NFTs — Software’s Still Hungry and Art’s on the Menu
Crypto can be an intimidating frontier. If you’re not a software developer or macroeconomist, the concepts and terminology can be weird and confronting. Blockchains, hash rates, gas fees, staking, mining and smart contracts aren’t easy-to-grasp concepts for the uninitiated. It doesn’t help that many have memories of the late 2017 ICO hype cycle that ended in an 85% crash in the bitcoin / USD exchange rate. However, today there are real use cases for consumers in the crypto ecosystem and potentially one of the most accessible is non-fungible tokens (“NFTs”), or more simply, digital art.
Now, first some housekeeping. I have no credentials as an artist, an art historian, a software developer or a crypto expert. I haven’t participated in an art subject since primary school and I’ve worked in traditional finance my whole career. Please fact check me — I would love to hear from people with different views.
What is Art?
Oxford definition — the expression or application of human creative skill and imagination, typically in a visual form such as painting or sculpture, producing works to be appreciated primarily for their beauty or emotional power.
Art can be everything from Vincent Van Gogh’s Starry Night to a toddler’s finger painting. The value or importance of art is dictated by two things:
- Scarcity — the authentic original version can always be differentiated from copies, knock-offs or replicas
- Art has to capture a cultural moment in time — the most valuable art is often the first of its style, leading the way for a new generation of artists
Let’s take the Mona Lisa by Leonardo Da Vinci. Some believe its value could be in the tens of billions of dollars if you take into account the number of tourists it brings into the French economy every year. Why is it so valuable? Well, there is only one Mona Lisa and it is hanging on a wall in the Louvre. You can buy a print and hang it in your home, but that copy does not give you ownership rights over the original painting. The Mona Lisa also has cultural significance. Painted by perhaps the most famous Italian in history, known for his contributions to art and science, using unique techniques, unparalleled by peers in the 16th century.
Now many would look at an oil painting like the Mona Lisa and its photo-realistic qualities and understand the immense talent and skill required to produce such a piece. However, art took an unusual turn in the 19th century. The art world looks back on this period and celebrates impressionist artists like Monet, Renoir, Pissarro and Cezanne. Their paintings are worth hundreds of millions of dollars apiece, owned by billionaires and hung in the most famous galleries around the world. But at least for a period, these artists received harsh opposition from the conventional art community in France. They were breaking from conventional definitions of photo-realistic art and creating something new.
This has been a defining trend over the last 200 years in the art market. There’s lots of fancy names for the different time periods and genres that can be hard to remember, but we know a lot of the stories.
Vincent Van Gogh was considered a failure while he was alive. His artistic genius was not recognised and celebrated until after his death aged 37.
Jackson Pollock’s art has always been the subject of great controversy. How hard is it to splash paint on a canvas? A primary school student could technically replicate the art. But it was the first of its kind and it captured the cultural moment. Hedge fund billionaire Ken Griffin reportedly paid US$200 million for Pollock’s Number 17A in 2016.
The list goes on of famous artists pushing the definitional boundaries of art for their time. Andy Warhol painted Campbell’s Soup cans. Jean-Michel Basquiat and Keith Haring fused street art and gallery art. Banksy and Ai Weiwei fused political protests and activism with street art. Every generation of new artists fights against the groans of the stuffy art establishment to make their mark on culture.
That brings us to today, in this strange cultural moment, almost two years into a global pandemic that has heavily restricted tourism and live gallery events. According to the New York Times, global auction sales of art in 2020 was down over 20%.
Enter non-fungible tokens and an explosion in digital art.
So What Changed with NFTs?
The key innovation to enable digital art was the public blockchain. Think of a blockchain as a public database to record ownership of items like art. Not dissimilar to a public chain of recorded events in a spreadsheet that might show:
- Fraser created a piece of art on 01 September 2021
- Fraser sold this piece of art to Harry on 07 September 2021
- Harry then sold the piece of art a day later to Tom on 08 September 2021
Why is this so important? It satisfies the first principle that brings value to art. It makes digital art scarce. You can finally prove authenticity.
