My 5 Emerging Principles for Investing in NFT Art
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I first discovered the crypto artist Pak with my girlfriend Hana and we invested in his NFT collection The Fungible as it dropped in April of this year.
6 months later, investing in Pak across multiple projects has yielded massive multiples and also helped us understand and establish some principles for NFT investments. Pak’s new NFT strategy game Lost Poets represents the confluence of multiple personal interests ranging across poetry, visual art, metaverse, virtual goods, cryptocurrency, decentralization and other web3 trends. The art here is not just the pieces - the art is the process and the technology and the community - and the art is also a game with real money. This is experiential art in the metaverse of today with hints of what the metaverse of tomorrow could feel like. Let me explain further.
WHAT IS AN NFT
NFT stands for Non-Fungible Token and are tokens primarily built on the Ethereum Blockchain, which allows for a decentralized model to verify ownership, honor contract terms, avoid trickery like Ponzi schemes and serve various other benefits. It’s complicated but this cheeky article from the Verge is a good primer.
A short-hand way that I explain NFTs to the unacquainted is that it’s similar to the Title of a house since it proves ownership. It’s also like combining it with your act of sale agreement and previous owner disclosures. And it does this at amazing scale so processes like fractionalization are relatively easy (i.e. imagine a timeshare condo that’s 10 million parts rather than 50). This is overall a gross simplification and I do not recommend buying your next house as an NFT. 20 years from now though, we’ll see...
NFT ART & COLLECTIBLES
There are many segments which NFTs could impact or disrupt ranging from games to music to basically any asset that involves rights management. We started with Art (individual pieces) and have followed the trend into Collectibles (ecosystems for trading & collecting: think baseball cards or Pokemon cards).
Not surprisingly the strategies between Art and Collectibles are converging and Pak’s Lost Poets seems to be the most sophisticated implementation of a strategy that blurs the lines between the two. The game thus far seems to make use of every NFT mechanic in the current popular playbook - Burning, Minting, Airdrops, Mutable NFTs, different contract types and more! These mechanics help to drive scarcity, serendipity, rewarding and various other levers in the virtual good economy and this process itself is part of the art. That’s probably why Pak’s first collection is called the Fungible.
WHO IS PAK
Pak is an artist (or team of artists) who is anonymous, philosophical, counter-cultural and cryptic, similar to Banksy in some respects. Completely different to Banksy, Pak is deep into tech and likely a developer him/herself. Pak’s first project from 2014 was an Artificial Intelligence (AI)I for Art Curation called Archillect.
This WSJ article is a good Pak primer but pre-dates the launch of Lost Poets. Pak is the 2nd highest selling crypto artist of all time with $55M market cap on art pieces and likely another $150M+ invested into the Fungible & Lost Poets (both of which are collections not pieces).
WHAT IS LOST POETS
Lost Poets is a mysterious NFT-based strategy game that is slowly unveiling itself over the course of 365 days. No one knows all the rules and anything can change. Despite the ambiguity, the game sold all of it’s 65k+ blank pages raising more than $70M in the first hour of the drop on Sep 4, 2021. The investments have continued and I estimate there’s easily more than $150M market cap based on resales and current value. Those pages can be used to mint new Poets or to feed “words” to the Poets later on. Since no one really knows what all this means yet, there’s a lot of speculation and guessing. The investor Shorts Howard has a great newsletter about Lost Poets that details various “game” theories along with financial analyses and investment theses.
What we do know is that Lost Poets is thematically based on the Library of Babel, a short story by Jorge Luis Borges that tries to visualize the history of time and all possible variations of it. Some very big ideas of philosophy & physics are at play here.
MY 5 EMERGING PRINCIPLES FOR NFT ART INVESTMENTS
I feel lucky to have gotten into NFTs at this early point in the evolution (or revolution!) and now starting to formulate some investment principles. I welcome your feedback and comments on this mainly to help push my own thinking.
The community moves the market
For NFTs, the community action is primarily on Twitter & Discord. Twitter is public while Discord is the ‘insider’ chat community where the artists, investors, collectors, techies, businesses and more are all speaking together. NFT Siblings was my main source of info for Pak opportunities until Pak opened his own Discord (which he only opens access for 1 min at a time via disappearing tweets saying “the portal is open”). Many Discord communities & channels include gates that check your wallet and only allow access to holders of specific tokens and coins.
How active the artist is with community management parallels how active their secondary market is. With NFTs, artists have smart contracts that guarantee royalties on every resale so they are heavily incentivized to maintain an active secondary market. Pak is a master at this and The Fungible collection with its mechanics of burning NFTs to mint Ash coin (up 12x since June btw), cryptic tweets, and contrarian economics (1 cube is now the same price as a 5 cube and originally 5 cubes were 5x the price of 1 cube) means that it’s kind of impossible to be rational in the primary and secondary markets. You need to be interpretative and even intuitive. Regardless of the logic, you have to watch the community to be early and things can happen super fast.
