Dear Clients and Friends,
October saw stock markets bounce back from their first meaningful loss in a year to post a strong gain of over 5% while intermediate and long term bond yields generally moved sideways. Short term bond yields started to move higher as fears over inflation and the Fed raising rates potentially next year forced traders and investors to reprice that part of the curve.
October brought a lot of the same in terms of data and concerns; markets are very highly valued and inflation might be here longer than some thought. A few notable items for the month:
- Bezos, Ikea and The Rockefeller foundations pledged announced plans to create a Global Energy Alliance for People and Planet that will enable efficient donations toward the energy transition in poorer nations. “Even if rich countries get to $100 billion, it is nowhere close to the trillions that are needed,” said Joseph Curtin, director of the power and climate team at Rockefeller. “We wanted to create the conditions for the private sector to invest at massive scale.”
- Zillow is selling 7,000 homes at a loss since they purchased too many homes for too high a price in Q3 as the housing market took off. The company also announced it would close the division and no longer purchase homes period. This isn’t unusual and in my opinion was an inevitability of this business model. If at any point in time they found themselves being long a lot of homes at a time when the market turned, this model would blow up.
- The International Monetary Fund expressed concern the global economic recovery has lost momentum and now expects output to expand 5.9% worldwide this year, down 0.1 percentage point. It held the forecast for 2022 at 4.9%.
NFT’s and P2E Gaming
Instead of the traditional market update which has lately focused on a lot of the same things (market valuations are very high, inflation is ticking up, etc. etc.), I wanted to spend some time on a topic I find interesting: NFT’s and play to earn (P2E) gaming. I’ve found it fascinating how many people seem to reject it before taking the time to fully (or partially) understand it. Crypto is a very divisive topic and when I bring up NFT’s in conversation, the response I receive is either highly enthusiastic, or met with overt skepticism. For those who’re skeptical, it usually comes from a lack of understanding as this market/marketplace isn’t well understood yet by most. Most think of NFT’s as digital artwork which is certainly the case, however, there are use cases well beyond this. For that reason, instead of doing a deep dive into the topic, I’m going to offer my perspective on on why I think NFT’s shouldn’t be dismissed outright.
One of the core features of an NFT which differs from traditional art is that the creator has higher economic benefit if their artwork becomes more valuable. This can be accomplished via an embedded smart contract which says that every time the NFT is sold, the creator receives x% of the proceeds. So if a creator sells a piece of art on day 1 for 1 ETH, and then a year later that individual sells the NFT for 10 ETH, the creator would receive a % of that sale. In this model, the creators benefit alongside investors which is an alignment of interest. And this is just for artwork but if you spend some time reflecting, there’s likely a lot of use cases for this model.
There are several places you can purchase NFT’s but the most popular market is OpenSea. In 2020, OpenSea did $21MM of volume which they surpass easily on any given day this year. The growth curve of not only OpenSea, but all NFT marketplaces, is exponential as I type this update.
You’ve likely seen news recently where a broad range of companies, from Visa to Budweiser, are spending real money to acquire NFT’s. Visa spent $150K to buy a cryptopunk while Bud spent $250K. The lowest price for a cryptopunk available for sale is around 84 ETH which is about $385K at today’s ETH price. The Economist created an NFT of a cover story they wrote called “down the rabbit hole” which spiked to over $400K in a few days. The final price ended up at $419K when all was said and done.
Let’s discuss play-to-earn (P2E) gaming for a moment and explain some key differences from how most games work. With traditional games like Fortnite, you can play for free and purchase things in the game using USD. Some of the things you can buy are skins which don’t make you play the game any better and are merely clothes and looks of the players. You can also buy emotes which is a cool name for dances. Want your player to do the Carlton emote? No problem – it will just cost 800 V-Bucks (the monetary system of Fortnite). When you buy these emotes or skins, Fortnite earns all of the fees. There’s also no scarcity as they can resell as much of a skin or emote as they want. And while there’s a secondary market, it’s not very vibrant or liquid from what I can tell.
Enter P2E gaming which flips the gaming model on its head. For this, we’ll focus on Axie Infinity (AI) which is the most popular P2E game in crypto, especially if you measure the market cap of their token $AXS which is currently valued at $38B on a fully diluted basis. AI is not free to play and will cost you ETH to purchase an Axie which is similar to a Pokemon character. The difference between this and Fortnite is you actually own the character and there are a limited initial amount of characters released which creates a floor value for each character. Depending on the rarity and qualities of each Axie, the price can certainly be much higher than the floor. So if you decide you want to stop playing the game, you can sell your Axie to another player.
One key and obvious difference with this model is the players are taking risk that there’s a market to sell their characters into, otherwise they will lose $. Another key difference is players actually own the game and not vice versa. Just as a creator of an art NFT can build terms into the art, P2E games earn a % of each purchase and sale which goes back to the DAO to manage. So with AI, 95% of the revenues generated go to the players. With AI, the price of each Axie got very expensive and a new model emerged where owners of Axie’s are renting them to other players and are sharing in the rewards that player earns. AI earned about $670K in fees back in April which spiked to $150MM+ in June. Sky Mavis, the creator of AI, just raised $152MM at around a $3B valuation and now counts a16z on the cap table.
P2E gaming really just began and has taken off as the product market fit became obvious similar to DeFi. DeFi didn’t really kick off until May 2020 when Compound Finance launched and has evolved a lot in the past 17 months. AI didn’t launch that long ago and started to take off around April of 2021 which means there’s a lot of innovation that will occur between now and the next 6-12 months. I’m personally excited for a game called Wilder World and have spent a lot of time on Discord engaging with the community members. As with anything, it’s important to do your own research as these are speculative and in a market where a few weeks can change everything.
If you count yourself in the NFT skepticism camp, perhaps this short, high level write-up helps to demystify things a bit and perhaps even sparks genuine interest. If you’d like to learn more about P2E gaming, Packy McCormick has a great writeup on Axie which goes very deep on P2E gaming and it’s potential.
Market Charts
I couldn’t let the month go without highlighting a few charts but will keep it short and sweet.
The probability of three rates hikes by the Fed by EOY 2022 has risen to almost 85%. This has been driven by the rapid increase in inflation which as a lot of participants concerned that it’s not transitory.
The result of rising Fed rate expectations and inflation data helped push short term rates materially higher in October. In aggregate, .50% is not very high but short term rates spiked by a factor of over 100% in a matter of weeks. And more increases might be coming assuming the 3 hike expectations prove accurate.
ProShares Bitcoin Futures ETF surged in assets and trading volume on the first day which highlights growing demand for a Bitcoin ETF. The likelihood that we see a spot Bitcoin ETF before year end is very low probability but in my opinion it’s just a matter of time. I view regulation as a positive for the industry and the lack thereof has likely held back a lot of institutions. Regulation can change.
I don’t see how this makes any sense especially as most car manufacturers are going to have a lot of competition for Tesla.
Just as working out without a spotter can be dangerous, investing without an “investment spotter” can be equally detrimental. I’m available if you need a spot.
I hope you found this month’s update helpful and informative.
Best Regards,
Jared Toren
CEO & Founder
Most Used Sources: Edges & Odds, WSJ Daily Shot, 361 Capital, Steve Blumenthal’s On My Radar
