• Quid NFTs?

• Models

  • ICOs

  • Dot-com bubble

  • Contemporary art

  • Common denominator

• Investment hypotheses

  • Investment vision

  • Investment vehicle

  • Scenarios and hypotheses

• Explanation of analysis and strategy

• Examples

  • Spells of Genesis

  • Rare Pepe

  • Cryptopunks

• The story-narrative

When you talk to people about cryptocurrencies and non-fungible tokens (NFTs), that conversation often quickly gravitates towards the financial aspect: "Did you make money from it?". On the one hand, this fascination surprises me, because the reason for the technology's existence is not to get rich from it. On the other hand, financial success captures the imagination, both seeing it in others and potentially in yourself. What recently, especially in 2021, captured our collective imagination more than “JPEGs” being traded for fortunes?

In this text, I ask the question whether there is value to be found in the world of NFTs. Regardless of my belief in the importance of this technological innovation for various reasons, my personal answer mainly leans towards "no", but for a specific subset of NFTs, I say a resounding "yes". I will argue here that historically significant NFTs are likely to be valuable, if NFTs play a role in our society.

For this purpose, I start by explaining what NFTs are. I then describe three models to inform the value proposition of NFTs and distil their common denominator. Next, I formulate my NFT investment hypotheses and explain the broader strategy. I end with three examples of historically significant NFT projects and a reflection on narratives.

Quid NFTs?

We can understand NFTs as digital certificates. A certificate is a document containing a stated truth (Merriam Webster's definition). A salient feature related to certificates is usually their importance to their owner. For example, that an old shirt belongs to you is of little interest compared to a certificate, which proves the authenticity of an artwork or the ownership of a residence.

Two properties related to digital and non-digital certificates require an explanation. The referent (Merriam Webster's definition) of a certificate, the stated truth, usually concerns something extrinsic or external to that certificate, such as possession of something or a particular qualification. For example, a paper document states that you obtained a degree or that you own a residence. The certificate thus proves a relevant attribute of a person or thing. In theory, digital certificates can refer to anything, whether digital or physical objects for which we used a paper document in the past. In practice, digital certificates currently refer mostly to digital media, which is stored elsewhere.

Because certificates state something, they can create scarcity. In both the non-digital and digital realms, this scarcity is artificial because there are no relevant hard limits on the number of paper documents or digital formulations that can state things. Therefore, certificates are little fungible compared to for example fiat money, because you can't simply exchange one diploma for another, but you can do that with dollars. It is best to think of this fungibility as a dimension: something can be unique (e.g. 1/1 art), limited (e.g. 100 editions of the same artwork) or owned by everyone (e.g. bitcoins and dollars).

If NFTs are digital certificates, than digital certificates are not necessarily NFTs though. Nevertheless, I think we ideally encounter digital certificates in the form of NFTs, because together with their more fungible counterparts, they enable a superior form of (digital) ownership. (From now on, I will use the terms "NFTs" and "digital certificates" interchangeably and they mean the same thing.) The minting and all subsequent transactions of such tokens is registered in a ledger, so that we know at any time who owns what digitally via a wallet. The public readability and decentralized organization (see Vitalik Buterin on types of decentralization) of this ledger make property scarce. The private writability of this ledger, through cryptography-based identification and linked to the structure of wallets, guarantee exclusive access to this property. This so-called distributed ledger technology (DLT), or more appropriately in this context blockchain technology, enables reliable digital property that is scarce and exclusively accessible (see section Investment vision).

Models

Understanding the nature of NFTs does not directly imply that value is revealing itself in this nascent investment class or a subset thereof. To explore this terra incognita, I looked for models to inform the value proposition of NFTs. I understand “models” as examples, modelling the thing we want to illuminate, and a "value proposition" is a statement about the value of something which can be right or wrong. The focus here is on analogies with other investment types and movements, rather than products or services we use. NFTs can theoretically be useful in all sorts of ways, but utility and value are regularly independent of each other, as they can both occur without each other. What has utility is not necessarily a good investment, either to preserve purchasing power or to grow it.

In the following sections, I compare NFTs in a broad sense with other investment types and their associated episodes of increased attention. Recurring elements for the models are definition or meaning, motivation for relatedness and distinction to (a subset of) NFTs, evaluation of the value of the investment type, examples of the investment type and instances from the realm of NFTs. After covering these models, I try to distil their common denominator.

ICOs

In an initial coin offering (ICO), a crypto startup sells a coin or token via a blockchain. On the one hand, this token acts as a vehicle to fund the development of a project or protocol, as in crowdfunding.  On the other hand, such a token is usually attributed functionality within the to be developed protocol to engage and incentivize stakeholders. Both aspects of ICOs solve real problems, as they facilitate the start-up and growth of new projects.

