A Treatise on Value: A Real Look at NFTs

The great Albert Einstein once said “Try not to become a man of success, but a man of value. Look around at how many people want to get more out of life than they put in. A man of value will give more than he receives. Be creative, but make sure that what you create is not a curse for mankind.”

I’ve been thinking a lot about value lately. When I was a kid, I used to weigh the value of a dollar (which I didn’t have too many of) vs. buying a Cherry Coke or a bag of Flavor Blasted Goldfish out of the school’s vending machine. When I was older, I wrestled with the idea of taking a date to my favorite restaurant, Applebee’s, or going somewhere more expensive for a better first impression.

Name a better restaurant, I’ll wait…

I’ve sought value (read: “hustled”) for as long as I could remember. My mom used to drop off lunch on special occasions to my middle school, until she found that I was selling the lunch she brought to the highest bidder in my class. I bought and flipped tickets to events I knew would be popular like Kobe’s last home game. While I was working at WME, I launched a stock trade alert service to capitalize on all of the people who asked me for stock picks every day.

We all make about 35,000 value decisions every day, but it seems the lines of value have blurred indeterminately over the past decade. Inflation is at its highest in 39 years, with the CPI soaring nearly 7% this year after the stimulus, supply chain disruptions, and labor shortages.

Today, less than 40% of publicly traded companies are profitable. Only 22% of 2020’s post-IPO companies are in the green. The word “value” has become almost laughable in the stock market as companies like GME and AMC have gone from near bankruptcy to rocket ships headed straight for the proverbial moon, elevated by retail traders and media hysteria. Speculation is here to stay, as retailers have largely foregone historical diligence in favor of “aping” into positions that carry asymmetric opportunities, and this form of bold degen culture has become extremely profitable in the NFT space.

NFTs

No asset class has seen more speculative buying in 2021 than NFTs. In about 9 months, the NFT space has generated over $23 billion in trading volume. Consumers have seen their NFTs rise 50–100x in a matter of days after purchasing, rendering any movement in the traditional stock market uninspiring.

There has been a ton of fanfare around value accretion in the NFT space, but what’s really driving this speculation? Is it the art? Is it the potential of the asset class as a whole? It it scarcity, or is it just more tulip mania?

One of the biggest and most important revelations that I have found after trading hundreds of projects is as follows:

GOAT Helene

In upticks, a good project is not necessarily one that accrues the most value, but rather those with the highest price (few understand this). In downturns, however, money flies to quality blue chip projects that have shown a strong propensity to build.

I’m not going to pretend that every NFT project should moon (or even justify the vast majority of movement on certain assets), but I’m also not going to run DCFs on projects (yet). That said, I do think there are several categories that don’t always come into consideration when thinking about value.

Community

The biggest driver in today’s iteration of NFTs is certainly community. It is something that projects can build before they’ve written a single line of code, and it is the make-or-break for most projects. A strong community will be patient when things go wrong, they will diamond hand, reducing total supply, and they will amplify the project, increasing visibility and driving demand generation.

Building community is one of the hardest things to do in the space, so it makes sense that it is the primary source of early value (until projects begin to execute). At the end of the day, people want to spend their time in a community that they enjoy, and there is a pretty clear value to people’s time, as we’ll continue to see. There is a clear definition to the community that Gutter Cat Gang has created, and this differentiation and its associated scarcity has driven longer term value for the project.

One important point is that the value of community has diminishing returns over time, and that if a project is unable to execute on the vision that brought the community together in the first place, they’ll very quickly see the value of that community deteriorate.

The Metaverse

There are hundreds of projects that tout their place in the Metaverse, whether it’s through buying land and developing on Decentraland, creating 3d objects of the NFTs themselves that can port into other platforms, and using NFTs as profile pics and avatars.

The Metaverse is important because it has the potential to be where people spend the majority of their time. Gaming is already eating the world, with over 75% of Americans gaming and average time spent playing games peaking at 15 hours per week. While it’s entirely impossible to tell how big this market will be, using gaming as a proxy can provide a decent picture of its potential. Bloomberg has it pegged as an $800 billion market opportunity.

