Challenge Profitability

How to systematically approach participating in challenges

Earlier this week we saw the announcement of the first Seeing Stars Challenge: collect every All-Star from Team KD, and you’ll be rewarded with a Kevin Durant Seeing Stars moment. Top Shot might throw us yet another curve ball (looking at you, Cool Cats Master Challenge), but it’s not a stretch of the imagination to assume there will be a similar challenge for LeBron. So the question is:

What have we learned from past challenges, and how can we analyze the profitability of a potential LeBron Seeing Stars Challenge? Let’s dive in.

Moment Utility Value

Time and time again we’ve seen how a challenge can significantly increase a moment’s price in the marketplace. Being a required moment for an attractive challenge immediately spikes the market’s demand, and the supply remains relatively unchanged — resulting in a price increase. Look no further than the 2nd Cool Cats Challenge and Will Barton. Once included as a required Moment in the Challenge, the Series 2 Barton moment skyrocketed from $3 to $330 in a matter of days. This is what’s often referred to as a Moment’s utility value.

Otherwise less-than-desirable Base Set moments are the most susceptible to significant depreciation as soon as the challenge timer runs out; with no utility, they rapidly crater back towards their pre-challenge value. But what about All-Star caliber players from a unique Set with its own artwork? This is a different beast, and the hand we’re dealt with the Seeing Stars Challenge. There’s one challenge that might be best suited to teach us about how things may go: The Gift.

The Gift

Similar to the Seeing Stars Challenge, the Gift Challenge featured moments with a sub 10,000 circulation count, special artwork, and even some previous All-Stars. So how much did these moments depreciate due loss of utility after the Challenge ended?

Here we can see the price of each moment over time, as well as their cumulative value in the marketplace. We can see where these moments settled in the days before and after the Challenge timer expiring, and calculate an estimate of their depreciation.

In the final hours before the challenge expired, the five moments had a total marketplace value of $2,184. One day after the challenge came to a close, the marketplace value dropped to $835 - a depreciation of 62%. Not surprisingly, this depreciation seemed to effect the individual moments relatively equally. All five of the challenge moments saw a depreciation between 57% and 70%.

Can we expect similar depreciation from Team LeBron All-Stars? We don’t know for sure, but it’s not a stretch of the imagination to assume we’d see similar, or possibly less depreciation. If it carries any value, between LeBron, Jokic, Luka, Giannis, and Curry, Team LeBron represents five of the top seven players with regards to current MVP odds. I don’t know about you, but I wouldn’t mind holding onto a moment from a league MVP minted during their MVP season.

A Simple Model

Let’s assume that we weren’t lucky enough to snag a Seeing Stars or Rising Stars pack and we’re interested in completing the (likely) LeBron Seeing Stars Challenge purely through the marketplace. We can come up with some simple equations that describe the scenarios in which we’re able to break-even on our investment, and earn our lottery ticket that is a LeBron James reward with a shot at landing a valuable serial number. Simply put, we break even when the value of our initial investment (post-challenge) plus the reward (LeBron) equal our initial investment.

Initial Investment, Post-Challenge Value

As we saw earlier, we can expect challenge moments to depreciate after the challenge comes to a close. Taking this, and the 5% transaction fee, we can represent our initial investment’s post-challenge value as:

0.95 * initial_investment * (1 - pct_depreciation)

So if our initial investment was $2,000, and we assume a depreciation of 50%, our initial investment has a post-challenge value of $950. Simple, right? Let’s move on to the other half of the equation.

Reward Value

To calculate the value of our LeBron reward, we have to first start with its expected market cap. A moment’s market cap represents the total value of all minted moments, and dividing this value by the circulation count (number of minted moments), we arrive at the market value for a single moment. In the case of a Challenge, the circulation count isn’t determined by Top Shot, but rather by the number of users completing the challenge. Again, taking into account the 5% transaction fee, we can represent our LeBron reward value as:

0.95 * (market_cap / challenge_completions)

When this reward value plus our initial investment-post challenge value match our initial investment, we’ve broken even. In order to calculate scenarios in which this challenge is profitable, we have to make some assumptions about these four variables.

Breaking Even

Let’s start by estimating the LeBron Seeing Stars market cap value. Fortunately there are two existing Series 2 LeBron moments: a dunk, and a no-look three-pointer, and their market cap values are $11M and $14M, respectively. These are both some amazing plays, and we can only hope that LeBron’s Seeing Stars moment is just as enjoyable. To be a bit conservative, we’ll assume LeBron’s Seeing Stars moment has a smaller market cap of $10M.

With this market cap value established we can run through various scenarios of depreciation and challenge completion, and calculate the maximum price we could purchase all of the Challenge moments for in order to break even.

As we can see, we have curves representing the break-even point for various combinations of challenge completion and depreciation of our moments post-challenge. With these, we can run through a likely scenario and decide if the challenge is worth pursuing. Let’s assume we have a depreciation of 60%, and 7,000 users complete the challenge (70% of the maximum possible number). Looking at the chart, we’d take a look at the red curve, and find a break even point of roughly $2,200. Purchase all the required moments for less than this, and we’re looking to make a profit. Spend more than this, and we’re going to need some help — an increase in the LeBron reward market cap, a lower depreciation, or fewer users completing the challenge.

That’s all for this week! I hope this helps you approach Top Shot Challenges in a systematic way, and that you learned a thing or two along the way. If you’re feeling adventurous, take these equations for a spin and plug in your own assumptions!

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