What’s behind an NFT price?
NFT, or more precisely the token standard ERC-721, was elected by the famous Art Review magazine as “the most influential person in art”, with a mention “non-human entity”.
We understand that the magazine wanted to pay tribute to the fantastic emergence of NFTs this year, but they couldn’t be more wrong in formulating the nominee. In fact, they could have as well put a brush and a canvas on their list – just like these tools are used to create a physical painting, the ERC-721 standard is a tool to fix the ownership of a digital piece on the blockchain. That’s all.
Can ERC-721 influence art? We don’t think so. Without the creator (or the creation) behind, NFT is a blank canvas, and without the community appreciation it is as good as inexistent.
Where does NFT’s value come from?
The creator and the community are two main parts of an NFT’s value – and success. They are also two main factors that one should take into account when bidding on an NFT, whether it is for investment purposes, for the hype or whatever.
So here’s a lifehack: whenever you analyse an NFT, always ask yourself what is the potential of the creator/creation behind it and how engaged is the community interested in it.
Let’s try it with this week’s events.
Wikipedia’s first edit (‘Hello, World!’ posted by its co-founder Jimmy Wales in 2001) was sold for $750k by Christies. The creation behind the NFT is a simple jpeg, but it represents this great idea of an open online encyclopedia that in 20 years grew to over 6.4M articles. The community is composed of millions of people advocating for the free Internet, open content, altruism, liberation of human knowledge… So as long as the Wikipedia website stays true to its principles and its community’s values do not dry up, this NFT’s value as a collectible holds.
What’s interesting is that another piece on the auction was Jimmy Whales’ iMac he used to create Wikipedia, but it yielded “only” $187.5k, showing how physical memorabilia are becoming less significant than those in the NFT form (it is indeed more difficult to show it off 🤷). The mix of physical and digital form – the phygital – is doing pretty well though.
This week a Banksy painting that was thought to be lost – a rat painted on a metal door on San Francisco’s Fisherman’s Wharf and then painted over by the city services – was put on a auction as an NFT phygital. The piece, restored and appraised by the American Society of Appraisal, is considered to be worth $700k. The team behind the sales chose the NFT format for its worldwide accessibility, and also for its capacity to provide additional monetization and community making: apart from the painting itself, it will sell 333 Wharf Rat collectibles giving the voting right to a Banksy Wharf Rat DAO and access to “some future partnerships with exciting projects by the Team” (0.33ETH), as well as a series of “souvenirs” without any specific rights attached, but with an access to another private community (0.033ETH).
In case of the Wharf Rat, the associated 1/1 NFT will reflect the value of Banksy’s art and the hype around it. As to the derivative collectibles and souvenirs, they will reflect the Wharf Rat team’s ability to develop new projects and nurture an engaged community.
A great example of relentless community management that pushes NFT prices ever higher is Yuga Labs and its Bored Ape Yacht Club. With its exclusive online and real-life events, partnerships with, most recently, Adidas and game developer Animoca Brands, the Apes are becoming ever more desirable. The community contributes a great deal too, with some eminent Apes like Timbaland launching a production company dedicated to the Apes and creating music videos with them.
It is no wonder that many people speak now of BAYC “flippening” the Cryptopunks – the oldest and most prestigious (so far) NFT collection that de facto represents early crypto adopters. A Cryptopunk is an esteemed possession in the crypto community, which explains colossal prices (punk#4156 sold last week for 2.25k ETH, or $10.35M), however as Cryptopunks creators Larva Labs don’t do much, the collection is already generating less monthly trading volume than BAYC.
How to measure NFT’s value?
It is not easy to compare two NFT collections though.
NFTs are by their nature non-liquid and low-velocity assets, which means that their price discovery is a dynamic (and subjective) process: the seller offers their price, if the buyer agrees, a new price is set; if not, the seller offers a new price etc.
Not everyone puts market price on their NFTs (the owner may not wish to sell or hopes for a huge increase in price), but there’s still a way to estimate it.
The most common is the floor price of the collection, i.e. the lowest price an NFT from the collection was recently sold at. To get a better idea, one can check the rarity of the piece sold at the floor price: the rarest NFTs of the collection are more expensive.
There are other tools now that make NFTs more liquid and thus help better understand their price. DeFi platforms specialized in NFTs like Niftex, Unicly, NFTX or NFT20 allow users to put their NFTs into a vault (pool) and mint fungible tokens representing it. As it is often the case in the DeFi, these tokens then can be used in a variety of farming protocols, or to bid on other NFTs, but most importantly they allow users to buy a fraction of an NFT, thus making it more liquid. The more actors trading fractionalized NFTs, the more its price reflects market sentiment.
Some of these protocols (NFTX) offer NFT-focused index funds, which give yet another perspective on the prices of an NFT collection or a specific type, without investors having to evaluate specific NFTs.
For even better understanding of an NFT price one can also resort to specialist analytic companies like Upshot, which uses machine learning and crowd intelligence for NFT price discovery (Upshot is being used, among others, by Unicly, Aavegotchi, NFTfi, Polymarket and some other NFT-related protocols).
NFTs are now surfing on their hype, which encourages people to create more interesting projects… but also many useless ones, which are in a way the shitcoins of the NFT world. Many celebrities for a day decide to capitalize on their fame before it’s gone, some of this week’s examples including the guy in a horned headdress who stormed the Capitol and has recently released a collection of 1006 “shamans”, or Melania Trump who presented an NFT platform that premiered the painting of herself.
People with a more substantial legacy are not protected from the NFT failure neither. American wrestler and actor John Cena spectacularly failed his NFT launch this September, selling only 37 of 500 NFTs, which he later admitted as over-priced.
NFTs are great and they are an integral part of the future. Choose yours wisely 😉
NFTs and Metaverse
As the metaverse is becoming increasingly coveted, and its many projects are promising to merge virtual and real-life experiences, more consumer brands turn their eye to it. Some seal partnerships with cool NFT projects, like Adidas did with BAYC. Some start clearing the space from copycats.
This week luxury company Hermès called the NFT project MetaBirkin an infringement on its trademark, precising that Hermès did not authorise any of its NFTs and that they are “an example of fake Hermès products in the metaverse”.
With a floor price of 5ETH and 259ETH of the volume traded, MetaBirkin gives a valuable lesson to all consumer brands: metaverse branding is to be taken seriously.
Bitcoin price continued sliding this week, losing almost 7% and currently staying at $46.5k.
The prevailing sentiment is bearish, and the Grayscale Bitcoin Trust is now trading with 20% discount, reflecting institutional investors’ mood. However, the miners are not eager to sell: the outflows from their addresses have reached their lowest level in three months.
The odds that Bitcoin will have a Xmas rally are decreasing (although some still continue to believe), however market sentiment is cyclic, and as long as we are confident in a long-term appreciation, the fear will give place to greed, and greed will change to fear, and so on.
Ethereum too dropped 7% this week, losing the $4k level.
Ethereum bulls hope that its price will bottom off the upward channel in place since September and make new high above $5k - but for this they would need to avoid a further price drop that would break this channel (which is rarely good news).
Quote of the week
If you are in need of a holiday gift 🎁, Bitcoin is on sale.
Michael Saylor, CEO of Microstrategy