NFT Notes: My Investment Logic for Crypto Art

This article is from Chain News, authored by Xiao Mao Ge Mao (Twitter @porounclemao).

Whenever my friends learn that a poor guy like me has bought certain NFT artworks at high prices, they often show confusion and frequently ask questions like: "Why is this NFT (or some say JPEG, GIF) worth so much money?"

To answer this question, I could choose to say emotionally and whimsically: "Because I am a fan, I like it." But from a rational perspective, this question actually attempts to answer:

"From the perspective of investors in the crypto space, how to understand the logic of buying NFT artworks for collection or investment?"

I hope to discuss this question in an easy-to-understand manner. Of course, the views in this article only represent the author's personal opinions.

(Thanks to friends like LeftOfCenter, Alen, Shirley, Blair, Johnson, Rex, Felicia, etc., for their discussions and inspirations, and to Teacher Cao Yin for reference articles.)

Due to financial constraints, it took me about two years from my first encounter with NFT artworks to being moved by an NFT artwork and convincing myself to buy and collect it. Although I learned to appreciate the works of major artists like Beeple, my true journey into collecting began with a Hashmasks piece that I couldn't resist wanting to own.

Hashmasks piece, collected by Xiao Mao Ge

This piece depicts a man wearing an abstract mask in the style of Picasso, holding a book titled "Alice in Wonderland."

Looking back at my experience of unintentionally falling into the "rabbit hole" of cryptocurrency a few years ago, I can see my confused self when I first entered the field. Art requires the transmission of emotions, and I am glad to have such feelings in the restless and cold crypto world, but what exactly is art?

British art theorist Gombrich wrote at the beginning of his book "The Story of Art": "There is no such thing as art with a capital A, only artists."

Why only artists? Different people have different understandings. But regardless, this tone facilitates ordinary people to understand artists and start learning art history, while also emphasizing the importance of the role of the "artist."

In today's era of technological determinism, people prefer to refer to artists as "Creators" or "Makers" ------ an artist is someone who "makes things."

With the entry of non-fungible token (NFT) technology into the art field, the role of creators in the crypto art space has become even more enriched, giving rise to roles such as crypto artists, curators, critics, and distribution platforms.

If we believe in this argument, it becomes difficult to separate each NFT's context and the various roles behind it to discuss "the NFT art" itself. For the crypto art discussed in this article, we can even boldly paraphrase ------ "There is no such thing as crypto art, only those who create and those who own."

Why Not "NFT Artworks"?

If we set aside the so-called art, compared to traditional art, the crypto art field not only has a more diverse role of "those who create," but also expands the range of "those who own" artworks, revealing a more potential capital market behind it.

At the same time, from a technical perspective, the unique ownership "certificate" attribute brought by NFT non-fungible tokens makes them inherently suitable for application in the field of unique-value art NFTs, increasingly fitting to become a value carrier for transferring or holding large amounts of capital.

Owning an NFT artwork is equivalent to having an on-chain certificate of the artwork asset, but NFTs still have a long way to go before large-scale application. One of the core issues includes why NFT artworks are still not widely regarded as capable of storing value.

• First, the value consensus of NFTs remains controversial. Some believe that NFT artworks are more of a digital certificate of collectibles, but this does not mean that all NFT artworks are inherently valuable; while others have a strong interest in collecting specific NFT artworks. Even among the crypto community, which is usually more open to new things, attitudes towards the value of NFTs are polarized.

• Second, the liquidity of NFT artworks is relatively poor, and pricing is highly subjective and difficult. Typically, it may take investors several days to resell an ordinary NFT artwork, while higher-priced NFT pieces may take weeks or even longer to change hands.

• Although more and more traditional industry leaders are trying to issue NFTs, judging by indicators such as active buyers, NFT artworks are still circulating within a relatively niche circle.

• Additionally, the infrastructure in the NFT space is still not well-developed, with most projects still in the exploratory stage.

Although the infrastructure and industry standards of the NFT space urgently need improvement, fortunately, we are still in an era of rapid updates and iterations of NFT technology and the crypto art field, filled with opportunities.

With the innovation of more NFT projects and the improvement of infrastructure, NFT artworks are also achieving increasing capital flow in various constructed scenarios. I believe that with the promotion of these key projects, the entire NFT space will rise.

Although it is somewhat risky, why not participate in a fantastical journey of capitalizing on crypto art?

My Exploration Journey in Investing in NFT Artworks and Projects

Why Do Some People Buy NFTs?

"Money can rug, but fun cannot rug."

------ Excerpt from a self-introduction by a member of a certain NFT community project.

For those who spend a lot of money on NFT artworks, my first instinct is to think that these people are either too rich or very foolish, but is it really like that? To embark on the investment journey of NFT artworks, one must first consider: What drives people to acquire or buy NFTs?