ICOs are part of the collective memory of the crypto community but are little known outside it. To shed broader light on this exotic phenomenon, I will bridge the gap with concepts from the financial world: initial public offerings (IPOs) and venture capital (VC). All three help companies raise capital. Relatively and in general, ICOs and VC do so at an earlier company stage with smaller amounts than IPOs. However, IPOs and VC differ from ICOs in terms of compensation for funding. Investors receive a stake in the company in the former case. They receive a token in the latter case, usually with functionality in the protocol, but without ownership in the company. Despite this difference, a major merit of ICOs was – in my opinion – that they democratized VC and gave everyone a chance to invest early in startups.

There are a number of similarities between the rise of ICOs and NFTs. The culmination of the ICO hype happened around the turn of 2017 into 2018, which marked the end of the crypto bull market at the time. The timing of the culmination of the ICO hype parallels that of NFTs, as interest in NFTs peaked in the next crypto bull market of 2021. Presumably, collective attention could not remain focused and the ICO hype gave somewhat way to that of NFTs. In the ensuing general crypto bull market, NFTs – and not their fungible counterparts – absorbed opportunists, speculators, momentum chasers, who wanted to make quick and big money, by launching NFTs in the primary market or trading NFTs in the secondary market.

Without juggling with concrete numbers, the fate of the practice of ICOs and the value of related tokens is clear. Hardly any ICOs are currently taking place (primary market) and most projects failed to generate persisting value for their token, with prices converging to zero as a result (secondary market). The latter is typical of what internet entrepreneur Chris Dixon calls the Babe Ruth effect in VC, which also applies to ICOs. Despite hitting relatively many home runs (winners), the baseball player missed the ball even more often (losers). Many investments are loss-making, but some are hugely profitable. By focusing not on the frequency of correctness but on the magnitude of correctness, this somewhat counterintuitive investment strategy can still lead to a favorable expected value of an investment portfolio.

Finally, we look at examples of ICOs. One of the most successful blockchain projects with ditto ICO is Ethereum. In 2014, well before the ICO hype, 1 bitcoin allowed you to buy 2000 ether at around $0.31 each. Since spring 2016, Ethereum established itself as the second largest blockchain by market capitalization and its developer community is by far the largest. Another token, issued through an ICO via Ethereum and related to IPFS, is Filecoin. This incentivizes to offer unused data storage online, so that data can be stored more decentrally and robust. Despite its societal utility and specific relevance to NFTs, the price followed a bumpy trajectory and Filecoin dropped below its issue price again in 2023.

Dot-com bubble

Much has already been written about the excesses of economic speculation, including on the technology, internet or dot-com bubble in equities, which burst in spring 2000. So that the comparison with NFTs and simultaneously ICOs doesn’t lead us too far, I rely mainly on 2 memos by Howard Marks: a pre-mortem analysis in Bubble.com and a post-mortem in We're Not In 1999 Anymore, Toto. Let us define a bubble in line with Marks' conception of market cycles: a price appreciation of a good, far removed from the secular trend – secular in the sense of long-term (Merriam Webster’s definition) – with an explicit psychological component. Economic bubbles are timeless, as historical descriptions of the 1720 South Sea Bubble illustrate, and can occur in all kinds of investment products.

We start by exposing central similarities between the NFT hype and the dot-com bubble. (I use the term "bubble" with internet stocks because its use is common practice, but I don’t insinuate a fundamental difference with the ICO and NFT hypes.) In January 2000, Marks neither doubted that the internet would revolutionize society nor that you would better not invest in it. Profound technological innovations like the internet and NFTs induce a sense of "this time it'll be different" resulting in a “valuation parameter vacuum”. For technology companies in 2000, price-earnings ratios (P/E ratios) were outdated notions of the past as people invested in concepts. Such parameters remained calculable in theory but were neglected by investors in practice, as there was little, no or negative profit. On the contrary, fungible tokens issued in ICOs and NFTs suffer from a fundamental lack of historically accepted parameters, even in theory. There is no P/E ratio of a token's utility or the story behind an NFT. This does not mean that these investment products will remain devoid of valuations, but that they provided fertile ground for insane prices. In the absence of other signs, people look to price to determine how an investment product is doing.

Related to the valuation parameter vacuum, especially for ICOs and somewhat for NFTs, was the role of VC and IPOs in the dot-com bubble. Too much money sought its way to too few ideas, when startups raised venture capital or companies attracted public funding through IPOs. In 1999, VC had a "triple-digit annual return" and in 2000, IPOs averaged a 55% rise on their first day of trading. The "mania-within-a-mania" of IPOs made public funding an end in itself rather than a means to build a company. IPOs offered so-called "exit liquidity" to VC: an opportunity for early, privileged investors to sell their positions to others – a term that colors many crypto conversations.