Don’t get me wrong, you can still use your computer to copy and save a piece of digital art, much like you can take a photo of the Mona Lisa or go wild splashing paint on a canvas to re-create a Jackson Pollock. But there is only ever one officially recorded owner of each authentic piece. Copycat items do not receive the same economic value as the originals. People have tried.
Iconic NFT Collections
I want to first say that art is in the eye of the beholder and you should only consider investing in pieces that bring you joy. I have purchased NFTs that I love, but they have turned out to be worthless in the eyes of other consumers. I have also purchased NFTs that many would consider silly and juvenile, but hold good value in online marketplaces. It’s also important to note there are many cash grab projects that are looking for a quick buck and the art will ultimately prove to be worthless. Do your research. Find your community. Twitter and Discord are must-have tools for any potential NFT investor.
In March 2021, Beeple’s “Everydays: The First 5000 Days” was sold at a Christie’s auction for US$69 million. The piece is a collage of 5,000 individual images released by Beeple to his 1.8M Instagram followers every day since May 2007.
In June 2021, Sotheby’s auctioned a rare CryptoPunk for US$11.7 million. Today, the cheapest of the 10,000 piece collection of CryptoPunks is US$285,000. While many see an uninteresting pixelated image, CryptoPunks were the first mainstream digital art collection on the Ethereum blockchain. CryptoPunks launched the current wave of profile picture style projects, kickstarting the huge NFT ecosystem that exists today. They were first.
In August 2021, a Chromie Squiggle (Art Blocks Curated) sold on OpenSea for US$2.4 million. Today, the cheapest of the 10,000 piece collection of Chromie Squiggles is US$35,000. These were the first generative art collection where the art was generated through an algorithm at the time of first purchase. Neither the artist nor the buyer knew what the pieces would exactly look like at the time of purchase.
In August 2021, a piece in Tyler Hobbs’ Fidenza collection (via Art Blocks Curated) was sold for US$3.3M. Today, the cheapest of the 999 piece Fidenza collection is US$500,000. Like the Chromie Squiggles, the Fidenza collection utilises unique generative art techniques that randomly generates the art through an algorithm at the time of first purchase. Neither the artist nor the buyer knew what the pieces would exactly look like at the time of purchase.
In September 2021, Sotheby’s auctioned a 101 piece sub-set of the 10,000 piece Bored Ape Yacht Club collection for US$24.4 million. Today, the cheapest of the Bored Apes is US$125,000. The Bored Apes weren’t first, but they were able to create an iconic brand by creatively releasing follow-on artworks (Bored Ape Kennel Club and Mutant Ape Yacht Club) for free to holders of the original Bored Ape Yacht Club collection.
There are others out there that may also lay claim to historic significance. Solana’s first mainstream NFT collection, the Degenerate Ape Academy or Ethereum’s open source gaming gear list NFT collection, Loot are great examples. There are many others pushing the boundaries of creativity and artistic expression.
What’s interesting is the value consumers place on the authentic collections. People have tried to launch ‘creatively inspired’ projects. Consumers have already voted — they want the originals — the copycat collections receive less than 1% the value of the originals. In the same way I can’t sell an Andy Warhol inspired Campbell’s Soup painting for US$100M, I can’t sell a collection of 10,000 FraserPunks for US$285,000 each.
While this is going to lead to huge opportunities for artists to practice their craft and earn a living, it has also been used as a force for positive social impact. On 10 September 2021, National Suicide Prevention Day, digital creator fxnction launched Trippy Bunny Tribe to his +30,000 Twitter followers. The 1,111 piece psychedelic collection sold out in less than 20 seconds. After the sale was complete, the Trippy Bunny team announced that 100% of proceeds (+US$220,000) would be donated to the American Foundation for Suicide Prevention. An amazing story of a digital creator using their platform for positive social impact.
Better Economics for Artists and Creators
The other important innovation for artists is the NFT economic model.
Like the physical art market, artists receive an upfront payment for the initial sale of their NFT collection. However, unlike the physical art market, NFT artists can insert a resale royalty fee into the NFT contract that allows for them to receive a percentage of the proceeds every time the NFT is traded. For the first time ever, artists can create a recurring revenue stream. As an artist builds their brand and increases the value of their early NFT collections they can directly benefit. It’s no longer just the art collectors that financially benefit from an artist’s growing profile.