From the perspective of demand theory, the famous Maslow's hierarchy of needs summarizes human needs into five levels, from the bottom of the structure upwards: physiological (food and clothing), safety (job security), social needs (friendship), and self-actualization. Combining this with the previously summarized two parties of NFTs, "those who create (creator)" and "those who own (buyers)," we can speculate on the roles played by both parties in terms of demand:

The demand of "those who own (buyers)" for NFT artworks also has five levels, from the bottom of the structure upwards: obtaining short-term speculative profits, obtaining long-term investment returns, gaining fan or ecological rights, acquiring social attributes (on-chain identity symbols, interactive social certificates), and enjoying the pleasure of collecting.

It can be observed that often the news we see, including a certain numbered Cryptopunk being sold for a million dollars, may be from a type of collector with a higher demand level for NFT artworks. However, as time goes on, we cannot overlook the pursuit of investing in NFTs and fan rights or social proof by more ordinary people entering the space.

We see that more and more new participants are beginning to lean towards collecting some already valuable NFT artworks. One can imagine that as the base of people participating in the NFT art field grows, both collectors and investors will increase, making it easier to see more high-priced artworks.

From another perspective, if you truly believe in a small circle of people who spend money to collect NFT artworks purely for love and joy, the more loyal the circle is, the easier it is to attract more smart money from outside the circle to speculate. Of course, one must also be cautious of the potential for bubbles and side effects.

From a business model perspective, how to choose NFT artworks and projects?

First, crypto art projects do not necessarily need a so-called business model, and the standards of various artworks are closely related to audience preferences. However, the cryptocurrency attributes inherent in NFTs, along with the success of crypto art projects like Cryptopunks and Hashmasks, have inadvertently established a set of project design and issuance standards for exploring collectible-focused NFT crypto art projects.

As of now, projects like Cryptopunk and Hashmasks still rank high in terms of trading volume and prices among crypto art projects. But more importantly, these NFT art projects have strong consensus-driven fan communities.

From a collector's perspective, the common characteristics of high-quality projects in terms of artistic and thematic design include:

• The artwork itself is attractive, with a fixed total issuance.

• The issuance model has high community participation (fair issuance or blind box purchase issuance).

• Attractive rarity design of collectibles (e.g., alien or zombie characters in Cryptopunk).

• Others: hidden attributes or Easter eggs beneficial for the long-term development of the project (e.g., cultural hidden attributes in Hashmasks), community activities with rewards (such as hosting online exhibitions).

Additionally, for crypto art platforms, the sales methods for NFT artworks are also continuously innovating. Crypto artists can not only register on platforms, issue works, and engage in market bidding, but many platforms have begun to experiment with pricing and selling in collaboration with artists.

For example, the Nifty Gateway platform has launched the NFT Drop model, selecting different artists' works daily and allowing artists to issue a series of limited works with different price tiers. This attempt not only makes it easier for newcomers to start collecting, but the data performance during the sales process, such as whether anyone is willing to rush to buy at issuance and how the works perform in the secondary market, also serves as a process for "price discovery" of crypto artists' works.

NFT Drop model launched by Nifty Gateway

Moreover, projects including Meme are exploring models that combine tokens and deep collaborations with major artists, where investors can purchase MEME tokens and stake them in different artists' pools to earn points, which can then be used to rush to buy works issued by the artists. The benefits of this innovative model compared to open market platforms include:

• Participants do not need to spend a lot of time selecting artists; the community can attempt to collaborate with major or promising crypto artists.

• It helps token holders acquire collectibles from major artists that have been sold for "astronomical prices" without incurring huge costs.

• Participants can simultaneously play different roles, including token investors, art collectors, and project governance participants.

• Participants can meet different needs, including acquiring art collectibles at low long-term costs, directly interacting with artists in the community, rushing to buy artworks for speculative resale or long-term investment, etc.

Famous crypto artist Fewocious's work issued on the Meme platform

Is the exploration and design of these business models merely to attract more fans to discover and purchase collectibles? Indeed, within the niche circle of art collectors, such designs often have a greater appeal to collectors and form a strong consensus within the fan community.

But from another perspective, the "business model" of NFT artworks is actually an exploration of how to clearly "price" NFT artworks, also serving to generate more valuable community consensus.

Envisioning the future, NFT issuance models will gradually become a prerequisite standard for capitalizing NFT artworks, such as the blind box issuance model or NFT Drop model, which actually provides objective reference for the relatively subjective pricing of NFT artworks, while rarity design will influence the subsequent pricing and appreciation of different types of NFTs.

It is worth noting that merely imitating these business models does not necessarily lead to high-quality NFT art projects; it can even be foreseen that similar to the previous ICO craze, 99% of NFT art projects may lose their value, and the value of a project ultimately depends on whether the works are liked or whether the project can achieve strong consensus.

How to avoid NFT artworks that may lose value? I have a few small suggestions to share with readers:

• Purchase projects that already have a certain strong consensus and value, and stay away from overly hyped NFT art projects.

