Diamonds are Forever: Updated Investment Thesis on $ASH (Price Target $50.00)
Disclaimer: This is not financial advice. By reading this article you agree to the contents of this disclaimer. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, we make no representation as to its accuracy or completeness. Our research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individuals. Readers should consider whether any advice or recommendation in our research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice (for which this is not).
We previously wrote about Pak’s currency $ASH in August here and estimated $ASH was worth $20-$50 million market cap at the time (given all available information). That estimate has since been eclipsed as additional utility and announcements have been forthcoming from Pak.
Executive Summary
2021 Price Target (“PT”): $50.00 based on a discounted demand valuation model
Pak's Currency: $ASH represents one of the best risk-adjusted returns and tokens with intrinsic value
Backed by future NFTs created by Pak and other artists: Two $ASH exclusive drops will occur by the end of 2021, one featuring Pak NFTs and another from five of the most “brilliant” minds in the space. These NFTs can only be purchased with $ASH
Pak is gaining substantially more coverage with their recent $70 million Lost Poets drop and 1/1 Rubik’s Lure (Whaleshark) being sold in Sotheby’s Natively Digital 1.2 Auction
Andreessen Horowitz ($19 billion AUM) and Initialized Capital ($1 billion AUM) invested in Manifold.xyz in early October, citing Lost Poets (and referenced $ASH) as one of the examples of Manifold’s innovations in web3.0 and smart contracts. Manifold partnered with Pak on Lost Poets and Burn.art
Discounted Demand Valuation Model
Our Base Case valuation model focuses on the potential demand for $ASH and assumes two edition drops in 2021 along with few other simplifying assumptions:
We forecast $ASH demand and apply a “discounted cash flow” analysis to this demand based on the 5-year projected growth of $ASH. In our valuation, we estimate Bull, Base, and Bear cases to obtain a range of possible values that are then probability-weighted
The discount rate used for 2021 to 2025 demand is set at 25%, based on our perception of the risks and progress of $ASH. The discount rate is consistent with the rate used in Messari’s recently published MakerDAO DCF Valuation Model (an authoritative source of cryptocurrency research and analysis)
To be conservative, our model assumes a terminal value multiple of 13.5x 2025 discounted demand
Assumes one 1/1s will be sold in $ASH in 2021, steadily increasing over the course of the forecast period
Three $ASH drops into perpetuity
For simplicity, we assume a fixed $ASH price and no slippage (the effect on liquidity pool supply and demand are beyond the scope of the model)
While the exact edition numbers and pricing is unknown, an estimated $4.8 million valuation for all the $ASH drops in 2021 is a reasonable “order of magnitude” number for the Base Case
In future years, we assume a steady growth to about ~$10 million in annual $ASH demand and a perpetual growth rate of 18% in perpetuity. Given a single 1k edition drop in the current environment could easily go for 1,000 - 5,000 Eth (say on Art Blocks Curated), we view these as relatively conservative demand figures.
In general, it is better to think about a coin’s market cap than price per coin as the supply can increase. The Base Case models $ASH to have a present value / intrinsic value of $41, or ~$105 million market cap and 1.64x today’s market cap.
Probability weighting $ASH scenarios using the below, we arrive at our price target of $50 per $ASH:
Background
After PAK’s $17 million Open Edition The Fungible (Sotheby’s x NiftyGateway), PAK has created a burn process that allows PAK pieces (and NFTs from many marketplaces) to be burned for $ASH (ERC20). $ASH is already accepted on OpenSea and Rarible. Almost 1/3 of all PAK pieces burned (excluding collabs).
ASH Mkt cap (August): $8.5 million; LP: $234k; Daily Trading Volume: $50-$150k
Contract: 0x64d91f12ece7362f91a6f8e7940cd55f05060b92
Dextools Prices: Uniswap V2 Uniswap V3
Top ASH Holders: include top NFT investors/collectors who publicly support PAK: Illestrater/Tim Kang, 888, and SilverSurfer. The top 3 ASH holders have never sold a single one.
Some of PAK’s goals with ASH:
1) Clean up the NFT space by providing an incentive to burn lower-tier ERC works in return for receiving ASH
2) Social/community token (latent potential)
3) Medium of exchange
4) Store of value
5) Challenge NFT collectors by letting them “curate destruction” and decide what dies
“Everyone tries to curate existence, I will curate destruction instead...and create value with it. Because sometimes, cleaning a garden makes it more valuable for all.” -PAK (April 30, 2021)
How ASH is minted – Burn Mechanism and Quantitative
1. ASH can only be minted by burning NFTs. Over 3k PAK NFTs burned so far (out of ~6800 total PAK NFTs, excluding collabs which cannot be burned). There is a High Tier burn for Pak NFTs and a Low Tier burn for almost all other ERC721 NFTs (1 is the starting amount of $ASH / NFT so that would be 1000 $ASH for Pak NFTs for the first High Tier):
2. $ASH minted per NFT declines continuously according to decline curves, halving at 5 million ASH (minted) supply. All NFTs on Rarible, SuperRare, etc. can be burned in the Low Tier yielding <0.7 ASH / NFT. The Low Tier declines faster than High Tier so as to not dilute ASH supply.