We’ve even seen artists spend hundreds of hours creating NFT collections and then give them away for free with a view to building a community and brand overtime and then monetise their efforts through the royalty fee! Solana’s Sneks collection was a recent example of a free collection of 10,000 pieces that now trade for hundreds of US dollars each and the artist collects royalties on each transaction!
Art Going Mainstream
So hopefully I’ve convinced you there’s value in the most culturally significant NFT collections. But how do we think about how valuable these could be? Why is software eating art?
Historically, the art market has been largely restricted to the rich and famous. Auction houses like Sotheby’s and Christie’s have dominated high end art sales.
In 2020, the global value of art sales was US$50 billion and there were 30 million transactions. Let’s be generous and assume each person is only doing one transaction. That means 30 million people are buying art each year. In a global population of 8 billion people that’s less than 0.5% penetration rate of art purchasers every year. I mean it makes sense. Who has the spare capital to buy, store, secure and insure expensive art?
NFTs open art to the entire world with incredible network effects. Consumers in Australia can safely purchase pieces from artists all around the world with instant settlement. The ownership record is safely stored on a public blockchain. The images are readily accessible via mobile or desktop anywhere in the world. The art is easily traded online through (relatively) liquid markets.
Thanks to the NFT revolution, OpenSea, an online marketplace to buy and sell NFTs, has already reached a US$40 billion annual sales run-rate in August 2021. For context, that means the digital art market is already 80% as large as the US$50 billion physical art market. And this is just the beginning. The TAM for global art sales has absolutely exploded. You don’t have to look any further than the actions of the physical art market incumbents. Sotheby’s and Christie’s are already auctioning the highest valued digital collections.
Beyond art — NFTs as a unique digital identity
Humans for centuries have expressed themselves creatively through their outward appearance. The global fashion industry is worth over US$1T per year and it’s built around intangible brands differentiating largely commoditised products like white t-shirts and blue jeans.
Up until now, there was no ability to creatively express yourself visually on the internet because anyone could copy your content. A photo of Bondi Beach or a generative art piece were just random photos on the internet that anyone could access and you couldn’t prove you were either the artist or the owner. There was no way to prove the authenticity of what you displayed.
Twitter has just announced its intention to build NFT verification into its platform, allowing users to actually prove they own the image in their profile picture or banner.
This might seem like an insignificant step, but for the first time in the internet’s history you can have a unique, public, digital identity. This digital identity can be freely ported across platforms. Many crypto influencers already have large cross-platform followings on Discord, Twitch, YouTube, podcasts, Twitter, Telegram and Instagram. People follow the brand / community. This is very different from the more recent crop of online influencers that were typically restricted to the platform where they gained fame. This platform lock-in has been reflected in the out-sized value captured by the major platforms (Facebook and Alphabet alone generate +US$350B annual revenue across their properties) and the relatively insignificant amount of advertising revenue that is ultimately shared with artists and creators.
Beyond art — NFTs as a new alternative asset class
While NFTs have largely been the realm of crypto’s early adopters, there is potential for it to become an entirely new alternative asset class for institutional fund managers, including pension and superannuation funds.
While art has provided attractive returns for a long time, it has been complicated by low trading volumes and poor price discovery. Both problems are substantially improved with 24/7 online marketplaces for buying and selling NFT collections.
The toughest question is how do you value NFTs? The answer will depend on the collection.
Some collections are taking a portion of the recurring resale fees generated from trading and moving them into funds controlled by the NFT holders (community DAOs). Perhaps these funds will eventually become a dividend stream to NFT holders. Much the same way music royalties have become a desirable asset class.
Some artists are airdropping future NFT collections to the holders of the first original NFT collection. You can think of this like a free distribution of new art to your existing collections and fans. Imagine receiving a number of free Andy Warhol pieces after buying one of his early pieces! The Bored Ape Yacht Club team airdropped ‘mutant’ versions of the original collection to existing collectors (note the actual mechanism was super cool and involved airdropping ‘mutant serums’!).
Other collections have no intention of ever providing any additional economic value to NFT holders and therefore no clear path to providing additional economic value beyond any capital appreciation from the growing desirability of the artwork.
