The Project Valuation Miscalculation
Should I buy right now?
It’s the question everybody asks when looking at a project that they may or may not buy into. Is now a good price to buy? And if I do, what am I expecting to get out of it? Ironically, most of us don’t actually address these questions properly. As a result, we often have irrational expectations with how we expect projects to perform.
The Why
Like any endeavour, we need to establish goals and systems. Goals offer direction. Systems are the guide to get your there. Too often though, we see people having a one-size-fits-all approach. Buy. HODL. Moon.
This isn’t entirely unreasonable. Who among us wouldn’t want to see their portfolio absolutely skyrocket overnight? The problem is this is putting the cart before the horse and not thinking critically about how we intend to reach our goals.
We cannot be looking at the huge array of projects available for our consideration and approach them all with the same goal of finding that moonshot. ‘Diversification’ is a buzz word that gets thrown around a lot in investing, sometimes rightly, sometimes wrongly.
In this context, I would make the case that with a diversity in project opportunities, we therefore need a diversity of strategies in how we evaluate projects.
Too often, we are applying the wrong type of strategy and evaluation to the wrong type of project. People are buying projects for the wrong reasons.
The ‘Utility’ Misconception
Utility is another buzz word that gets thrown around a lot on the space. This is understandable as it is often the first thing we ask about when discussing a new project. What is the utility?
Typically, when we think of utility we think of one of the following things:
- Tools
- Passive Income
Now consider this. If a project is providing us with passive income or tools, can we not therefore quantify the value we are getting out of it?
For example, consider a sniping tool like Solrarity and their Rarikeys. We would inevitably be comparing them to other tools like Scalp Empire and their Nestors. If Scalp Empire provides functions that are considered more desirable then Solrarity, this will be reflected in their floor prices. What is created is a comparison of functionality and demand determining price.
What about passive income plays?
Let’s say Project X currently pays out 1 SOL per NFT to holders per week. Floor price is currently 1 SOL. Buyers immediately recognise the 100% ROI within a week and ape in very heavily.
Floor price is now 10 SOL per NFT. ROI is now 10% per week which is still very appealing to a lot of people, but not as many as when floor price was lower.
Floor price gets pushed to 20 SOL per NFT. ROI is now 5% per week which is great but far less enticing. We are now approaching what I refer to as the glass ceiling.
The Glass Ceiling
Inevitably what happens is a glass ceiling is created on where the floor price can go. People are only going to be willing to pay certain amounts of money to extract certain amounts of value out of a project.
We see this in projects like Jelly and Smyths (and this isn’t an indictment on them but rather commentary). A huge appeal for both projects was in the demand and use cases for their respective tokens being $JELLY and $FORGE. When there was demand and regular use-case for the tokens, their value increased. As their value increased, the appeal of being able to earn them from staking created an enticing passive income play which cause an increase in their floor price.
However, at some point, people will only be willing to spend so much on the tokens to participate in the ‘fun things’ and holders will be looking to capitalise on that demand by selling the tokens they’ve earned passively. Eventually, a plateau is formed.
Then, those ‘fun things’ to use the tokens on might start to become boring. Or they start to dwindle. The demand for the token falls and with it, the passive earnings from the NFT and then the floor price.
To be very clear, this is not to say that utility plays are bad. What I’m trying to say is that this needs to be taken into consideration when evaluating what you expect to get out of a project and what strategy you are applying.
In other words, don’t expect a project based around access to various tools to be the thing that moons because people are only willing to pay so much for access.
Understand that projects where an SPL token is involved as a potential passive play will also be limited by it.
So what?
My point here is about being very clear on why you might buy into a utility-based project and having rational expectations of what you will get out of it.
You buy into utility projects because you like the tools and plan to use them to your benefit. Or you might buy in because you believe the tools to be undervalued and therefore speculate on that but with the understanding there is a cap.
Whilst utility plays may have a ceiling, their advantage could lie in having a solid floor. By providing benefits, there can always be value assigned to the project.
The DeGods Experiment
DeGods are the perfect example of the other side of the coin. If we were to apply the ‘utility’ assessment, what would we get?
- $DUST emissions have stopped so no passive income.
- Not as wide an array of use-cases for $DUST already earned by holders
- No access to any tools or utilities
So why the hell are they as expensive as they are when there is no quantifiable value being provided? Well the answer is in the question. Because there is no quantifiable value, they can drive demand without being hampered by the glass ceiling. The value is now based on qualitative factors.
Emotional attachments. Sense of prestige. Sense of belonging to an exclusive community. Being part of ‘that group’. It is these things that Frank and DeGods have masterfully cultivated through their project and it is what has driven demand for people to buy in and history has shown that there aren’t many limits on how much people are willing to spend to be part of ‘the clique’.
Think about the other ‘top’ projects on the Solana Ecosystem. Solana Monkey Business. Claynosaurs. Okay Bears. What quantifiable utilities are they offering? Virtually zero. What’s the appeal? Brand. Status. Community.
Summary
The tl;dr of it is I personally categorise projects into being either utility or brand plays. Some are a bit of both but the underlying principle is that I view them with a different lens.
Utility projects will always be met with ‘what am I getting, and how much am I willing to pay for it?’ but I will never expect it to shoot to insane prices.
Some projects have elements of both. Jelly Co, Smyths, Famous Foxes. All very well known brands but inevitably hampered by being tied to utility value. It’s the reason why the Blocksmith Labs created the separation between them and Smyths because they recognised this point.
Some projects are brand plays. Oogy would be a very current example of that. Am I buying because they are providing me with tools and passive income? No. I buy if I believe in the team’s capacity to create hype and build a community that people want to be a part of.
Here’s the key to brand plays though:
Do they have more potential upside? Yes.
Do they carry significantly more risk? Extremely. Could they go to zero? Most do.
So strategise accordingly.