Marks is convinced that the bursting (falling) is proportional to the size of the bubble (rising). So after its best year in 1999, the NASDAQ Composite index, the benchmark of the technology sector, had its worst year in 2000 and the index was trading lower than half 10 months after its top. In addition, nine times more Internet companies closed in the first half of 2001 than in the first half of 2000. The challenge for internet investors was to select the winners and determine their value without buying at any price. In practice, during the bubble, the market was valued as if all direct competitors would win, despite fierce competition among themselves. Yet, after the bubble, even future winners experienced huge price declines, as the valuation of a single instance rarely move against the flow of the market.

Amazon and Yuga Labs are respectively a winner in hindsight from the dot-com era and an alleged winner from the realm of NFTs. Big Tech giant Amazon was founded by Jeff Bezos in 1994 and held its IPO in 1998. What started as an online bookstore grew into an e-commerce giant and provider of web services (Amazon Web Services). When the bubble burst, Amazon was not spared, as its share price fell 95% from December 1999 to October 2001, but by July 2021, shares were trading at 3.200% higher than the bubble top and 68.000% higher than the post-bubble bottom. In April of the same year 2021, Yuga Labs launched the Bored Ape Yacht Club (BAYC). This is an NFT collection of 10.000 profile pictures (PFPs) with unique characteristics for each bored ape. Originally, you could mint them for 0.08 ether each. Because of their popularity, the floor price (cheapest price of an NFT from a specific collection) peaked about 190.000% higher on 1 May 2022 to 153 ether but dropped 85% soon after in the summer of 2022. Whether Yuga Labs will win with their bored apes in the longer term like Amazon remains unclear. Nevertheless, they are exemplary of the enthusiasm and speculation that accompanies nascent, promising technological innovation, as with the ICO hype and the dot-com bubble.

Contemporary art

To compare NFTs with the world of contemporary art, I turn to Don Thompson's book The $12 Million Stuffed Shark, The Curious Economics of Contemporary Art. What constitutes contemporary art is surprisingly difficult to define, but Thompson suggests an easiest definition: that which is sold by the major auction houses in contemporary art sales. Christies and Sotheby's, both founded in the 18th century, form a duopoly and are the "branded", "value-adding" auction houses. They sell NFTs under the rubric of "contemporary art", sometimes together with physical works. This bare fact suggests that digital certificates and digital art are taken seriously by serious agents, established institutions like auction houses and affluent art collectors.

If Thompson's book makes one thing clear, it is that the world of contemporary art is utterly eccentric. Money, status and connections rule when competing for the culturally significant objects of our time. NFTs are not a panacea for all questionable practices from the world of contemporary art, but their blockchain nature enhances reasonableness.

Casey Reas' essay Collecting in the Age of Digital Production helps us understand the two-part innovation of artistic NFTs: art as information, but collectible. The first comprises a shift in the art world from tangible objects (e.g. a painting) to digital data (e.g. an mp4 file). Reas refers to the transition from vinyl records, compact discs, ... (continuous) to digital files such as MP3 (discontinuous). As a result, ownership properties associated with the tangible, artistic object such as trading, lending and giving away expired. In theory, licenses prohibited these actions in the music business. In practice and applicable to all digital media, it made little sense to attribute property value to things which were available to everyone via the internet. This leads to the second shift made possible by blockchain. Because digital data cannot be collected directly, artists register digital certificates on blockchains, which record ownership of the digital data. This way, digital information (hypermedia) remains universally accessible by all as a public good, but only a few can individually own the related digital certificates (cryptomedia) as personal property (see Jacob Horne). Digital media thus becomes simultaneously free for consumers and expensive or valuable for producers, instating feasible abundance (see Matt Dryhurst).

This technological and abstract (r)evolution has profound implications. NFTs are more liquid than tangible art because they can be traded globally via blockchain anytime and instantly. This makes physical barriers disappear and tends to break down societal ones. Today, for instance, a humble collector from the developing world can buy a digital work from Damien Hirst's studio in the UK. Traditional middlemen like auction houses and dealers are no longer needed to create a market and trade artworks. Their high commissions (50% is common among primary dealers) and premiums (for buyers of art through auction houses) are melting away on contemporary NFT platforms such as Opensea. As less money sticks with intermediaries, there is more left for collectors and/or artists. For the latter, blockchain even makes it possible to ask for royalties on secondary sales.

Blockchain records a transparent and immutable trail of digital certificates. It allows us to trace the authenticity of a digital certificate and identify forgery. This offers a solution for art in general and contemporary art in particular, as works are sometimes easy to duplicate and conceptual in nature. Illustrative are Andy Warhol's silkscreens, of which the Andy Warhol Authentication Board assesses their authenticity by observing the "presence of the author", and Yves Klein's intangible art, collectible only through a paper certificate. In addition, blockchain proves the provenance of artworks, a list of previous owners – not necessarily where the work was exhibited. This sounds of minor importance, but in the world of contemporary art, prominent collectors such as Charles Saatchi influence the value of works.

