Billions At Stake As Bored Ape Battles Crypto Bear

I’ve welcomed quite a few new readers this year, and particularly over the past few months. For those folks, I want to emphasize that I don’t normally pen consecutive articles about crypto. This isn’t a crypto-focused site.

However, recent developments, including and especially the implosion of the Terra ecosystem tokens, spilled over into equity market sentiment at a delicate juncture and that made the discussion not only relevant for “regular” market participants, but in fact obligatory.

More broadly, DeFi is still touted by many as the future of finance, crypto as the future of money and the metaverse as the future of almost everything, so staying apprised is important. If nothing else, billions is at stake and that alone merits attention. Just a few days ago, Mark Zuckerberg doubled down on his commitment to transforming the company formerly known as Facebook into a metaverse powerhouse, even as he admitted doing so will continue to mean losing “significant” amounts of money. Real money. Not any tokens.

In “Is Decentralized Finance Imploding?” I talked at length about the implications of the Terra debacle for a disintermediated ecosystem that promises high yields on “savings” and facilitates trading in virtually every cryptocurrency imaginable. Here, I want to briefly discuss and illustrate an underappreciated risk for investors and creators in the NFT space. I’d encourage you to bear with me — I think it’s important.

When you buy an NFT or, on the other side, tokenize your digital art and sell it to NFT investors, you’re taking on two types of risk associated with crypto.

First, and most obviously, you’re buying (or selling) something denominated in a volatile token. The value of what you bought (or the value of the tokens you received in exchange for what you sold) can and will oscillate wildly. If Ethereum depreciates against the dollar, your art collection will depreciate in lockstep, as will any tokens you received in exchange for selling your art that weren’t converted.

Second, and not well understood, is the implied depreciation from falling floor prices. In a pinch, market participants may want to raise cash or, in this case, coins, to meet margin calls or simply to “get out,” as it were, ahead of expected future losses. In that kind of environment, NFT holders will lower the prices they’re willing to accept for the assets they hold. Owners of NFTs from the same collections effectively incur a paper loss in that scenario assuming their NFT doesn’t possess some special attribute that makes it more desirable for would-be bargain hunters than NFTs from the same collection for sale at the new, lower floor price.

Crucially, falling floor prices and falling crypto prices go hand in hand. Owners of expensive NFTs are more likely to lower floor prices when the market is in distress than they are when times are good. If there’s no demand, you lower floors. If there’s voracious demand, you raise them. So, other NFT holders experience two kinds of depreciation simultaneously. Here’s how I explained it earlier this month:

NFT holders are likely getting hit on two fronts. Would-be sellers who need to raise cash are almost surely reducing floors, while the currencies in which the NFTs are denominated are depreciating rapidly against the dollar. Imagine you owned a blue chip NFT from a collection which, prior to the selloff, had a floor price of 50 ETH. That meant your NFT was worth, at minimum, $150,000 with Ethereum at $3,000. If other owners in the same collection offer to sell their NFTs at, say, 25 ETH amid a rush to the exits, and Ethereum falls to $1,900, the implied minimum value of your NFT drops to $47,500, a 68% haircut. And that assumes you can sell it, a dubious proposition in the best of times.

Fast forward two weeks and I can say my assessment was absolutely correct.

The figure (below) shows the price floor for Bored Ape Yacht Club, the wildly successful NFT project that’s well on its way to becoming a pop culture sensation, crypto selloff or not.

Measured in dollars, the declines are larger. And substantially so. That’s because the dollar value includes both the drop in the floor price and the built-in devaluation from Ethereum’s selloff.

The same is true of CryptoPunks, Doodles and Bored Ape’s companion collection, Mutant Ape Yacht Club, where the 30-day floor price-implied value decline in dollars was almost 75% as of May 28, versus 60% on an ETH basis, according to nftfloorprice.com

Do note: Even after the selloff, blue chip NFT prices are still so high that explaining the situation to the totally uninitiated would be an exercise in abject futility. The majority of my readership comes from traditional finance. One of my goals this year is to raise awareness vis-à-vis the almost unfathomable reality of Bored Apes and, more broadly, Yuga Labs as a phenomenon. The figure (below) shows the history of Bored Ape Yacht Club’s floor price.

As of May 29, 2022, at noon, the lowest price you could pay to get a genuine Bored Ape on OpenSea (a popular marketplace) was around $157,600. As you can see from the chart, that price (i.e., the cheapest available Ape at any given time) was in excess of $400,000 just three weeks ago, when Yuga Labs (the collection’s creator) was promoting the launch of a metaverse project (“Otherside”) powered by the company’s cryptocurrency, ApeCoin.

The Apes can still go lower. Notwithstanding the free ApeCoin and other perks holders enjoyed this year and any new perks they may enjoy going forward as Yuga builds its brand, these are still just images of cartoon monkeys in various sorts of outfits. The average new home in America sold for $570,000 in April. $150,000 would be a respectable downpayment. So, you could have a brand new, half-million dollar home, or you could have a jpeg of a monkey with a hat on.

If you think this doesn’t matter, you should think again. Yuga recently closed a $450 million seed round valuing the company at $4 billion. I don’t pretend to know what the implications for future rounds would be in the event the Ape pictures fall even closer to their intrinsic value, but it’s reasonable to assume that in such a scenario, ApeCoin would likely come under more pressure and the “land parcels” Yuga sold for its metaverse project would depreciate too. The price of those parcels (“Otherdeeds”) is down 16% in dollar terms over the past 14 days, but only 3.4% on an ETH basis, underscoring the dynamic outlined above. I’d also note that “Otherside” (which doesn’t exist yet) is “powered by ApeCoin,” which presumably means the lower ApeCoin goes… well, you get the idea.

Finally, on a more somber note, I’d encourage readers to spare a thought for the countless photographers who began tokenizing and selling their work on NFT marketplaces this year and last. If their collections didn’t sell out, they’re now staring at an inventory of unsold work they paid to mint (it’s not free to tokenize something). For collections where some of the work sold, but not all of it, they’re hostage to the floor price set by existing holders, as well as to the falling price of Ethereum.

It’s not all bad news, though. Some people are still paying up. The highest price paid for a Bored Ape over the last seven days was $448,000. The combined “floor cap” of the collection was $1.58 billion as of Sunday. ApeCoin’s market cap was around $2 billion, down from a peak of more than $7 billion late last month.