Making money investing in jpegs is about the most uncomfortable profit you can come by right now.
Jpegs — NFTs — don’t seem to carry any tangible value. They’re just digital pictures. That’s the consensus view, perhaps the sane view, but it’s wrong.
The non-consensus view is that good NFT projects create and distribute new assets to holders similar to dividend-yielding stocks. If an NFT project sends you a new NFT for free, and you can sell that asset on the open market, that’s a dividend. A dividend stream means you can value the NFT on fundamentals, not only whether someone might pay more for it in the future.
A couple of weeks ago, I analyzed the pure investment prospects of Bored Apes vs Cryptopunks and several readers asked for more NFT investment analyses. I’ll oblige, starting with the recent APE DAO Remix launch.
First, here’s what to expect from an NFT investment analysis.
The UP NFT Framework
Good investment analyses consist of qualitative and quantitative assessments. The quantitative side often gets the most attention because the numbers are what ultimately determine fair value, but the qualitative assessment is the most important part. The qualitative elements of a company or NFT form the basis for delivering on the potential of the investment.
There are six total factors that I will assess, three qualitative and three quantitative. The three important qualitative factors of an NFT investment analysis are:
Team. The team ultimately creates value for NFT holders through compelling future distributions and fostering a vibrant community. Teams that don’t have strong commitment to the project or don’t spend time engaging their community aren’t likely to succeed. I won’t analyze any projects where I think the team is bad, and I always try to connect with the team somehow before forming an opinion. Response and response time is an indicator of a strong team in startup investing, and that’s likely to hold true for NFTs, too.
Community. Communities create sustainable value for NFT projects by establishing baseline demand for future distributions. Communities set the floor value for future distributions because even if the rest of the world thinks future distributions from a project aren’t any good, the rabid fans will still buy them. Stronger communities also create more potential for derivatives to be built off the project. Derivatives are a mimetic signal of an NFT’s relevance. More derivatives mean more relevance.
The best way to judge an NFT community is its Discord. The top-level number of members is one indicator, but the most important thing is the density of engagement in the chat. A lot of members can be misleading if those members aren’t really engaged in the project. It’s better to have a small top line member base with greater engagement than a big top line base with poor chat dynamics. Engagement can be a bit subjective, but if you spend enough time in NFT Discords, you start to get a good feel for a lively community vs a dead one.
Art. Any project that has objectively bad art will usually be a poor investment in the long run. The future value of distributions from any NFT project depends on that project’s cultural relevance. Bad art will have a hard time staying relevant because no one will want to use it as a profile picture, and no one will want to collect it. NFT investors don’t need to be art critics, but we should trust our guts when it comes to art. If I think something looks terrible, I won’t analyze it. The safer route is to invest in projects that use art or artists that already have relevance, as we’ll see with APE DAO.
The three quantitative measures key to project analysis are:
Balance Sheet. Good future distributions require resources. Artists and coders need to be paid. A project’s balance sheet enables those projects to happen. A bad balance sheet is a guarantee that future distributions won’t even happen.
Liquidity. Liquidity allows an investor to reasonably get into and out of a position, but it’s also a sign of relevance. Bad projects always have ready sellers, but only good projects have ready buyers over the long term. Liquidity changes quickly in the NFT space. New projects come and go with quick spikes of activity. Sustained liquidity is the stronger sign, even if over a relatively short period.
Price. I don’t know who said it first, but someone once told me price is a fundamental. It’s arguably thefundamental. Price reflects the market’s real time assessment of an asset. When a price is moving up, it reflects growing positive sentiment by virtue of more demand than supply. When the opposite happens, the inverse is true. Price is also the basis for determining whether something is a good value based on future expectations. Investors need to be disciplined to only buy into projects where the price is at least fair relative to the future opportunity.
APE DAO Remix
Disclosure: I will own some of the projects I analyze and write about. When I own, I will disclose. I currently own these Apes.
Bored Ape Yacht Club (BAYC) is second only to Cryptopunks in the NFT hierarchy. At a 40 ETH floor price ($140k), Apes aren’t that accessible to most people. To make these assets more accessible, several projects have fractionalized individual apes or collections of apes.
APE DAO is one such project. In June of this year, a BAYC collector named Kylo fractionalized a vault of 49 Bored Apes (and one Cryptopunk). Tokens equivalent to ownership of half the vault were sold for 70 ETH. That value was donated back to the DAO by Kylo to purchase more assets. The vault now holds 81 Apes.
Bored Ape owners control the IP of the asset. If you own an Ape, you can use the art however you want — sell shirts, change the art, etc. Last week, APE DAO began leveraging its Ape ownership by launching Remix, which reimagines 50 Apes held in the APE DAO vault. The result is several pieces of unique art based on Bored Ape IP.