When advocates claim that contemporary art is an attractive investment, they usually refer to the Mei/Moses index. This index includes artworks purchased at least twice in an auction because auction houses report these repeat sales in a transparent and public way. However, this indicates a selection bias for successful art, as privately traded and art rejected for auctions does not make it to the index. Despite limitations, the index reveals two interesting findings: the cyclical and independent nature of the art market. Even successful art not only increases in value but also experiences long-lasting, sharp declines. From 1990 to 1993, the index of contemporary art halved and after it took more than 10 years to recover. Besides, the art market moves barely together with the financial market (stocks and bonds) resulting in a correlation of almost 0 – a diversification dream. Successful art was spared from a deep and sustained depreciation during the recessions of 2001 and 2008 (global financial crisis). May and Moses find a fortiori that in falling stock markets, investors sell stocks and buy "museum quality" art.

Thompson argues that art generally remains neither a good investment nor an efficient investment vehicle. Most art will not appreciate, in part because typical expenses such as transactions, insurance and storage eat away any profits. We tend to think so, because exceptionally profitable sales make the news. On the other hand, auction houses exclude four out of five offered contemporary works from their prominent evening auctions. Even a branded collector like Saatchi with the privilege of shaping the market sells 40% of his art at a loss, 40% at a moderate profit and 20% at a large profit. According to Thompson, you may achieve the latter by looking for innovators: identify the trend first and then the young innovative artists.

The price of an artwork can fluctuate, but what is it worth? Contemporary art is notoriously difficult to value. For instance, what price do you put on one of Felix Gonzalez-Torres' Candy Works, installations of packaged sweets you can eat? In the primary market, when traditionally a dealer offers an artwork, price primarily signals the artist's reputation, the status of the dealer and intended status of the buyer. Besides these extrinsic factors, usually no intrinsic property determines price, including quality or artistic merit, except the size of an artwork. The price rather creates than reflects value – the Veblen effect. In public secondary sales, the blow of the auction hammer marks a historical moment that equates price and value. An artwork becomes meaningful because it is expensive. Even museums are more likely to promote works for which they have paid (a lot) instead of donated art. All these oddities indicate the primacy of (perceived paid) price over the (intrinsic) value of an artwork.

Both the world of contemporary physical and digital art have spectacular price appreciations and illustrious sales. An abrupt appreciation of a physical work happened to John Currin's The Fishermen, which was bought in 2002 at $100.000 and sold 18 months later in 2004 for $1,4 million. In the realm of digital art, Xcopy is one of the protagonists. This artist has been selling glitch art by means of NFTs since 2018, which have since appreciated astronomically and are among the most expensive digital art. For instance, Xcopy sold the work Right-Click and Save As Guy in December 2018 for 1 ether or $90 and in December 2021 collector Cozomo de Medici acquired the work for 1600 ether or $7 million. In the digital realm, things tend to go even harder than in the physical.

Finally, I want to remark that the comparison of NFTs to contemporary art can be somewhat generalized to other collectibles, such as coins (numismatics) and Pokémon cards. Collectibles rely less on artistic creativity but remain part of the culturally significant objects of ours or earlier times. Digital collectibles are more about sets of properties, which we can collect through digital certificates. Collectibles thus become more liquid and provided with a reliable trail. Sensational sales also happen to collectibles, such as the sale of Illustrator Pikachu Pokémon card for over $5 million. In this respect, the spirit of the current NFT movement more broadly boils down to the decentralized collectibility of objects (see Chainleft).

Common denominator

After an elaborate exploration of the ICO hype, the dot-com bubble and contemporary art, I distil relevant common features from these informing models. These are respectively functional tokens of crypto startups, shares or ownership of internet companies and physical traditional artworks. Such tokens and shares are rather fungible and art is rather non-fungible in nature.

Both the internet and tokenization had the potential to revolutionize our society. This is less the case with contemporary art, as there are no direct practical implications, but it could possibly indirectly change our society with its cultural significance. Marks notes that changing the world and making money from investing are two different things. It proved to be not evident to invest successfully in revolutionary technology such as radio, automobiles and aviation.

Related to innovation are the apparent or real difficulties in appropriately valuing new investment products. Marks speaks of a valuation parameter vacuum. For internet stocks investors could theoretically calculate P/E ratios, but in practice these were uninformative. Quantitative parameters were calculable for fungible tokens, but there was insufficient consensus on their significance or historical data to compare with. Contemporary art derives its value mainly from qualitative or even unpredictable aspects and less from quantifiable ones. The lack of reliable parameters results in circular valuations: value does not so much determine price, but price indicates value. In a way, disconnected from value – it remains a feedback loop between value and price – price development has its own dynamics.

Innovation accompanied by missing reliable valuations not rarely leads to excessive enthusiasm, part of the psychological component present in economic bubbles. Analysts sometimes claimed beforehand but mostly concluded afterward that internet shares in 2000 and fungible tokens in 2017 were in a bubble phase. The term bubble is used less convincingly with contemporary art, but the art market too has its cycles with highs and lows or alternating deviations from the secular trend.

