Discover more from Stuffed Blocks
Could crypto collectibles be worth trillions?
Crypto collectibles are digital assets created and managed using smart contracts. Over the last few months, individual crypto collectibles have sold for over $100K. It’s fun to watch people buy digital cats and squares for more than some IRL houses, but is this an aberration or a sign of what’s the come? What should a crypto collectible be worth?
The closest non-crypto equivalent to crypto collectibles are virtual goods in video games. Virtual items and DLC accounted for ~$80B last year (2017). The gaming market continues to grow rapidly (10%+ last year) and virtual items are driving much of this growth. So ~$100B is a good starting point for the total addressable market for crypto collectibles.
But just as blockchain projects warrant a valuation premium compared to traditional startups, crypto collectibles warrant a valuation premium compared to traditional digital assets.
1. Liquidity (3x premium)–The liquidity of crypto collectibles is fundamentally more favorable than traditional virtual items where you’re lucky if you can trade your items inside of a walled garden for in-game currency, much less outside of it for fiat. Most traditional virtual items have zero liquidity whereas crypto collectibles are transferable by nature.
2. Trust (6.5x premium)–Traditional virtual items are rows in a database managed by one company. The relationship between a virtual items and an owner requires full trust in the company that manages the database. Crypto collectibles require no trust because they’re transparently managed by a non-fungible token (NFT) contract. This provides several benefits like scarcity, custody, immutability, and persistence.
2.1. Scarcity (2x premium)–The value of any collectible item, virtual or physical, is largely driven by scarcity. When a central entity can mint more of an item at will, the market must discount that item based on the probability that the supply will increase. The scarcity (or lack thereof) of a crypto collectible is known by inspecting the NFT contract.
2.2. Custody (1.5x premium)–Whereas ones ownership of a traditional virtual item is a row in someone else’s database, ownership of a crypto collectible is immutably captured in an NFT contract. This means crypto collectibles are fully in the custody of the owner and not the issuer.
2.3. Immutability (1.5x premium)–The properties of a crypto collectible are set in the NFT contract, not a modifiable database managed by a central entity. This is strong guarantee that an item today will have the same properties at a later date.
2.4. Persistence (1.5x premium)–When a game company shuts down its servers, its players cannot take their virtual items with them. The market instantly collapses to zero. Crypto collectibles last forever.
Altogether, my very precise evaluations suggests that we can price crypto collectibles at a 9.5x premium to traditional virtual items. That means the total addressable market isn’t just the ~$100B virtual items market, but potentially 9.5x that: $950B.
That’s close enough to a trillion for me.
And virtual items in games is just the beginning for non-fungible tokens.