APE DAO Remix offers three tiers: basic, silver, and gold. Each tier comes with different benefits for the owner, creating different investment profiles. Basic holders can claim 10 APED tokens for DAO ownership plus “periodic claimable NFTs” that the team will generate in the future. Silver holders can claim 50 APED tokens plus exclusive access to some future NFT drops and periodic claimable NFTs. Gold holders can claim 250 APED tokens plus monthly NFT giveaways and unique voting rights in addition to the same access to NFT drops and periodic claimable NFTs as silver.
The art is fun, but are these Apes a good investment?
APE DAO Remix Assessments
Per the framework outlined above, APE DAO passes the qualitative and quantitative requirements for me to consider investing:
Team. The APE DAO team has the right ingredients for a successful NFT flywheel. The founder, Kylo, has shown a spirit of generosity in creating APE DAO by not only initiating the community but also donating the 70 ETH generated from APED token sales back to the DAO. Generosity begets generosity. It’s not a coincidence that generosity is a common theme amongst the most successful NFT projects. In a DM conversation, Kylo told me:
“I’ve realized that building bigger things is only possible via a community hive mind approach with the resources and intellect of a passionate bunch of people.”
Community. APE DAO’s Discord had around 4,000 members shortly after the launch of Remix. It now has over 7,000. The hive mind has already grown given the success of the Remix launch. The chat is active even early in the morning ET on a weekend.
Art. You don’t need to be a sophisticated critic to approve the art of APE DAO Remix given its association with BAYC. Using Ape IP guarantees interest in the Remix project. Given there are only 10k Apes and 20k Mutant Apes, it’s likely there are many more people who want Apes as part of their NFT collection. If Remix continues to use Bored Apes as a palette for future projects, they should be in demand from the community and beyond.
Balance Sheet. Half of all secondary royalties from Remix launch are for projects to be distributed to Remix token owners. The project has done almost 4,000 ETH in volume since launch with an 8% total royalty (4% to Remix project). That means there’s already 160 ETH (~$500k) dedicated to creating new projects for Remix token owners. In the hands of Kylo, it’s a reasonable bet something interesting will come out of that capital.
Liquidity. The project did well over 3,000 ETH in volume in its first 24 hours after drop, making it the largest volume project over that period. Since launch, the floor price for an APE DAO Remix NFT has fluctuated between 0.3 ETH to over 0.8 ETH. The floor is 0.6 ETH today. Remix has generally stayed in the top 50 NFT projects by volume according to Nansen. In the last 24 hours, the project has done about 150 ETH in volume (~$450k). The bottom end of the top 10 NFT projects by volume is currently BAYC at 565 ETH.
Discounting the Future
The last factor is price. The current floor for basic Remix tokens is .6 ETH. It’s 2.2 ETH for silver and 10 ETH for gold. A good investment case must discount expected future distributions of the project back to the present to determine if the NFT is trading at a fair value.
As described in the BAYC vs Cryptopunk post, we can calculate an estimate of fair value using a simple discounted dividend model (DDM):
Fair value = Dividend / (discount rate – perpetual dividend growth rate)
For an NFT, the dividend is the estimated market value of any fungible or non-fungible assets that are airdropped to or reserved to purchase for the core asset holder on an annual basis. The discount rate is the investor’s hurdle for return given the assumed risk of the investment. The growth rate is how much the investor expects the value of the annual dividend to grow into perpetuity.
Assuming a 60% discount rate — which is in-line with early-stage investing, and I believe fair for a startup project like this — and 10% annual growth of distributions, you’d have to believe the basic NFT will distribute 0.3 ETH in value per year for current prices to be a fair value. A silver token would have to distribute 1.1 ETH per year and a gold token 5 ETH. If you believe one of these scenarios is possible, then Remix could be a good investment.
We know a few things to help us assess the prospects of Remix meeting these distributions:
Remix holders will receive APED tokens, which are currently worth about 0.003 ETH each. That means basic holders can already expect a 0.03 ETH distribution later this year.
Owners of Remixes numbered 2775 and below will receive a special dividend. These tokens should be worth more than the other tokens to account for that distribution.
Most importantly, Remix has 160 ETH from secondary royalties. This amounts to 0.03 ETH in current book value. To invest, you have to believe that Kylo can compound that current asset into a consistent stream of far more valuable distributions for token holders.
APE DAO Remix has a committed team deep in the NFT space that wants to build something great for their community. Leveraging the excitement around BAYC and teaming with quality artists derisks the future relevance of the assets they create. As with BAYC and Punks, APE DAO Remix isn’t so cheap that it’s a no brainer, but it’s worth a look for investors. Even more so if you’re an Ape fan.
Always do your own research.