In such an investment climate, the challenge is to pick winners. Marks highlights this in the context of internet stocks. Don Thompson acknowledges that very little art appreciates considerably in price, as evidenced by Saatchi's results. Even baseball player Babe Ruth often misses the ball and not just venture capitalists or ICO investors.

All these similarities between the models translate into simultaneously convergent and divergent price movements. A specific stock, token or artwork rarely moves against the direction of the market's aggregate. In a bubble or bull market most similar investment products appreciate and after bursting or in a bear market they depreciate. Regardless of this cyclical convergence at the macro level, at the micro level, few investment products will increase in price over the long term and diverge from the majority that dies out (see below the image from Tradingview).

We can understand NFTs as an investment class and the phenomenon of NFT hype or bull market in line with the three models discussed. NFTs are the result of promising technology, have no reliable valuation parameters, are bubble-sensitive and few will appreciate over the longer term. This does not create the expectation that we will easily invest successfully in NFTs...

Investment hypotheses

There are numerous ways you can try to grow your capital. The strategy, which I will explain below, is two-part. First, I formulate a broader, longer-term prediction or macro vision about the future (investment vision hypothesis). Second, I select an investment vehicle wherewith my invested capital can grow if that prediction comes true (investment vehicle hypothesis). This approach to investing is fruitful because it prevents us from neglecting important considerations. Your prediction about the future can materialize without you gaining anything by choosing the wrong or lacking an appropriate investment vehicle. You can also take positions on specific investment vehicles in isolation without a broader vision of the future.

Investment vision

A macro vision of the future can be substantively about anything, such as the economic growth of a country (e.g. India), the importance of a sector (e.g. renewable energy), the impact of a technology (e.g. artificial intelligence), the supply of agricultural commodities (e.g. grain), ... Here, I am stipulating as investment vision the increasing societal importance of digital certificates.

Hypothesis 1: NFTs will play a role in our society.

In this text, I already argued fragmentarily specific innovations of digital ownership linked to the models discussed. In the context of ICOs, I mentioned that tokens could function to attract capital and motivate stakeholders. In addition, ICOs democratized the privileged world of venture capital. In relation to contemporary art, I pointed to the reliable, transparent trail of authenticity and provenance that digital certificates offer. Moreover, it removes obstacles, which hinder the trading of contemporary art, such as physical distance and the reliance on intermediaries to create a market. We also benefit culturally from NFTs, because despite the fact that few usually own them (cryptomedia), yet generally everyone can consume the associated creative content (hypermedia).

In the Quid NFTs section and the section on the dot-com bubble, I suggested that digital certificates herald a technological innovation approaching the order of magnitude of the internet. This is because NFTs enable ownership in the digital world, specifically the set of computers communicating over the internet. This form of ownership is highly compelling and desirable – ideal ownership (?) – as it guarantees exclusive access and scarcity. The cryptography underlying crypto wallets allows only you to have exclusive access to your property and manage it (private writing). The blockchain, a publicly and decentrally maintained ledger, additionally lets you reliably consult the scarcity of your property (public reading).

In this way, this property differs both from its physical counterpart and existing digital variants enhancing both significantly. From the introduction of (physical) property in the digital realm follows programmability of computers and liquidity or instant, global connectivity of the internet. The nascence of such digital ownership also improves existing digital variants. Data namely becomes possessable for the first time. Before, this was not possible due to copyability, for instance in the case of mails and circulating internet memes, or it was enabled by an intermediary's central database, such as Fortnite items managed by Epic Games. With the improvements of blockchains property becomes liquid, programmable, reliably exclusive and scarce. In my view, this is not a storm in a teacup or an unnecessary gadget but of fundamental and existential importance to our society.

Investment vehicle

However, formulating a macro vision of the future even if it unfolds is not enough to grow your capital. Sectors such as tokens (ICOs), internet stocks (dot-com bubble), contemporary art, radio, automobiles and aviation bear witness to this. Investors namely require a good understanding of the investment vehicles available and how they relate to their macro vision.

One obvious way to cover your macro vision is to take a position in an Exchange-Traded Fund (ETF). This is an accessible investment fund that trades like a stock on an exchange at typically low costs. With an ETF you can obtain a "basket" of different investment products in one move gaining broader exposure to a country, sector, ... Legendary investor Warren Buffet recommends "ordinary" investors to allocate their capital in ETFs, especially in those that act as a proxy for the S&P500. This is an index of the 500 largest companies listed on US exchanges. The related ETFs had an alluring price appreciation over the years and besides attract the most capital. Yet, ETFs record mixed results regardless of the fact that they invest in promising industries, such as green ETFs. This may be due to industry specific characteristics, but also to at least one general one: ETFs tend to have both winners and losers on board.

