How to Value a ZED Run Horse
One of the most common questions that pops up on all the ZED Run forums is some form of “How much is this horse worth?” Putting a price on something as complicated as an NFT racehorse is complicated, but does not need to be difficult. I will walk you through a high-level overview of valuation techniques that you should consider when purchasing a horse or pricing one to sell.
So, how do you value something? You can group the methods into two main buckets: 1.) intrinsic value; and 2.) relative value. Intrinsic value can best be described as “how much a horse is worth based on its ability to generate cash.” Relative value can be thought of as “how much are similar horses trading/selling for in the current market.” Both of these methods can be combined in order to determine a range of values for ZED Run horses based on their ability to generate cash and what comparable horses have been sold for recently in the market.
In finance, an intrinsic valuation is derived from a “discount cash flow (DCF)” analysis. To spare you the boring details, this requires projecting out the cash flows expected from an investment and then discounting them back to their present value at a rate commensurate with the risk associated with receiving those cash flows. This will be the general framework of how we approach determining the intrinsic value of a horse.
For cash flows, I think using “Projected Payout per Race” is the best proxy for deriving how much money a horse could generate. Projected Payout per Race is simply the percentage chance of finishing in a position that pays money in a paid race, multiplied by the payout of that position.
In other words, we will determine the probability of finishing 1st, 2nd, 3rd, and making no money. Then we will multiply that percentage by the payouts for those positions, currently 6x entry fee for 1st, 3x for 2nd, 2x for 3rd, and nothing for finishing 4th and below. See table below for simple breakdown per race assuming $1.00 entry fee.
So in the example above, we can see that we could expect to make $0.90 per race is the horses statistics continued to hold true through paid racing. Assuming you could race 10 times per day, you could expect to make $9.00 per day for every $10 .00 spent in entry fees. Assuming that you can race 30 times per month, you could expect this horse to yield a ~21% ROI per month once you consider the initial cost of the horse plus the cost of the 300 entry fees to race for the month. In this example, $1,000 horse cost + (10 races/ day x 30 days / month x $1 / race) = $1,300. So with projected winnings of $270 at a total cost of $1,300, we yield a monthly ROI of 20.77%.
Most horses do not have these stats for paid racing that allow for such a return, and thus will not yield a high value. However, you can see why the few horses that do have such stats can command such a high dollar amount in the market. There are few places you can go to earn a 20% return on a monthly basis, which makes these types of horses absolute gems.
Armed with this information, how do we now determine how much we should pay for a horse? This is where personal preferences come into play. For me, given the riskiness of the game and the opportunity cost of spending my time racing digital horses vs. working, I need to be able to generate a 15% return per month and recoup my investment within 3 months of purchase. Therefore, I look for horses that already match this criteria listed in OpenSea or on Hawku, or I make bids at prices that would provide me with the return that I need. Using the previous “Example Horse”, you can see that the monthly ROI is there, but the payback period is too long (111 days vs. 90 days desired). So to buy this horse I would bid down to number that allowed me to meet my desired 90 day return; in this case $810.
Looking at current listing in the marketplace, I could then pull the stats of horses that I am interested in a see which ones currently meet my return requirements and bid down those that do not.
In the table above, I see at least five horses that meet my criteria and would consider purchasing pending more in-depth research on the specifics of the horse, but the initial screening reveals that the price is right from a cash flows perspective.
Pulling from finance again, a fundamental method of determine relative valuation is through Precedent Transaction Analysis. This method is a simple as it sounds; we will look at the prices and statistics paid for each horse in the market in a given Bloodline and Breed-type to get a sense of what price we should also expect to pay.
So, taking Z10 Szabo Exclusive “Cherin” from the previous table as an example, we would then want to go look at what Szabo Exclusives have sold for in general, as well as what other Z10 Szabo Exclusives with win rates between 10–15% and show rates of 35–45% have sold for in the market.
Screening for Szabo Exclusive sales, we would see that 983 sold between 1/1/2022 and 2/20/2022 at an average price of 0.234 ETH ($640). The average Szabo Exclusive sold had a 7.0% win rate, 13.6% place rate, and 24.3% show rate.
Already, we see that “Cherin” is undervalued relative to the average Szabo Exclusive at an asking price of $571 with a ~13% win rate. Looking at Z10 Sabo Exclusives with win rates between 10–15% and show rates of 35–45%, we get the following table of transactions.
Looking at this specific set of horses, we can now see that “Cherin” is priced slightly above what the most expensive horse in the group sold for, which would be appropriate given that “Cherin” has a 13.8% win and 40% show rate vs. “Marin Kombucha” with 13.0% and 40%, respectively. So the additional ~$30 in cost is justified by the higher chance of placing top three in a race and earning a payout.
Another way to think about how to use the above table is to ask yourself, “If I was going to pay this price for a horse, what would I need to believe is true in order to justify paying that price.” In this instance, I would need to see that “Cherin” had better statistics that every other horse in the set of precedent transactions in order to justify paying the $571 for her. In this case, she outperforms the most expensive horse, but relative to the whole field of horses, her Win % would place her in the 80th Percentile of performance, with her Show % putting her at the top. Given that performance is what drives returns and winning pays 6x my entry fee vs. 2x for showing, I would bid down slightly to compensate for the lower win rate. I think it is fair to say that “Cherin” is in the 98th Percentile of Z10 Szabo Exclusives sold in this set of transactions and is therefore worth the 98th Percentile price of 0.188 ETH ($513).
I hope that this article has provided a constructive framework for how to gauge the fair value of a ZED Run horse based on its racing performance. Racing is what drives the game. It is what makes this game fun and provides a daily return for those stable owners who can find good racers to put into the field. Remember though, your real ROI will decrease with each additional dollar that you spend to buy a quality racer. Screen the horses you are interested in buying to see how much money you could reasonably expect to generate from daily racing based on its paid racing stats, as well as verify the price being asked by looking at prior transactions of similar horses.
I plan to release a monthly report that will provide this data and market trend analysis on my website at Rainier Racing Co. Please visit the site for in-depth reporting on the ZED Run marketplace.
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Thanks for reading!