A Framework for Investing in NFTs
Tags: Nft, Nft Collectibles, Cryptopunks, Cryptocurrency, Arfblocks

I will try to keep this post short and to the point.

The NFT Art ecosystem is here to stay. It will have its ups and downs, but it is here to stay. And faster than you might expect, it will eclipse the physical art market in terms of capitalization.

This is because the combination of art, extreme liquidity, and financial incentives will fundamentally change what art is (more on this in a later post).

Over the longterm, I believe unprecedented amounts of capital will enter the ecosystem. In the short term however, my biggest concerns are illiquidity and oversupply. This combination could cause hemorrhagic gaps in liquidity as valuations get ahead of the amount of new capital entering the ecosystem.

It’s ok though. Just keep holding!

But, hold what, you might ask. Where should one allocate their capital?

I believe that if you have a good framework for evaluating NFTs you will end up holding pieces you’re very glad you held vs. pieces you’re very sad you held. This is especially important in an environment where capital and attention are being spread thin by oversupply.

Advantages of a Good Framework

A good framework will save you time by allowing you to ignore most projects and concentrate your bets.

To me, a good framework looks like a hierarchy of filters. Filters help systematize one’s approach to predicting what’s going to be valuable so you can filter out everything else. I’ve ordered the filters by how reliable of predictors they are.

Top-most filter → the most reliable predictor of longterm value

Bottom-most filter → the least reliable predictor of longterm value.

And the most important, over-arching filter should always be:

Is the project likely to become a Schelling point in which capital inflows and social proof reinforce themselves over the longterm? e.g. CryptoPunks, Autogylphs, Fidenza, BAYC.

Everything in the framework below will help answer the above question.

Framework

1) Is it a breakthrough project?

In other words, does the project play a major role in the cultural or technological evolution of NFTs? Some prominent examples are Autoglyphs (first on-chain generative art on the Ethereum platform), Fidenza (first breakthrough long-tail generative art), and CryptoPunks (first successful avatar project).

Breakthrough winners in new categories will attract capital and attention over the longterm. Hint: generative art will be a massive category.

2) Does the collection have credibility / legitimacy?

Is there a legendary artist, DAO, or other source of strong credibility behind the collection? (e.g. AB curated, Axie, Deafbeef, etc.)

It’s also important that the person/entity is actively pushing the project forward, building community, and generally increasing the project’s legitimacy. Not just releasing it and abandoning it for another project.

The Chromie Squiggle was the first Art Blocks Curated project, created by Snowfro

Aside: I believe that ArtBlocks (AB) has become a Schelling Point that will experience self-reinforcing inflows of capital and attention. The amount of attention that AB has been able to capture in such a short period of time is truly exceptional. People are “playing” ArtBlocks as intensely and consistently as they play video games. This is a strong signal.

3) Does ownership come with incentives or utility?

As NFTs evolve, creators will find interesting incentives to engineer into their work. One example of this is giving out free drops to existing holders (e.g. all CryptoPunk holders received a free Meebit). Another example is NFTs that provide ownership in a DAO. At some point, pieces in a collection might form a mini economy.

Dmitri Cherniak’s “Eternal Pump”

There are only 50 of Dmitri Cherniak’s Eternal Pumps. Soon, only his holders will have the opportunity to mint his new project, Wrapture. However, if any of them sell, he will immediately flood the supply until it hits 666.

The Punks Comic NFT represents ownership in its DAO

Aside: can someone help me make a spreadsheet of creators/projects that are likely to do this or have already done this for holders?

4) What is the project’s collectibility quotient?

Collectibility is a quality that should be felt at multiple levels — the entire collection, sub-categories within the collection, and individual pieces.

The key here is maximizing versatility while preserving ease of categorization. Lets break these two things down: