. In order to parse those factors, it’s both important to account for the Insider/Outsider ratio itself (the lower the better up until a certain point) and the vesting schedule of insiders. With a reasonable balance and a strong vesting schedule that incentivizes professionals to develop the project, a token will have a higher expected valuation.

We hope that our insights from working on some of the most successful token launches in the market are useful to your own valuation. This industry and the cryptocurrency market is growing at a breakneck pace. It is important to us at Horizen Labs that we can help build the thought leadership to create a vibrant and fair market of knowledgeable market participants. If you have any questions, comments or thoughts on our valuation methodology, please reach out.

Originally published at https://medium.com on June 1, 2022.