In line with that, Buffet argues the key to investing is not about estimating the success of an industry but assessing the longer-term competitive advantage of companies. Redirected to NFTs, you should look for those with a clear competitive advantage over others rather than the entire investment class. For digital certificates – even more so than for more traditional investing – this seems an extraordinarily difficult task because the investment class can expand indefinitely despite programmable scarcity. A proliferation of NFTs is conceptually obvious due to the permissionless nature of the technology. Consequently, we could empirically observe an explosion of NFT projects in 2021 and 2022.

In my quest for value in the NFT world, I was originally guided by the first-mover advantage. This concept is central to a prominent Bitcoin narrative, namely that the first cryptocurrency possesses a unique advantage over later cryptocurrencies. First-mover advantages have different origins, but with Bitcoin they mainly originate from the network effects of a protocol which introduces a superior form of money. Therefore, the Bitcoin protocol and the bitcoin token enjoy a value proposition, which is difficult to supplant by other protocols with tokens that aspire to do something similar.

Are there first-movers in the realm of NFTs? Can we formulate compelling value propositions such as for Bitcoin? I am inclined to answer "no" and "yes", respectively. Although somewhat informative, I consider it doubtful to call certain NFTs first-movers, without breaking open the concept. More importantly for NFTs, there are "firsts" or first versions of different types of digital certificates. These act as a heuristic or mental shortcut for determining what is valuable. Consider, for example, first editions of books, such as the Philosopher's Stone from the Harry Potter series auctioned for £356.000, and Kevin McCoy's digital artwork Quantum, marketed as the first NFT, auctioned by Sotheby’s for 1,47 million.

Although firsts provide an excellent starting point for a quest for value, it is advisable to understand this suggestion not strictly but as directional. On the one hand, the first version of a specific type is likely to enjoy less interest from collectors than a general type. For example, the first NFT collection of animals might prove valuable, but the first of koalas with hats will rather not. On the other hand, collectors should not limit themselves to only the first version of a type, as NFT projects with a rich story regularly follow in the historical vicinity of firsts. Thus, the importance of a first version may even be overshadowed by that of slightly younger variants.

In this way, I want to shift the fixation somewhat from the first version of a type of NFT to historically significant NFTs (see ZeroG on historical NFTs). The historical component can be objectively established in the form of an early timestamp and correspondingly old age of the digital certificate. The public readability of blockchain and the related verifiable trail of NFTs lead to their reliable identification. The significance of digital certificates is a more subjective matter, which blockchains do not determine, but depends on an examination of narratives from the NFT canon. You can namely not literally read off which NFTs started the digital art movement. Thus, the primacy of narrative rooted in a commonly recognized truth, being a publicly readable ledger, offers an extraordinarily suitable investment vehicle.

Hypothesis 2: NFTs with historical significance will be valuable.

A key role here is played by self-proclaimed NFT archaeologists and historians, including Martin Lukas Ostachowski and Adam McBride. By systematically scouring blockchains, they resurfaced forgotten projects and reconstructed the history of NFTs graphically represented by timelines. This led to the finding that relatively few old NFT projects exist, which offers investors focus and lets them successfully navigate within the overwhelming mass of digital certificates. NFT historian Whiterabbit puts it this way: "there is no limit to the supply of tokenized assets that will emerge in future, but there is an iron-clad hard cap on the scarcity of those in the past".

Scenarios and hypotheses

How do the investment vision hypothesis and the investment vehicle hypothesis relate to each other? In the "mainstream" scenario (M), digital certificates play a role in our society. If digital certificates play a role in our society, than there is a high probability that those with historical significance are valuable. In other words, if hypothesis 1 is true, than there is a high probability hypothesis 2 is true.

In the "death" scenario (D), digital certificates play no role in our society. Those with historical significance and, by extension, all digital certificates are worthless. In other words, hypothesis 1 and hypothesis 2 are false. This happens when the infrastructure behind digital certificates fails to perpetuate digital property.

In the "niche" scenario (N), digital certificates play no role in our society but infrastructure continues to support them. This scenario is worth mentioning because digital certificates currently reside in this grey area between the mainstream and death scenario. If digital certificates play no role in our society, than there is a noteworthy probability that some are valuable anyway, especially those with historical significance. In other words, if hypothesis 1 is false, than there is some probability hypothesis 2 is true. On the one hand, collectibles represent a niche within the world of investable things – yet of considerable size in absolute terms. On the other hand, digital certificates may constitute a niche within the world of collectibles. Even as a niche of a niche, historically significant, digital property may prove valuable.