But what does the Metaverse mean for NFT projects? Are they all going to buy virtual land and build on the same platforms? Who is going to participate outside of the closed communities? What happens when Metaverse platforms are closed systems? And when this IP is ported over, how is it to be quantified? The Metaverse is treated as an inevitability, but it is certainly worth thinking through what that looks like, and how NFTs will play a role.

What exactly these assets mean in terms of the Metaverse is largely to be determined, but early adopters in this blue ocean opportunity carry asymmetric upside. The most apparent value is in the form of identity.

Identity

The value of one’s virtual identity and profile is already tremendous, with the social networking market sitting at $72.2B today. As more of our lives move online, there will undoubtedly be a premium on the avatars that we use to present ourselves.

Some of us will wear suits in the Metaverse

Social proof is nothing new (dating back to pre-Bronze Age), the mechanisms in which we flex have just changed dramatically. We have only begun to scratch the surface on our virtual selves; we will soon be able to change our appearance and the way we present ourselves online with digital assets, badges, etc., and these assets will have interoperability between platforms that has heretofore been impossible.

The value of a skin on Fortnite is cheap because its use case sits in a closed system. If you could use that same asset on other platforms or as a proxy for your actual self, you’d attach a lot more value to it. The value of identity is irrevocably tied to that identity’s interoperability in the rest of the areas that you spend your time.

Off-chain brand / intellectual property (IP)

Above and beyond individual identity, many NFT projects are creating unique IP that can stand alone as a powerful brand. These projects can become tv shows, comic books, merchandise, and physical collectibles. They can become gaming assets or the next Supreme. Bored Ape Yacht Club, for example, is now raising capital on a multi-billion dollar valuation.

These brands have the potential to collaborate with the rest of the Web2 world as both a bridge to Web3, but also as a new form of crowd-sourced content creation. At one point, even the biggest projects minted for pennies compared to where they are at now, and creators have more tools than ever to build out their ideas. The value of IP has never been on bigger display than in the NFT space.

NFTs as brand fan clubs or memberships take on a different value proposition when they can deliver real world value on top of digital engagement. Being able to attend events, get exclusive access, or take part in the unique utility all has inherent value.

Passive income and revenue sharing

One of the biggest innovations in Web3 is the ability to give access to fans to engage more deeply with the brand or creator, and this carries a unique set of benefits beyond exclusive content or discussions on Discord. Early believers of an artist, for example, can essentially invest in their future and participate in the upside as their fame and demand grows.

Brands can potentially build treasuries that are governed by those that hold their NFTs through decentralized autonomous organizations (DAOs), and this is one of the more visible ways that NFTs are able to accrue value.

The main issue with this category, outside of potential regulatory fears, is that it almost necessitates a Ponzi-style bagholder dynamic, where an asset’s value is how much you think someone else will end up paying for it. Someone will always end up losing in this case if this is the sole utility, but by combining these elements with deeper utility, projects can avoid this dynamic.

So what should I buy?

It might seem cliche, but the key to happiness in NFTs (outside from changing the creator-fan relationship) is to buy what you find value in. The risk in speculative investing is that what you are buying might ultimately be worthless, but the upside is asymmetric to warrant that risk of the project going to 0.

This is sick no matter who you are

If it does go to 0 (as many of them will), then at least you have something that you find inherently valuable. The biggest and most emotional mistakes happen when you buy something that you think other people will find value in. Then you’re left with an asset that is worth 0 and that you don’t like.

At the end of the day, people will enter NFTs for a litany of reasons, whether it’s chasing wealth, supporting artists, or building out their digital identity. This amalgamation of value propositions will ultimately decide the future of the NFT space, but the sheer possibilities and applications of the underlying technology demonstrate that, in some rare cases, speculative value can be realized.

If you’d like to mint your first NFTs, you can check out the guide I wrote here. If you’d like to stay up to date on what projects I like, where I’m spending my time, or just connect in general, you can find me on Twitter.