How this $100M NFT Fund Identifies Winners
Frameworks and Taxonomies for the NFT Investor
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Executive Summary
Sfermion is one of the few institutional funds that is actively setting up thematic funds within the NFT vertical, and as of November of last year has raised over $100M from the who’s who of Silicon Valley and finance.
For this week’s research brief, we spoke with Managing Partner Andrew Steinwold and examine how one of the first and earliest NFT funds in the world evaluates NFT assets as investments.
At the end of the post, we will provide readers with under-the-radar tools seasoned NFT investors use to make educated decisions, as well as a list of important tastemakers, not shared in our public interviews.
Breaking NFTs Down Into Subsectors
Today, NFTs can be broadly classified into the following four categories, each with unique value drivers that investors should focus on.
Let’s break down the investment frameworks to each:
Collectibles
Due to the subjectivity of collectibles, Sfermion resorts to a comparables based approach to valuing NFT collectibles.
For instance, comparing two similar communities - Bored Ape Yacht Club and CryptoPunk - by their floor price or absolute fully diluted collection valuation (multiplying floor by total supply) are viable frameworks.
While “cultural significance” is at times subjective and hard to quantify, we can go one step further and compare the size of a project’s community by looking at their social media numbers.
Our initial hypothesis is that given the Veblen nature of collectibles/art, the numbers are a reflection of attention and represent market participants competing for the fixed supply of NFTs per collection.
A quick research on the biggest NFT collections, however, shows that while social media performance and fully diluted collection valuation provides a baseline comparison, it is currently still inefficient given the nascency of the market:
CryptoPunks with ~74% of Azuki’s Twitter follower count is still 2.7x larger in FDV
Proof (Moonbird’s founding collective) had only <67k followers before Moonbird’s mint but in approximately 2 weeks, Moonbird’s FDV has already exceeded Azuki’s all while having fewer Twitter followers
In addition to simplistic community metrics, increasingly more collectivles assets are perceived to be, or introducing explicit elements pertaining to - “meta-games” - whereby the collectible doubles as a profile picture, entrance to a gated community, stake asset for yield, airdrops etc.
Should token drops be continuous, or be tied to some form of cash flow, this will provide any vector for valuing NFTs based on modified discounted cash flow.
Art
Crypto art refers to mostly 1:1s - or unique pieces that may or may not belong to a wider collection, and is the most subjective of all four categories.
A prominent example is Beeple’s “The First 5000 days”, a unique art piece that sold for $69M in 2021. When evaluating art NFTs, Sfermion focuses on the following value drivers:
Brand and reputation of artist
Provenance (previous owner)
The above value drivers are corroborated by Richard Chen of 1confirmation, an early investor in SuperRare, one of the most popular crypto art marketplaces today.
Another potential sign of value is endorsements by tastemakers (similar to curators or famous collectors in the art world). We have curated an active list of 30 of them, shared below.
Virtual Land
Virtual land refers to plots of land in virtual worlds such as Decentraland, Sandbox.
Assuming one wants to express a bullish view on a particular virtual world, the following are key factors that should be considered when picking which plot to purchase, according to Andrew:
Location - Is the land middle of nowhere or the center and most accessible?
Content - What is being/can be built on this land?
Parameters - What is the maximum size (height, width & length) allowed to be built?
Despite similar value drivers, understanding the individual virtual worlds is also key as it will surface nuances.
A simple example is Somnium Space, a general social-themed metaverse where Sfermion bought land near to a lake. Their rationale was based on a simple assumption around traffic: in Somnium Space’s high-fidelity gaming environment, the lake was one of the popular spots where users hung out to enjoy the virtual sunrise/sunset amongst other activities.
This is similar to how real-life properties nearer to beaches are more expensive than those further inland. From the following traffic heatmap, we are able to confirm that land around the lake is indeed valued higher than those further inland.
However, this need not be true, and nuances apply.
