Cryptic Currency — Is Your JPEG Worthless Or Priceless?
What is the real value of a non-fungible token (NFT)? When many traditional valuation methods do not apply in the realm of Web3, how can you tell if you have a JPEG or a priceless work of art?
Limitations of Common Valuation Methods
Many asset valuation methods are improperly suited to estimating the value of NFTs. As an example:
- Net Asset Value — NFTs are typically a singular asset without any liabilities, excluding creator royalties.
- Discounted Cash Flow — outside of some edge cases such as music NFTs and some DeFi, there are not sufficient revenues and costs tied to an NFT to forecast the lifetime cash generation of an NFT.
- Cost — the last purchase price can vary wildly from the current value. If you purchased an NFT early, it blew up and you held #diamondhands, it will be less than current value. If you bought at the wrong time here is a help line https://twitter.com/coinfessions
What can we see on OpenSea
Let’s look at a Pudgy Penguin #7370, currently listed on OpenSea at the lowest listing price, of 12.5 ETH or US$ 41,298. This is the floor price for the collection. If it was to realize this floor price it would be close to 40x the purchase price. At the time of writing the current best offer is for 11.5 ETH. OpenSea shows the floor price of a trait or collection, which can be misleading as it functions as a reserve price and can often be set at iterations of 69, or other less funny numbers. The average price of historical sales of NFTs with a certain trait is a much more reliable measure of the actual open market value of an NFT or trait. To establish the average historical sales pick a trait e.g. “Face: Blushing” and select a time period that has a larger enough volume of past sales, so that you can gauge an average. This will involve judgment as you need to weigh more recent sales prices more heavily than less recent sales prices, but a larger sample size reduces the impacts of outliers.
Pudgy Penguins is my favorite of the large market-cap NFT collections due to their top-tier meme game. But is it worth the listing price?
Putting on my amateur anthropologist hat, the best comparables for large market-cap NFTs are fine art and luxury wearables, such as watches. These are assets valued based on rarity, history of ownership, and creator’s reputation e.g. brand or artist. As the Web3 community develops utility is expected to become more important, but clout remains the fundamental driver of an NFT’s value. The owner demonstrates their value within a group by owning a particular NFT. For example, no one buys a Rolex under the value proposition it will allow them to tell the time. Rather, they do so because it is a status symbol among other watch collectors.
Operating under the assumption that clout is the main value driver, we need to try and assess what drives clout. How much clout is derived from owning any NFT within a collection versus owning an NFT with a rare or valuable trait? There are two questions to address as part of this:
- How dependent are average sales prices on specific traits? and
- What traits, if any, have a significant impact on the value of an NFT?
Going back to the example of the Pudgy Penguin NFT, the best way to quickly gauge this is to look at the sales trends for the traits that it possesses on OpenSea. this will point us in the right direction.
Using the beige background as an example, it can be seen that the average price for NFTs with this trait was 11.5ETH on April 3, 2024.
What about the Pudgy’s other traits? Are there any that could suggest a higher value? Using averages for sales on the same date:
- Body: Tank Top Blue — 11.6133 ETH average ;
- Face: Blushing — 11.6591 ETH average;
- Head: Sombrero — 11.355 ETH average; and
- Skin: Red — 11.7375 average.
This relatively small gap in the average price across the different traits is confirmation that none of these traits are value drivers.
Based on this, a slightly higher price of 11.57 ETH, than the current best offer would make sense.
Valuation Tools
NFT Valuations.com provides a way to verify the above estimate with generally accurate valuations, see the NFTi figure of 11.56 ETH, this amount is NFT Valuations estimate using their machine learning models.
As with any calculation, we need the ability to rationalize the position. In any efficient marketplace, if valuation exceeds sales price we would expect to see a quick sale. This would suggest that the following NFTs are not accurately valued by the machine learning models used.
If we dig into Pudgy Penguin #7270 using OpenSea for consistency, we can see that the average selling price of the below traits of 11.6244 ETH does not support this valuation, nor is there a positive outlier to explain this.
- Background: Yellow 11.678 ETH average
- Body: Huddle shirt 11.6525 ETH average
- Face: Winking 11.5058 ETH average
- Head: Flat cap blue 11.6537 ETH average
- Skin: Normal 11.63ETH average
A tool like NFT Valuations adds immense value in terms of highlighting which traits within a collection are particularly valuable. At what point do we see a change in value based on rarity and across what type of traits? Ultimately, what can we use this to tell us?
Here is the most common Pudgy Penguin by rarity score. A real every man.
Most importantly, you find that he is not the least valuable Pudgy Penguin. This indicates that the valuation of the traits is not directly correlated to rarity, at least among the traits outside the exclusive ranges.
What we also find is he is not the least valuable Penguin by NFTi. Which is, oh no, our friend from earlier…