I suspect we will see more institutional involvement, including crypto VC funds that start adding NFTs to their portfolio holdings. Kevin Rose, a partner at True Ventures, has hinted on his podcast they will begin adding “blue chip” NFTs to their holdings imminently once they work through the legal structuring and security requirements. Even large corporates are getting involved. In August 2021, Visa paid approx. US$150,000 for a CryptoPunk.
Investing in NFTs
NFTs don’t have to be an investment. You can just buy something because it looks great with a fun community. I will also say the majority of NFT collections will be worthless in a decade, much like the crypto token ICO bubble of 2017 or the tech bubble in the late 1990s. Having said that, there is definitely money to be made investing in the right collections.
I’m certainly not an NFT investing guru, but based on my limited experience, which includes plenty of scrapes and bruises, it’s best to think about NFTs in two categories:
- Brands built around a community — this is perhaps the easier of the two to understand as an average consumer like me. In this scenario you are investing behind a brand and a team that you think can build a large community. The same as say a Nike or Supreme, it’s all about innovation and creating desirability. It’s critical you spend time in Discord groups and following key crypto influencers on Twitter to gauge the likelihood of a new project fitting in this category. Bored Ape Yacht Club, Degenerate Ape Academy, Solana Monkey Business, ThugBirdz and Trippy Bunny Tribe sit in this category.
- Fine art — this category is tough, particularly if you are an average consumer like me. It’s almost impossible to know at the original mint whether the collection is going to end up in this category. Typically, collections that end up as fine art have some sort of unique generative algorithm or minting process that means they are historically significant. Chromie Squiggles, Ringers and Fidenza sit in this category.
Interestingly, I’m of the view that CryptoPunks probably sit across both categories, which is why they are so special and deemed of such considerable value.
Tips and tricks
When you actually find a collection to invest in I have a few tips and tricks, happily learned from my own financially costly mistakes:
- All the trading liquidity is around the floor price and the super rare pieces (top 1% rarity). The middle ground is extremely illiquid. Don’t be the person that pays a premium for NFTs in the 2–80% rarity zone assuming you will get a premium to the floor price when it’s your turn to sell… I can tell you from experience it’s very unlikely to happen!
- In established collections, aesthetics can often be more important than rarity once you get below the top 1% super rare items. When pieces are randomly generated by an algorithm the aesthetics can vary significantly.
- Unless you are an art or NFT collector I wouldn’t try to get too clever trying to predict the next big collection. There’s a lot of projects that will be considered worthless in the years to come. Play it safe out there and leave the predictions to people with huge crypto-specific followings like Kevin Rose, Erick Snowfro or DC Investor.
- Always use a ‘burner’ wallet when minting new collections and engaging with online marketplaces! Think of this like having a savings bank account and a transactional bank account. If you had all of your savings and assets in your transactional account that you use every day you open yourself to higher risk of losses if your credit / debit card details are compromised. The same principle applies in crypto, except there’s no central authority to refund any losses. There are stories of people having their wallets drained and losing expensive NFTs like Bored Ape Yacht Clubs and hundreds of thousands of dollars worth of crypto tokens. All because they clicked on the wrong link or left their wallet passwords on a hacked computer desktop. Be careful. You’re on your own in the crypto Wild West!
Find your tribe!
Many in the establishment of the conventional art world have scoffed at the prices paid for many NFTs this year. Don’t let this deter you. Art is about community and pushing the boundaries of innovation. It’s not about getting bogged down in ancient history.
If you get a chance, check out these amazing virtual art galleries / collections curated by NFT investors. They’re best viewed from your desktop. It’s like visiting MOMA from your kitchen!
- 3D virtual gallery by Vincent Van Dough
- 3D virtual gallery by fxnction
- 2D gallery by Kevin Rose
- 2D gallery by DC Investor
- You can explore other 3D virtual galleries on Cyber
You can also explore and purchase NFT collections on popular marketplaces like Opensea.io or Solanart.io.
Remember, until we have 1 billion daily crypto users we are still early in this journey. One day, we might even see a humble CryptoPunk hanging next to the Mona Lisa at the Louvre.
If you enjoyed the article and want to learn more about crypto / NFTs from someone working across traditional finance and crypto please follow me on Twitter @Fraser_cc.
