Alright Altards,
Thought I'd do a boring post on the importance of doing proper DD. I'm braced for the downvotes.
I received an invitation to a pre-IDO private sale of a project. The token was being sold to private investors for price 33% lower than the IDO price. Seems good, right? I started doing a little research on the project. The website looks good, the team are transparent and everything reads well – no red flags.
For context, the project claims to have a machine learning algorithm that can “accurately” predict the valuation of NFT artwork, and is a P2P lending system using NFT as collateral. The whitepaper is fairly well written and I'm thinking of investing at this point.
I have this crude spreadsheet I use to help me evaluate a project. It's nothing fancy but it helps me ask the right questions about a project and gets me thinking. One of the questions is “What problems can I see with this project?”. I'll summarise my answer here:
Given the infancy of NFT artwork, coupled with the volatility of the crypto market in general and the likelihood that the market (and in particular NFT) is in a bubble right now, an “accurate valuation” of NFT art seems far-fetched. The operation requires lenders to provide liquidity and in order for someone to put their money up for lending they would want assurances that they will get it back. Although the returns on lending may be enticing (unsure what they are as of now) what if the fragile NFT market (or crypto market in general) was to crash? This could render the NFT as worthless and the borrower would have no incentive to repay the loan. Worth noting that this market would be unregulated so there is no one to prosecute borrowers who fail to repay.
As an example, say someone wanted to borrow $200,000 using their CryptoPunk as collateral. The CryptoPunk was bought for $500,000 and the algorithm values it as $600,000 based on price appreciation due to mainstream adoption. The crypto market crashes and 80% in 2 weeks and the NFT market with it. Not only is this CryptoPunk less valuable as its ETH price has fallen 80%, but people have lost faith/interest in the NFT market in general. It is now worth just $100,000. Why would the borrower pay back his loan when he can just let the NFT go and buy it or another CryptoPunk back for half the price of his loan?
Just thought I'd put this out there in case it stops someone from investing in a project destined for failure. No doubt this project will shoot up in value and I'll be sat bitching about how I wish I'd invested.