3. Currently, 1 PAK NFT yields ~700 $ASH; current ASH supply of 2.6 million.
Over 3k Pak NFTs have been burned. 50-Cubes and Complexity NFTs have even been burned (valued at +$15-$30k each). 42 5-Cubes NFTs have been burned (compared to 22 in August) and many other multi-cubes:
Investment Theses
1. World-Class Team and Exposure to Digital Medium/NFT Boom
"Pak is easily the most significant driving force and embodiment of the NFT art movement today.”
-WhaleShark, Oct. 11, 2021 (@WhaleShark_Pro)
Pak is a leading anonymous creator in the NFT art space, often employing algorithmically driven geometric shapes and sharp contrasts in black and white. Pak is a programmer as well and created Archillect, an AI that discovers and shares stimulating visual content followed by Elon Musk, Jack Dorsey, etc. Pak’s works, while seemingly simple, tend to create controversy and discussion and challenges the status quo: for example, The Title collection are identical NFT images leading to the same file, but with different titles and vastly different prices
In terms of all-time NFT sales, Pak is the # 1 selling NFT creator. The Fungible/Sotheby’s in April is the most successful NFT Open Edition (“OE”) and the first NFT drop done on a major auction platform ($17 million in sales and 6.3k NFTs sold). Floor pricing on A Cube is 30-40x original (day 1) price. Pak has been active in the world of digital art/design for over two decades*
Pak is collector-focused and also pushing the new smart contract medium:
o Free giveaways to people who predicted correctly / significantly impacted NFT art space
o Whale rewards: (“Complexity”) for the top 100 buyers of The Fungible OE and Origin Poets for those on the Lost Poets Leaderboard
o Extremely generous: supports community development
o Supremely clear communicator and wordsmith: keeps market engaged
NFT / Digital Medium Leader: Pak understands the importance of being on-chain or in-chain for NFTs, utilizing the full ability that smart contracts allow. Fade, sold in June at Sotheby’s for ~$500k, is the first major generative fully on-chain NFT sold. Generative art is an especially hot space right now with editions from Art Blocks and generative artists sometimes selling for millions.
Does not lack funding: PAK has sold +$100 million in 2021 alone (including secondary royalties) and has plenty of funding to support future works.
Manifold: PAK has also partnered with Manifold.xyz on Burn.art / ASH. Manifold is the #1 smart contract creator and has created contracts for all the major NFT artists (Fewocious, Mad Dog Jones Replicator, Fvckrender, etc.). This is essentially the $ASH (and Lost Poets) project team.
Chris Dixon, a Partner and leading investor in web3.0 at Andreessen Horowitz, cited the following work done by Manifold referencing $ASH:
2. Store of Value and Utility
As noted in the DCF, ASH is backed by demand for future digital art/NFTs and an $ASH economy. ASH represents a call option on purchasing a % of all future PAK and other NFTs. Notable artists like 3LAU have also hinted at PAK collaborations and possibly accepting ASH (not confirmed but 3LAU has mentioned needing to talk to PAK and ASH many times in his discord). Fvckrender also attempted a Twitter auction of a 1/1 in $ASH (that was not consummated).
3. Attractive Valuation
Target ASH market cap (2021): $110 million
PAK 1/1s have gone for $1.3-$1.4 million (The Pixel, The Switch) in H1 2021 and 1/1s like Fade have sold for +$500k. If PAK were to release even a small OE or 1/1 auction denominated in ASH, it would significantly increase the value of $ASH relative to its current market cap. In an auction, the demand for $ASH will be far higher than the winning bid as top bidders must be “good” for the amount they bid
$ASH demand in 1/1 $ASH auction ~ # top bidders x # $ASH bid per collector
Comparable market cap: #1 selling NFT artist Beeple has ~5200 Everydays. Conservative total sales per NFT of $1 million per Everyday -> Beeple’s entire body of work could be worth around $5 billion as of October 2021.
In fact, Pak is friends with Beeple and introduced Beeple to NFTs
4. Continued Catalysts Forthcoming
$ASH holders were airdropped Pages in Pak’s most recent Lost Poets project and given early access to mint. In addition, Pak has opened up their own discord with $ASH specific roles based on amount of $ASH in wallet, that gives access to certain channels:
Already, this “access pass” has boosted the number of unique $ASH wallets to over 7,000. Pak’s current discord has over 15k members with 9k unique wallets containing Lost Poets. All of this represents a significant addressable market for $ASH buyers should they seek to have exposure.
5. Favorable Supply / Demand
While there is no cap on the total $ASH supply, we believe that with a potential $ASH economy forthcoming and increasing demand, which will lead to more burning of Pak/High Tier NFTs, the total supply will not grow as fast as some expect (simplifying assumptions in Comments column):
We believe that a substantial portion of $ASH spent and received by artists/creators will not be liquidated on the open market as $ASH becomes, increasingly, a more accepted medium of exchange. While Pak has never stated what they will do with their $ASH received, Pak has mentioned they are crypto native and have not sold cryptos they acquired (BTC, Eth, etc.).
Investment Risks
1. Liquidity pool is fairly small so any sizable position (>$100k) would require several days of build-up
2. $ASH is not an NFT, but an option to purchase NFTs
3. $ASH price is too low to encourage low tier burns (that yield 0.8 ASH as gas costs are more then ASH’s current $ price)
4. Lost Poets (27k Poet NFTs) will be burnable for $ASH in about a year, and if they are burned it would significantly increase the supply. However, I do not believe any Poets will be burned, here’s why
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ETH: 0xbcbb9156f5fa29bf4bbf193f45ae8042c94e9008