The NBA Top Shot market lost $67M in one week

Bear markets, existential dread, and cheap Jusuf Nurkić moments

On March 30th, NBA Top Shot announced a $309M round of fundraising, valuing the company at a tidy $2.6 billion. Fundraising news did little to inspire current users, who reacted to the news with what can only be described as a sustained sell-off. 

According to Own the Moment data, sellers on NBA Top Shot undercut existing prices and sold off enough Moments to chip away $67M of portfolio value from March 30th to April 6th. Over 85% of existing Moments on the platform showed a decline in value compared to one week prior. 

NBA Top Shot’s portfolio valuation declined more in seven days than the industry-saving $48.5M opening weekend box office earned for Godzilla vs Kong

The methodology for portfolio valuation appears standardized. Multiple databases, including Evaluate.Market, a resource linked directly by NBA Top Shot, let users calculate the overall value of their collection by summarizing the lowest asking price for all moments. 

Here’s how the resource embeds into NBA Top Shot directly.

Assigning value to each Moment at the current lowest ask provides a quick and digestible method to understanding portfolio value. In some cases, like a low serial number or jersey number match on the Moments, this could undercut the sellable value slightly. However, to track aggregate trends, this methodology gives a baseline understanding with an easy-to-explain framework.

Changes to those average lowest asking prices per moment produce the changes in portfolio value; average cost increases and the Top Shot user banks the hypothetical and unrealized rewards. However, in down weeks like the last one, the undercutting prices decline the total value of each user who owns that moment; apply that across the entire market, and the total hypothetical market can decline dramatically.

A consistent and near universal decline from March 30th to April 6th evaporated over $67M in account values. Prices stabilized somewhat in the last few days, but trendlines overall still point downward. Own the Moment found 65% of all Moments lost value in the last 7 days, equating a $25M weekly decline. Eight-figure weekly fluctuations undermine the stability of the collectible, but will it impact long-term viability?

Who wins and who loses in the turmoil?

According to CryptoSlam, NBA Top Shot users produced over 3.3M transactions since the launch of the product in July 2020, netting just over $497M in total sales. NBA Top Shot takes a 5% fee on each sale, meaning that on marketplace traffic alone, the company made $24M in ten months. 

Marketplace transactions underpin the entire operation. Again, like mentioned last week, the company itself highlights the sheer size of the market in its call to action for users on their homepage.

Imagery like this inspires the speculator and day trader; join us for a piece of this nine figure action!

The $400M estimate does not include packs, the direct buys that NBA Top Shot offer that give users a random selection of Moments. With prices between $9 and $999, and constantly overfull queues, those likely drive an even larger portion of revenue for the company.

Over 325,000 users purchased a Pre-Order pack last month, according to NBA Top Shot’s listed numbers. Delivery of those assets should arrive some time in April. If we conservatively estimate that number to be exactly 325K packs, NBA Top Shot minted $2.95M off the release alone. Tidy business for Dapper, but this pack could be the first step toward a radical change in the marketplace.

What happens when packs are not instant profit?

Users—including me, who rushed to buy this pack—paid $9 for three common Moments from the base set. Sure, you hope for the upside of a very low serial LeBron James or a debuting rookie, but the comfort in buying these packs stems from the pricing floor of existing common Moments. 

As of this writing, the cheapest moments on NBA Top Shot cost $4. In the worst case scenario where you pack the equivalent of three Jusuf Nurkić's—sorry Nurk, I think you’re great—your portfolio value rises $12. Sell them instantly at the lowest ask, and, after fees, you’ve turned $9 into $11.4. 

One click instantly earned you half of a good cold brew, but is this practice sustainable?

Guaranteed ROI on these packs implies demand for every moment stays at the minimum value of $4 to avoid fees chipping into your profit. Currently, that vital benchmark continues to vacillate between $4 and $5. NBA Top Shot will release nearly one million new common moments into that declining marketplace. If the lowest ask dips below $4, users will experience what appears to be the first negative value pack purchase. 

This short-term pain might be the perfect panacea for the platform.

