I recently found a (short) investment thesis on Bitcoin which I wrote for myself in July 2014. I think I was way smarter in 2014. :-)

“Bitcoin, at its current valuation, provides a reasonable risk / reward profile.”
– me, in 2014

I dove into the NFT space in early 2022, and let’s say I feel compelled to write another investment thesis - this time on NFTs. And the first rule of the NFT club is “forget everything you think you know about NFTs”.

Let’s go through 3 observations:
1) NFT economics
2) Overpriced JPEGs
3) Art is the hook

1) NFT economics

Let’s start with the economics of NFTs.

Imagine you have build an amazing product and it’s flying off the shelves, what do you do?

Build and ship more product!

Nope - not in NFTs. Since NFT creator revenue comes from NFT royalties, and basically revenue = units * price/unit.

You could get more revenue if you raised the number of items sold, but dilution will drive the unit price down. Boo. So that’s why NFT creators focus on price/unit. If you create more value in your NFT, then your revenue goes up. The infrastructure to do this at scale wasn’t available for all until smart contracts was available end-to-end from creator directly to buyers.

2) Overpriced JPEGs

Left: CryptoPunks and Right: Mutant Apes from Bored Ape Yacht Club

Folks get really angry at NFT prices. Like really angry and upset at how the heck can a JPEG be worth HUNDREDS OF THOUSAND DOLLARS?! Don’t get confused. It’s not the art.

Sure there are NFTs which are valued based on art (think beeple), but if you are upset about collectible / art prices, take it up with … I dunno … the global art market. <insert expensive art piece being auctioned>

OK, so people are not paying for the art, what are they paying all that money / cryptocurrency for?

Access and status.

Status is somewhat easier - wow you own an ugly ape JPEG which Justin Bieber, Eminem, Snoop Dogg, Paris Hilton, Neymar Jr., Steve Aoki, Post Malone own?!?!!! Access is a bit more loosey goosey, but right now it looks like access to:

  • real-world assets: think swag and merchandise!
  • experiences: think invitation to conferences / forums, and
  • more / WL access to other NFTs: totally not recursion If you are worried about this being a unsustainable bubble, talk to the country clubs.

At the end of the day, the main question I have is if web3 can scale beyond an enclave of a small group of early-movers in a smokey cigar room? Maybe, but if you’re yelling at the JPEG, yell at the poor “utility” instead.

3) Art is the hook

Did you know… NFTs can be applied to other assets such as music and videos? I mean, I bet you do but do you hear about those NFTs lately?

Nope. it’s all of those degen overpriced JPEGs!

Music and Videos NFTs end up being valued in the same way… utility. Access to a music track, to an artist, etc. So why market it as a music or videos NFT? We take in visual information so quickly as humans, so profile pics (pfp) are so much easier for us to consume.

Here’s another way to look at this: it’s like having a black card IRL

The fact that pfps are unique makes it more personalized but the most important part is that the art conveys status like how flashing your black card says something about your net worth or status

What is the relevance of art in NFTs? It’s the hook.

Investing in NFTs?

Here is where I ask you to think about investing in NFTs - I am seriously considering doing more of it. I will address the elephant in the room: you don’t get it.

The issue is that folks think that they personally have to grok the utility, but honestly, the market doesn’t care.

I don’t appreciate or value membership to Augusta National Golf Club, which costs $100K-$300K. I also don’t care much for rare Pokémon cards, precious coins, jewelry.

But for those who are in the know, they get it.

“OK…”, people say, “… that just sounds like a bubble.”

Sure, but see above, pretty sure that golf clubs, collectible cards, coins, and jewelry are still a thing - if nobody believes in them, they’ll also be “bubbles” then.

“But… of course it’s going to be valuable, … it’s X!”

Ah, you grok it, so you value it, and therefore everyone else must too. You have fallen into the Dug fallacy: “If I am awake, EVERYONE must be awake!”

“No seriously, how can these JPEGs be possibly so expensive?”

The whales in this market include the blockchain natives - they got BTC when faucets were giving out 5 bitcoins per person, they bought ETH at ICO at $0.31 per ETH.

They reason in ETH and BTC, not in USD.

If you have thousands, heck millions, of ETH, what do 100s of ETH mean to you? Hey, you probably even bought CryptoPunks and BAYC and 100x whatever you put in there, so it’s the “play” money of the “play” money you are playing with now.

OK, now how do you leverage all that? So even if, or especially if, you don’t believe in the utility provided by NFTs, you could turn this into an advantage as someone who is more level-headed than others in the market.

You can pick out why some projects moon, and why others flop.

What are your best hypotheses?