• Buy works you like based on aesthetic intuition, as it is very likely that these works cannot be resold in the short term; at the very least, you can keep those that resonate with you.

• Truly lasting artworks or projects will have a pioneering or profound impact on social culture, industry, or art history (a way to identify is that if it has not had an impact now, it certainly will not have a profound impact in the future).

How Do I Sell My NFT Artworks? Who Will Buy?

When I first entered the NFT art collection field, my biggest concern was: "If I buy a crypto artwork at a high price, how long will it take to sell? What if no one likes it and I can't sell it?"

In fact, these worries and questions have always existed in the traditional art market, but the development of infrastructure in the NFT space is seeking to improve these persistent issues in the traditional art market.

Compared to the traditional art market, the current advantages of the crypto art market include:

• The entry of "wallet + platform" is simpler, making it easier for more ordinary people to participate in auctions, investments, collections, and resales.

• The buying and selling process is simpler and more convenient, more suitable for large funds (bidding, reselling, etc., can be completed in minutes without the intervention of traditional auction houses and banks).

• On-chain auctions are more public and transparent, with richer formats; due to the traceability characteristics of blockchain, there is no need for the process of verifying the authenticity of artworks. At the same time, it is easier to see others' collections and transaction records, adding more social attributes to crypto artworks.

So, who will buy my NFT artworks?

Ben Roy wrote in "The Fat CryptoPunks Thesis (Why CryptoPunks Will Experience a Cambrian Explosion?)" that the total market value of CryptoPunks will continue to grow significantly over the next five years, possibly in proportion to the entire NFT market size. He categorized future buyers of CryptoPunks into two types:

• Those who do not hold cryptocurrencies (new high-net-worth individuals entering the market).

• Those who hold native cryptocurrencies (ordinary investors in NFT artworks and NFT veterans).

In my vision, future collectors of NFT artworks will not need to worry about the issue of quality artworks not selling because, as the infrastructure of the NFT space continues to enrich, innovative tools such as NFT lending and collateral products, NFT exchanges, etc., will continue to emerge. The buyers of NFT artworks will also attract and cover a large portion of the existing cryptocurrency investor population, and there may even be demands for arbitrage by robots (quantitative traders in the NFT space?) and liquidity market-making in decentralized NFT exchanges.

In the future, the range of people buying NFT artworks will not only expand, but their attributes will also change; it may not be an individual buying the artwork, but a group of people, a pool, or an exchange, or even a robot. At the same time, ordinary NFT artworks can be sold at any time in liquidity pools at Floor Price, while high-priced precious crypto artworks will be fragmented into assets with shared ownership for easier sale.

Although still not perfect, these visions in the NFT space are being realized, with more and more NFT projects attempting to combine with DeFi, gradually piecing together a composable "NFT Lego" in the NFT ecosystem.

My List

Finally, let us glimpse the future NFT art market from some projects currently exploring and promoting the NFT space:

NFT Liquidity / Floor Price Related Projects: NFTX, Very Nifty

NFTX

Introduction: NFTX is an NFT index fund protocol that provides liquidity for non-liquid NFTs like CryptoPunks by creating NFT tokenized index funds (e.g., $PUNK). It currently supports users to deposit their NFTs and redeem them randomly. NFTX has also launched segmented NFT series collections, such as the PUNK-ZOMBIE index fund for the zombie series of CryptoPunks.

Very Nifty

Introduction: Very Nifty is a community-driven NFT liquidity + exchange project that divides NFT assets into different asset pools, incentivizing holders to deposit NFTs and provide liquidity through mining rewards and other models. Currently, the platform supports users to deposit their NFTs and redeem them at any time, supporting one-click NFT-NFT exchanges within NFT pools.

NFT Trading and Fragmentation Related Projects: NFT Protocol, NIFTEX

NFT Protocol

Introduction: NFT Protocol aims to establish a decentralized NFT exchange. The platform is currently in beta testing and will officially launch products in the first quarter. The released demo supports NFT swaps from ERC-721 to ERC-721 and ERC-721 to ERC-20. The platform will also collaborate with the Flow public chain.

NIFTEX

Introduction: NIFTEX is a trading platform that supports NFT holders to fragment NFTs into ERC-20 tokens. This project aims to provide the functionality of selling split NFTs and offers restrictions to prevent sellouts, making it convenient for investors to invest in high-priced NFTs.

NFT Collateral and Lending Related Projects: NFTfi, Drops

NFTfi

Introduction: NFTfi aims to become a peer-to-peer collateral loan platform for NFTs. Users can choose to collateralize NFTs and borrow assets like ETH or DAI. If the borrower defaults, the ownership of the NFT will transfer to the lender.

Drops

Introduction: Drops aims to become a platform for NFT raffles, staking, and loans. The project is currently in development and was founded by the team behind the blockchain game Noderuner.