For instance, with CryptoVoxels, a virtual world mostly known for displaying NFT users’ NFT art, Sfermion bought land near The Center in Origin City because it was the default “spawn area” for people loading into the game if they didn’t specify a land to visit.
This space will have the most number of visits per parcel and as such highest potential to generate revenue from land based on rental and advertising income.
The nuance: Andrew’s thesis that the “spawn area” receives the most number of visits holds true but only within Origin City.
As interesting content is being built out in other parts of CryptoVoxels, users load into the game with a specified location instead and thus diminish the flow of users spawning at the default location.
To validate this, we looked at plot prices on Cryptovoxels. This concern played out this week as all 14 plots that received more than 2,000 users over the past 7 days are in Miami island and outperformed The Center in Origin City.
A comparison shows that owners of land around proximity of The Center (default spawn area) are paying/ would have to pay 10x to 25x more per m2 (but has the same or less amount of visitors as those around Bybit in Miami) and 50x to 106x more per visitor.
The conclusion: either the land around the proximity of Bybit and BT Convention Club is undervalued, or inversely the ones around the default “spawn area” in Origin City is overvalued based on traffic metrics.
Gaming Assets
Of the four categories, Sfermion is the most bullish on gaming assets and gaming vertical. These are assets such as Axies in Axie Infinity, Shoes from StepN and Cards in Gods Unchained:
Sfermion sees the 2.7 billion gamers worldwide as a sizable total addressable market, compared to the 2.7 million players (Nov, 2021) in crypto-native games today. Sfermion believes if gamers today can already accept the idea of purchasing digital goods that do not truly belong to them, then they can see the benefits and hop on decentralized digital ownership with NFTs.
We have already witnessed gamers’ willingness to spend and participate in crypto-native games. With 2.7 million user base, Axie Infinity generated $1.3 billion of revenue in 2021 and is the first ever NFT collection to record $4 billion in sales volume.
Comparing Axie Infinity’s performance to Fortnite (one of the world’s largest games), Axie Infinity generated more revenue per user - Fortnite did $5.1 billion in revenue with 80 million monthly active users/300 million user base.
However, the performance sustainability of crypto-native games like Axie Infinity is often questioned as many suspect player interest would drop once profitability of playing the game decreases. Since peaking in November 2021, the price of Axie Infinity’s token ($AXS) and active user base has dropped 80% and 45% respectively.
Sfermion is also most bullish on the gaming vertical as gaming is most likely to onboard the next billion users into Web 3 due to the broad appeal of games.
For example, StepN - a fitness game that rewards users based on steps taken in the real world, has grown from 1,500 daily active users to more than 400,000 in April (which is also quadruple from a month earlier).
To Sfermion, building a game or NFT collection is not too different from a company (with added subjectivity, potentially shorter lifespan due to hits-driven nature of the gaming industry).
As such, the most important aspects fundamentals are not dissimilar from startup or protocol investing: looking at team, tokenomics, community, market, and data around traction on platforms such as Dune Analytics. Our only contention is the generally shorter half life of games, versus companies.
Actionables
As a final world, we concede that NFT investing is still largely driven by speculation, and it is possible the “fair value” for most NFTs reside much lower than where they are today (or higher)!.
In our tradition to “teach how to think, not what”, the following are valuable tools curated by our team for the curious NFT investor.
They provide data for those looking to make informed decisions about the NFT sub-category they are investing in.
Collectibles/ Game Assets:
NFT Scoring lists NFT collectibles by their community scores
Crypto Slam aggregates sales volumes of NFT collectibles
IcyTools aggregates sales data for NFT collections, with a premium tier
NFT Art:
Virtual land:
Current in beta, WhaleAnalytica features live price comparisons of plots across multiple virtual worlds
Metahood offers an aggregated view of metaverse plots
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Resources
Sfermion resources:
Resources used and mentioned in this article/podcast
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