When I speak of "probability", I must emphasize that this is about Knightian uncertainty, where the probability of an event is unknown. (When we consider the probability of an event to be known, Frank Knight speaks of risk. For example, if we toss a normal coin, the probability of heads-up is 50%.) I understand the reliability of probabilities here as a spectrum from known, objective to unknown, subjective probabilities. Predicting the probability of hypothesis 1, hypothesis 2 and combinations of these hypotheses is subjective and the result of my personal judgement. Venn diagrams below show my rough estimate of the relevant probabilities for the three scenarios and the two investment hypotheses.

Explanation of analysis and strategy

I suppose the market for digital certificates is inefficient, as not all potential participants in that market have all the relevant information. From nascent technology and the associated investment class whose societal implications are underexposed and little understood, you cannot expect current prices to reflect intrinsic value. Such lack of efficiency in the market invites the application of analyses to outperform the aggregate of the NFT investment class.

It is appropriate to mention what kind of analyses are not central to applying the investment strategy described, in particular technical and quantitative analysis. Technical analysis relies on information regarding the trading of an investment vehicle, which translates into price movement and trading volume. NFTs are quicker and easier to trade than their physical counterpart, but typically less liquid than fungible investment vehicles, such as cryptocurrencies and equities. Consequently, digital certificates tend to have utterly capricious price movements and low trading volume. The only technical motto, in my opinion, is therefore: "buy low and sell high".

Quantitative analysis is also of secondary importance in this way of investing. In the context of NFTs, the parameter supply comes to the fore. Is an NFT unique (1/1) or an edition of, for example, 100 (1/100)? For collections the rarity of properties of specific NFTs becomes relevant. What is the probability that an NFT has a particular trait as part of a collection of, for example, 10.000? Quantitatively you better buy, ceteris paribus, the NFT with a smaller supply or higher rarity.

This investment strategy essentially relies on qualitative fundamental analysis. In fundamental analysis, you look for the intrinsic value of an investment product. If you judge that it is above the current market price, than the investment product is undervalued by the market. The assumption prevails that over time the market price will approach the intrinsic value. Here, qualitative information dominates as input for selecting undervalued investment products. Many kinds of non-quantitative data fall under the umbrella of qualitative information, such as revenue models and sector characteristics. In the context of NFTs, investors regularly analyze the community surrounding an NFT collection, utility attributed to NFTs and roadmap of a project (the projected development of community and utility). Although these attributes may contribute to the intrinsic value of an NFT project, they should not be part of an analysis of NFTs enjoying another central value proposition such as historical significance. Moreover, it seems that NFT projects with fewer external dependencies, such as support of a third-party to generate value, are more suited to fulfil the role of a store of value (see Derek on storing value in digital objects).

Analyses ideally translate into (subjectively estimated) probability distributions – set of possible outcomes (prices) and their associated probabilities. For simplicity, if you assume equal expected returns for different investment vehicles, than a high probability of success implies a relatively small profit and a small probability of success implies a relatively large profit. For historically significant NFTs I expect a relatively high probability of success compared to other promising NFT projects. This implies that in a success scenario with this investment strategy, I only expect a relatively small profit by NFT or crypto standards.

Nevertheless, this investment strategy contains interesting advantages because it requires only a relatively small investment of your time. If you not only want to seize the opportunity to grow your capital but protect it at the same time, than with high probabilities of success you need to select fewer investment vehicles or less diversification than with small probabilities of success. Moreover, with historically significant NFTs you need to analyze fewer external dependencies and reassess them more sporadically. Correspondingly, you can expect such NFTs to have a more stable intrinsic value, milder price fluctuations – potentially still very strong at low liquidity – and a more regular longer-term price appreciation. In such a climate, the timing of buying and selling is also of less importance and you don’t have to flip NFTs under the influence of a shorter-term, flashy hype. Consequently, this investment strategy requires little concrete effort but mainly patience and conviction to capitalize.

Examples

In this section, I give examples of early NFT projects. I forced myself to select only three. In doing so, I chose only delineated sets of digital certificates with a clear narrative. I select these examples based on my personal assessment of their cultural significance. As always and everywhere, the acronyms "not financial advice" (NFA) and "do your own research" (DYOR) from crypto jargon continue to apply.

Spells of Genesis

From December 2014, Everdreamsoft, founded by Shaban Shaame, rolled out the collectible card game Spells of Genesis. This is the first game to employ NFTs to represent and possess in-game objects. To do this, Spells of Genesis uses the Counterparty protocol (see Counterparty explorer XChain), which extends Bitcoin's functionality with smart contracts. This allows you to mint and trade tokens other than bitcoin on the Bitcoin blockchain. It is noteworthy that Spells of Genesis ratifies their in-game objects both centrally and decentrally (exclusive disjunction). As of late 2017, you could transfer collector cards from their centralized database to a decentralized blockchain, such as Counterparty or Ethereum (blockchainization).

