First Mover Asia: There's No Universally Accepted Way to Value Three Arrows' NFTs

Good morning. Here’s what’s happening:

Prices: Bitcoin fell for a fifth day in a row, while the dollar and euro continued to flirt with parity. Traders are looking for clues about inflation in a major economic release expected Wednesday in the U.S.

Insights: Valuing NFTs might be more art than science. What's impossible to deny is that prices for ether (ETH) – used to value many NFTs – have tanked this year. Sam Reynolds explains.

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Bitcoin (BTC) fell for a fifth straight day, and traders are starting to worry that maybe the market hasn't reached a bottom, as some analysts were hoping as recently as last week.

It might just be that there are still too many negative forces pushing prices lower. The crypto term of choice is "FUD" – fear, uncertainty and doubt – but Michael Venuto, a co-founder of Toroso Investments, used the term "wall of worry" on CoinDesk's "First Mover" TV program on Tuesday.

The bugbears range from the crypto industry's credit crisis – CoinDesk's Krisztian Sandor has been all over liquidity-strapped Celsius Network's maneuvers to free up collateral by paying off decentralized finance loans – to the Federal Reserve's inflation-fighting plans. (Helene Braun's preview of Wednesday's scheduled release of the U.S. consumer price index for June is here.)

"We're just climbing a wall of worry," Venuto said. "We lack regulation, for clarity, to help get the institutional money in, we are dealing with; a Fed that is no longer accommodative. We've got deleveraging of all things. And then we've got a whole bunch of trusted third parties that came in to help people access to crypto markets, and as usual, they shouldn't have been trusted."

In traditional markets, U.S. stocks slid, and Asian equity futures signaled modest gains at Wednesday's open.

The big story in foreign-exchange markets this week continued to be the dollar's flirtation with euro "parity" – a 1-to-1 ratio. According to CNBC, the euro's slide against the dollar is a result of Europe's energy-supply crisis stemming from the Russia-Ukraine war and sanctions on Russia. There are also concerns that a weak economy might make it harder for the European Central Bank to raise interest rates – making the region's debt instruments less attractive than those in the U.S., where the Federal Reserve has been raising rates aggressively.

Valuing your JPEGs is tough; be careful you don't overestimate

Over the weekend, something weird happened. On Twitter, suddenly Three Arrows Capital was the victim of having its NFT (non-fungible token) fund, Starry Night Capital, undervalued.

DappRadar said Starry Night’s wallet was worth about $3.7 million as of Tuesday.

NFT Twitter didn't like the figure and thinks it should be worth more. Feedback to the article came in fast when it was first posted on Friday saying it was worth less than $5 million, and was often furious.

Blame was put on the DappRadar valuation tool only using the floor price of an NFT, or the lowest price you can “buy in” to a project.

But that’s not true as DappRadar’s algorithm also takes into account the last sale price as well, when available.

DappRadar says its tool uses a machine-learning algorithm to determine appropriate prices based on market conditions.

"Our algorithm calculates what is the price of an NFT, which is consistent with the historical sales data. It is not precisely predicting, but finding a price that makes sense for the current market conditions. This methodology allows the investor to evaluate how good the trade price is, whilst also assessing the importance of the sale within the collection’s market," a DappRadar spokesperson told CoinDesk via email.

Tools that only use floor prices for the collection value the wallet at much less. Value.app, which tracks the floor prices exclusively, puts the wallet's value at around $1.6 million.

NonFungible.com sent us an even higher valuation for the wallet: $19.7 million.

But that comes with a massive caveat. This figure uses the USD price at the date of the sale, Maxime Laglasse, NonFungible.com’s head of content, said in an email.

So that means if an NFT was purchased for 750 ethers in late October, when one ether was worth $4,000, NonFungible.com would maintain that the NFT is still worth $3 million, even though those 750 ethers are now worth closer to $867,770.

“An art asset bought for $3 million months ago can't be devalued because the ETH/USD price lost 50-60%,” Laglasse said. “Only an NFT sale can make the price move in a way or another. That's up to the last buyer to sell or not his asset to make this price move.”

The problems with that argument are that NFT sales are denominated in ether and million-dollar JPEGs are a product of the peak decadence of the bull market. You can’t maintain that an NFT is still worth the last price it was paid for in ether when that ether buys a lot fewer dollars now than it did last year.

If you account for the devaluation of ether, the underlying asset NFTs are denominated in from the time that Three Arrows filled up its wallet until now, there’s an average decline of 70%. That would put NonFungible,com’s valuation closer to $6 million than $19.7 million which is in range of DappRadar’s figure.

And that’s only accounting for the decline in numbers, the quantitative. It’s excluding the qualitative: Is the market still interested in NFTs the same way it was at the height of last year’s bull run?

Of course, all of that is ignoring wash trading (market manipulation designed to create the illusion of demand), which runs rampant in the industry and makes up most of the volume on exchanges such as LooksRare. What’s the real value when so much of it is fake?

You can get a sense of this gap between perception and reality by diving into the data provided on the CryptoPunk collection (considered to be a blue-chip NFT) by a project called DeepNFTValue, which was recently profiled on CoinDesk.

DeepNFTValue uses an artificial intelligence-based pricing algorithm to determine a CryptoPunk’s value (the team is expanding it to Bored Apes next) and compare it with the asking price and time on the market.

“Only about 10% of Punks have active bids and offers at any point in time, and only a few hundred Punks trade on a given day. Most Punks don't sell for months and have many have never been exchanged for ETH since they were acquired” DeepNFTValue said.

Doing a deep dive into its numbers shows a massive gap between the average seller’s asking price for a CryptoPunk and the value prescribed by DeepNFTValue’s algorithm.

Overall, for the nearly 775 CryptoPunks DeepNFTValue tracks, the average delta (difference between the asking price and value assigned by the algorithm) is 907%. The average time on the market for a CryptoPunk is 152 days, with about 40% of the NFTs being on the market for six months or longer.

When you narrow down the tracker to only the CryptoPunks that have been on the market for a month, that delta in price narrows to 140%. Interestingly, however, when you look at the two- to four-month period the average delta shrinks to 48%, suggesting that when punk holders really want to sell they will tempter their expectations.

It's tough to blame anyone for wanting to sell, especially in a bear market when his other positions might have been rekt – crypto slang for wiped out – because of the broader downturn.

And for wash trading on CryptoPunks themselves? Well, it runs rampant. Using Nansen’s wash trading filter, we can see that the filtered 24-hour volume is 82 ethers while the unfiltered volume, including wash trading, is closer to 2,304 ethers.

Despite the NFT community’s enthusiasm for the asset class, lots of the demand remains fake. Think about this: If there was such deep liquidity and demand, why do firms that offer loans against collateralized NFTs only offer a loan-to-value ratio of 30-50%?

Perhaps the market has determined that JPEGs aren’t the stoic asset class that the loudest members of the NFT community think they are.

Three Arrows' founders are due in court this week, and the hedge fund's creditors are requesting a list of wallets, crypto and other assets they have. Let's see the valuation they put on these NFTs then.

UPDATE (July 13, 10:30 UTC): Updates with a response from DappRadar on how its tool works.

In case you missed it, here is the most recent episode of "First Mover" on CoinDesk TV:

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