First Mover Asia: There's no denying those three arrows NFTs are priced in ether

CoinDesk's Sam Reynolds examines alternate methodologies for valuing the beleaguered crypto hedge fund Three Arrows Capital's NFT collection. Bitcoin slides for a fifth day, and doubts are forming over whether the market bottom is in.

Good morning. Here’s what’s happening:

Prices: Bitcoin fell for a fifth day, while the dollar and euro continued to flirt with parity. Traders are looking for inflation clues in a major economic release expected Wednesday in the U.S. – of the June reading in the Consumer Price Index.

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.

Prices

• Bitcoin (BTC): $19,361 −2.7%
• Ether (ETH): $1,043 −4.4%
• S&P 500 daily close: 3,818.80 −0.9%
• Gold: $1,724 per troy ounce −0.4%
• Ten-year Treasury yield daily close: 2.96% −0.03

Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.

Bitcoin (BTC) fell for a fifth straight day, and traders are starting to worry that maybe the market has not 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 might be "FUD" – for fear, uncertainty and doubt – but Toroso Investments' Michael Venuto used the term "wall of worry" on CoinDesk's First Mover TV program on Tuesday.

The bugbears range from the crypto industry's recent credit crisis – CoinDesk's Krisztian Sandor has been all over liquidity-strapped Celsius's maneuvers to free up collateral by paying off decentralized-finance loans – to the Federal Reserve's inflation-fighting plans. 

"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. 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 stems from Europe's energy-supply crisis due to the Russia-Ukraine war and sanctions. 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 in the U.S., where the Federal Reserve has been raising rates aggressively.

Markets

Biggest Gainers

Asset	Ticker	Returns	DACS Sector
Chainlink	LINK	+0.8%	Computing
Gala	GALA	+0.4%	Entertainment

Biggest Losers

Asset	Ticker	Returns	DACS Sector
Terra	LUNA	−9.6%	Smart Contract Platform
Loopring	LRC	−8.0%	Smart Contract Platform
Cosmos	ATOM	−5.9%	Smart Contract Platform

Insights

Valuing your JPGs 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 fund, Starry Night Capital, undervalued.

DappRadar said Starry Night’s wallet is 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.

DMs from a reader (Twitter Screenshot)

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.

A screenshot from DappRadar showing an NFT in Starry Night's wallet with its last sale price (Screenshot)

We reached out to DappRadar asking them to explain their methodology but didn’t hear back.

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 $1.63 million.

An alternative valuation of the wallet from Value.app (Screenshot)

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

But this comes with a massive caveat. This figure uses the USD price at the date of the sale, explained Maxime Laglasse by email, NonFungible’s head of content.

So this means if an NFT was purchased for 750 ether in late October, when one Ether was worth $4,000, NonFungible would maintain that it's still worth $3 million. Even though now those 750 ether are 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 problem with this argument is 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 those ethers buy a lot fewer dollars in July 2022 than 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 their wallet until now there’s an average decline of 70%. That would put NonFungible’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 they were at the height of last year’s bull run?

Of course, all of this 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?

Another Datapoint: CryptoPunks

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 to the asking price and time on the market.

DeepNFTValue's valuation of CryptoPunk #8484 (Screenshot)

“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,” is how the DeepNFTValue team describes the market.

DeepNFTValue's list of some of the CyberPunks for Sale. (Screenshot)

Doing a deep dive into their numbers shows a massive gap between the average seller’s asking price for their crypto punk 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 punk is 152 days, with approximately 40% of them being on the market for six months or longer.

When you narrow down the tracker to only the punks 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 this average delta shrinks to 48% suggesting that when punk holders really want to sell they will tempter their expectations.

Diamond hands these are not. But it's tough to blame anyone for wanting to sell, especially in a bear market when their other positions might have been rekt – crypto slang for wiped out – due to the broader downturn.

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

Nansen's wash trading filter turned off (screenshot)

Nansen's wash trading filter turned on (screenshot)

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.