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NFTs are typically denominated in Ether, the native cryptocurrency of the blockchain on which they trade, Ethereum. However, when offered and traded fractionally, like all other fractional assets, the CryptoPunks and Bored Apes of the world are denominated in US Dollars.
So, when the value of ETH plummets against the dollar, it stands to reason that we would concurrently see the USD value of these assets fall. Why? Well, though a specific NFT may still be worth 10 ETH through the turmoil, with falling ETH, that 10 ETH may be worth 25% less in USD terms than it was a month ago.
Why then, in a January that saw ETH drop 27% vs the US dollar, did the Altan Insights Fractional NFT Index lose a paltry 1.0%?
At face value, that’s nuts. Nuts.
So, is the market just extraordinarily inefficient, or are there other factors at play?
Before going further, some quick background on the Altan Insights Fractional NFT Index, which, as of this week, is available to Altan Insights Pro Plan subscribers. The index is a market capitalization weighted index of all NFTs that have begun trading fractionally (currently those assets trade only on Rally and Otis). It's heavily weighted towards CryptoPunks and Bored Apes, which are of course the highest market cap and most well represented projects that have been offered in the space.
At the turn of the year, it was particularly CryptoPunk heavy, mostly because those assets were offered earliest. On December 31st, CryptoPunks made up 75% of the index, versus just 22% for Bored Apes, as there was only one of those trading at the time. As of 1/31, the index was 65% CryptoPunks and 30% Bored Apes, with another Ape opening for Trading in late January. The mix has since shifted as of 2/11 to 54% Punk and 44% BAYC, both through market movement and the addition of another Bored Ape to trading. These are the projects we’ll focus on here, but bear in mind throughout that the space has been Punk-heavy for much of the early part of the year.
When you look at the chart of the NFT index’s YTD return against ETH, you’ll notice that by the mid-to-late stages of January, the fractional markets begin to perform - at least directionally - in line with the cryptocurrency, though there does appear to be a multi-day lag at play in spots. The latter point is not particularly surprising; nobody would argue that fractional secondary markets digest key information quickly and efficiently at this stage.
From the 15th of January onward, the NFT index was down 9% versus -12% performance for ETH. We’ll dive into that discrepancy in a moment, but clearly, we got warmer as the month went on. It was in the first half of the month that things really went haywire. Through January 15th, the value of ETH dropped close to 10%. The NFT index? Gained 14%. That was bizarre, and there was no rational underlying reason for it to happen. For example, one might speculate that perhaps a new asset started trading, and that asset may have been favorably priced at IPO, leading to a nice pop for both the asset and the index once it began trading. But…nothing started trading in the first 15 days of the year.
Okay, but until now, we’ve really only considered the impact of the value of ETH, and that’s just one component of return for an NFT to dollar-centric owners. What about the performance of the projects themselves? How did they fare in ETH terms?
Using floor price data from NFT Price Floor as proxy for project performance (acknowledging specific assets will fluctuate in performance around the general population), we see that through the first half of the month, project performance does not really provide merit for the appreciating index. Yes, the BAYC floor rose, nearly 40% as a matter of fact, but recall that the project was only 22% of the index at the start of the year. That appreciation of a minority portion of the index is not sufficient to offset the pressure on the cryptocurrency, especially in an environment where the project comprising the majority of the index, CryptoPunks, saw its floor price trend modestly negative in that stage of the month.
But fractional markets are proving to be a land of sentiment first, facts later. And while crypto got broadly flattened to start the year, the NFT sentiment on fractional markets remained strong. There are a few paths of conjecture one could take to pinpoint the reason. First, despite the broad weakness, the trend of high profile individuals and influencers purchasing and flexing NFTs, particularly Bored Apes, continued and strengthened to start the year. These instances are highly visible and reshared ad nauseum on social media when they occur. Second, fractional NFT ownership has been a driver of new users to the platforms. To the extent new users are arriving on platform specifically to gain NFT exposure, there would be demand that is somewhat independent of valuation. For example, CryptoPunk #2142 on Otis has a higher 30 day trading volume than any sports card on the platform. CryptoPunk #543 has a higher 30 day trading volume than all but two cards (Mahomes RPA and SP Authentic Brady, for what it's worth).
However sentiment became as positive as it was, by the middle of the month, sobering reality set in. Despite the floor prices of both relevant projects surging in ETH terms in the back half, fractional valuations tailed off to settle more closely in line with the supporting data. It’s fascinating to see that the Fractional NFT Index performance, as of the end of last week, is almost exactly in line with the movement of the CryptoPunk floor price in ETH terms. Now, one might expect that if the market were behaving rationally, the index would perform more closely in line with the movement of the floor in USD terms, but that raises an interesting question.
At this point, are fractional shareholders concerned purely with project strength, rather than the volatility introduced by the cryptocurrency?
It kind of makes sense long term. If someone is bullish on these blue-chip NFTs, it stands to reason that their long term view on ETH is bullish as well. So, perhaps to many, short term drops in ETH are not reason to consider an exit at the lower implied values. Do fractional investors have the strongest diamond hands of all? It would be a departure from other categories, where many fractional shareholders are keen and eager to offload shares at prices down 30% from IPO, even without negative data points to support that activity. But that returns us to the hypothesis that it’s - at least in part - a new fractional user that’s contributing to propped up NFT values.
When we look at the performance of the Fractional NFT Index against the project floor prices denominated in USD, it’s vexing. Still, it supports the notion that, to date, fractional markets are less consumed with ETH prices and more captivated by project strength. And there is some evidence to suggest that fiat currency value still matters to those selling and buying the full NFTs themselves; look at the ETH floor price rise with a late month ETH dip - in an attempt to stabilize the USD value - and then fall when ETH recovered to end January and begin February.
With Bored Apes making up an increasingly large portion of the index, expect sentiment there to remain critically important, even as other projects like Meebits, Doodles, and more continue to come online. And perhaps those newer projects won’t get the same blue-chip benefit of the doubt, but the index will still be led by those that have.
The markets will likely get more efficient over time, particularly as newer users become seasoned users. But be that as it may, certainly don’t count on fractional shareholders to be totally paper-handed the next time crypto gets bloodied.
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