Collecting vs Speculating

NBA Top Shot navigates a tricky middleground as they grow their userbase and build out this product. Like their forebears in the physical collectible space, they must simultaneously prove out the value and potential of owning an asset while creating the infrastructure that allows investors to transact off those purchases.

Dapper Labs CEO Roham Gharegozlou outlines an exciting and innovative vision for the product. In an interview with USA Today, he hints at multiple product developments and addresses one of the foundational optimizations: displaying your assets. 

“We’re also working on a mobile app to visualize those moments, so you can show off your entire collection just by – not by having to go to a website, but having it on the app and having it on your phone. So that should be really cool. I mean, we’re just barely getting started.”

Investing in your collectors produces a virtuous cycle. Those users tell their friends, create content, and evangelize the product organically. Money spent on moments and packs support Dapper Labs and NBA Top Shot, and the benefit for actually collecting starts to chip away at the speculating and day trading.

Instead, as Max Minsker outlined in a great Twitter thread on the product, the current cycle actively destroys the momentum.

Existing users watch their portfolio value plummet in unrealized value, and the majority of users who did sell for profit face problems in actually withdrawing their funds. New potential users who want to buy into the hype cannot; instead, they watch existing consumers lose their proverbial shirts and start the doubt the viability of the collectible.

The challenges of Challenges

NBA Top Shot creates specific promotions, called Challenges, where collectors must acquire a group of Moments before a deadline to earn a limited edition reward. Prior challenges focused on Kevin Durant and LeBron James in the NBA All Star Game. Functionally, the challenges should drive demand on the selected moments and reward investors with a rare collectible that can earn back the cost of acquisition.

DraftKings Nation’s Matt LaMarca covers the NBA Top Shot space and neatly analyzed the cost and potential ROI of the Zion Williamson challenge. The question posed by his headline summarizes NBA Top Shot’s existential dilemma.

Worth it for who?

In our last post, I tried to create a framework for understanding a Moment’s value and highlighted these challenges as a way to inflate pricing for Moments. I thought that challenge rewards would, at minimum, earn you back the price of acquiring the assets needed to get the prize. 

LaMarca’s excellent analysis shows the error of my thinking.

He looked at the performance of a previous Anthony Edwards challenge as an analog for the Zion challenge, and the findings are stark. Not only do these challenge reward Moments fail to recoup any investments, the value of the underlying Moments instantly evaporates once the challenge ends.

However, if you completed the challenge right before the deadline, the low asking price on the nine required moments was $7,378. Immediately after the deadline, the price plummeted to $4,086. In the span of one hour, the price of those nine moments decreased by a combined -$3,292.

LaMarca wrote his piece on April 5th. As of April 7th, Own the Moment prices the lowest ask for that Edwards moment at $2,779, with multiple moments selling for less in the last two days. The underlying assets needed for that challenge declined to $3,346. 

Like LaMarca outlined, the collector who bought at the cheapest point spent $7,378 to earn the Edwards reward. With prices through April 7th, that collector lost $4,032 on the value of those required Moments. Even if they try to recoup costs by selling the Edwards Moment—the item they spent over $7K to acquire—the user still loses $1,253.

Money lost painfully vs money spent happily

Here lies the challenges (sorry) for the Challenge idea and NBA Top Shot’s identity. Undoubtedly, the Edwards Moment is iconic and perhaps the dunk of the last few years. Out of all eligible highlights, you’re hard-pressed to find something more entertaining. Yet, potential collectors and new users waiting in the wings must consider the barrier of entry and the risk profile of completing one of these challenges.

If the required Moments crater in value instantly after a challenge ends, liquidating the very asset you spent all that money for becomes the only way to stem the bleeding. If you hold on to the prize and sell the rest to recoup some of your spend, you lose half your original investment.

Of course, you could hold on to everything, take a long position on NBA Top Shot, and avoid checking Evaluate.Market’s valuation of your portfolio. The users who take that path might just be collectors, here because of a belief in the product and the long term potential. Investing in those people restarts the virtuous cycle, discourages short-term thinking and flipping, and starts to buildup actual equity in the product.