A fun aside is that the community has its own short-hand and lingo that overlaps with Meme stock & Cryptocurrrency culture. “Go Ape” means to take a big position (also inspiring the popular NFT collection Bored Ape Yacht Club & other Ape-themed NFTs). “Paper Hands” & “Flippers” mean to sell quickly while “Diamond Hands” and “HODL” mean to hold for as long as possible ignoring the peaks and dips. “Whales” are those with massive holdings of crypto and/or NFTs, which are transparent because the blockchain is transparent and everyone can see what every wallet holds.
The knock against the community is that it’s just an insider-trading scheme and in some ways this could be true. However I believe that the blockchain mechanics at the very least prevent this from being a Ponzi scheme and guarantee liquidity. Whales move the real stock markets too but at least in the blockchain ecosystem, that's transparent to all.
Power Law: Wealth Concentrates at the Top Crypto Artists
Top crypto artists will experience power law and continue to grow in value. They understand the form, the mechanics and are first movers on platform standards. If you look at pieces from artists like Beeple, Pak, Fewocious, Mad Dog Jones, XCopy & Fvckrender that were released this year, you’ll see that nearly all have multiplied in value. These are artists whose art’s value pre-dates the NFT craze and have been recognized as leaders across Art communities. Contrast that with NFTs from musicians or celebrities, which do not experience such multiples unless it’s truly a collectible moment in their career (i.e. Jack Dorsey’s first tweet or NBA top shots).
The art is not just the piece: it’s the project and the mechanics, the performative art and the experiential marketing. A good point of real world reference is Banksy’s self-destructing painting that has 10x’d in value since being partially destroyed - the destruction is part of the art! Top Crypto Artists have been planning around these mechanics for a while and it will be interesting to watch artists like Vhils, who started destroying in the real world years ago, as he translates those mechanics into NFTs.
Platforms & standards matter
Andressen Horowitz, one of the top global VCs, recently invested in Manifold which is the platform powering Lost Poets and various other sophisticated crypto art projects. There’s so much optionality and creativity with NFTs right now that platforms building services to simplify NFT creation and management will help creators focus & refine the creative aspects of their work. First movers on these platforms are setting precedents for others to follow and establishing trusted token types and game mechanics. Platforms will allow for replicability and scalability so I will continue to follow a few NFT platform leaders like Manifold, Nifty Gateway, Dapper Labs, OpenSea and others.
It’s early. HODL. Be a Diamond-hands & trust in top Artists.
Speculation is rampant in cryptos and NFTs so you see a lot of quick flipping for 2-3x ( i.e. “Paper Hands”). We experienced this with an XCOPY piece, which we acquired for $700, sold for $2500 in 2 months and 6 months later its selling at $40k. What a massive miss on the upside.
Pak tweets about how his mechanics are designed to reward long-term holders and Lost Poets itself is a 365 day game. Despite seeing 2-3x returns already, we plan to hold (HODL!), play the game and exit way after the game is done. Given that this is the first NFT Art / Collectibles Strategy game, these pieces may continue to grow in value after the game ends OR the game may actually never end and continue as a self-perpetuating AI. These are big ideas, Pak is very smart and we are just scratching the surface right now. Trust that top artists know what they’re doing, HODL and enjoy the experience!
Plan for Massive Risk
There is massive risk all-around starting with compounding crypto risk. If BTC & ETH crash, all these NFTs will crash way more. NFTs are primarily bought & sold with ETH and ETH’s value follows BTC.
Another risk is security risk. My writing this article and outing myself as a holder makes me a target for hackers. Anyone who’s a Whale these days and active in communities maintains an anonymous online identity for this reason (i.e. see some NFT whales like SilverSurfer, 888 & mexpex). As a personal first principle though, I believe in radical transparency and being my authentic self no matter the forum. I also see the more important opportunity as revolutionary ideas rather than revolutionary ROI.
While this article mentions a few extraordinary successes, it does not cover the many foolish investments. We’ve bought NFTs for thousands that are now worth hundreds, especially falling prey to ‘celebrity’ NFTs’ and NFTs that I thought ‘looked cool’ early on.
Overall, we will continue to invest in NFTs with caution as if it can all go down to zero (i.e. crypto crash or hack) and we really have no idea how to time exits yet. Everything that is up can definitely come way, way down.
CONCLUSION: INVEST IN LEARNING NOW
All these experiments with NFT Art & Collectibles are the cutting edge and foreshadow what’s to come in a Metaverse with decentralized governance, currency and computation. Early lessons from NFT Art & Collectibles may translate well to the NFT-ification (i.e. tokenization) of everything. This opportunity is more than the Now, it’s for the Future. The ROI is the insight, not the money.
EPILOGUE: WHAT’S NEXT
See you at NFT.nyc if you’re there next week!