From the collection of all Spells of Genesis NFTs, I try to identify collectible cards worth mentioning. An ideal starting point are the collectible cards which JP Janssen notarized. Spells of Genesis NFTs, as digital certificates, did not originally refer directly to their creative component, as digital data. Therefore, JP Janssen recorded the authenticity of some Spells of Genesis NFTs in November 2015, using Counterparty broadcasts of the (truncated) hash output of their creative component. For these notarized collector cards, we can expect a price premium because they date from 2015 and we can verify the authenticity of their creative component through a blockchain record from the same year.

Everdreamsoft minted FDCARD as NFT in March 2015 and at a later unknown time they published the related image. NFT archaeologists consider FDCARD to be the first of its kind in some key areas (see Equ1l1br1um on FDCARD). It is the first gaming and interoperable NFT, as Everdreamsoft granted functionality to FDCARD in both Spells of Genesis and their other game Moonga. In addition, FDCARD was distributed as a reward for Folding Coin participants, who offered their computing power to Stanford University to search for solutions to diseases. This makes FDCARD the first proof of work digital collectible.

In June 2015, Everdreamsoft minted SATOSHICARD, the first digital collectible depicting Satoshi Nakamoto, the pseudonymous developer of Bitcoin (see Equ1l1br1um on SATOSHICARD). The more significant innovation unfolded as Christian Moss integrated this NFT, along with CNPCARD and SARUTOBICARD, into another game, SaruTobi (see LeonidasNFT on SaruTobi). Consequently, SATOSHICARD is the oldest interoperable NFT with functionality in two independent games. NFT archaeologists call this the birth of the metaverse which ideally supports digital certificates in various or all digital universes including games.

Rare Pepe

Matt Furie first revealed the fictional character Pepe the Frog in his comics magazine Play Time. In 2005, he illustrated the stories of Pepe and his three housemates in the full-fledged comic book Boys Club. Pepe emerged subsequently as one of the most important internet memes. In September 2016, a certain Mike linked three Pepe memes to Counterparty tokens and founded the Rare Pepe Directory website. This marked the birth of the Rare Pepe NFT set, which came to its conclusion in February 2018 with a total of 1774 different Pepe memes as part of 36 series. The unofficial Rare Pepe Foundation entity consisting of "scientists" examined whether submitted Pepe memes met some basic rules and then decided whether or not to include them as NFTs in the collection. To enhance the collecting experience of these NFTs Joe Looney developed the Rare Pepe Wallet. To this day, Pepe remains successful as the subject of numerous tokenized memes part of new collections, including the Fake Rares project that started September 2021.

Jason Bailey, also known as Artnome, calls Rare Pepe NFTs the origin of CryptoArt, an art movement and style propelled by the technological innovation of digital scarcity. Everdreamsoft was already integrating art into its Spells of Genesis collectible cards, but no one else could create such NFTs. Rare Pepe adopted the form of the collectible card but allowed everyone to contribute to the Rare Pepe collection. This way, it blossomed into an inclusive and community-driven project truly in the spirit of blockchain. The tandem consisting of Rare Pepe Directory, the overview of curated Pepe memes, and Rare Pepe Wallet, its collecting and trading place, would become the model for issuances of digital works by artists. From the democratic nature of the project, it followed that artists were allowed to sell their Rare Pepes commission-free in their preferred quantity and at their preferred price.

It seems impossible to select specific NFTs from such a vast and diverse collection as Rare Pepe. According to the Rare Pepe wiki, age (issue date), rarity (supply) and "dankness" (memetic power) determine the value of a Rare Pepe NFT. In addition, the Rare Pepe collection contains some firsts in general or within the set: with RAREPEPE the tokenization of pepe memes begins; UFOPEPE is the first NFT which refers to a gif file; DJPEPE is the first audio-visual NFT with exclusive music available to owners; SARUTOBIPEPE is the first playable Rare Pepe in the Sarutobi game as it unlocks a special skin; PEPEBALT is the first tokenized game. Remarkably, with these last three NFTs, the Rare Pepe project explored the use of digital certificates as access tokens to bonus material.

Cryptopunks

Cryptopunks is a set of 10.000 NFTs inspired by the London punk scene, the cypherpunk movement and Daft Punk. Each cryptopunk consists of 24x24 pixels and is unique, although sometimes they differ by only 1 pixel. The characteristic appearance of each cryptopunk was randomly composed by algorithms based on 92 attributes, including body type, such as female or zombie, and headgear, such as mohawk and hoodie. Cryptopunks' smart contracts contain, in the form of a hash output, only one image depicting all 10.000 cryptopunks. By means of coordinates (0-99; 0-99), each NFT refers to one specific cryptopunk (see Sean Bonner on Cryptopunks).

The birth of the Cryptopunks project had a bumpy ride (see The Norwegian on the history of Cryptopunks). On the 9th of June 2017, Larva Labs (see Yash Bora on the history of Larva Labs), the duo John Watkinson and Matt Hall, launched an initial smart contract defining cryptopunks. Over the next few days, interested parties claimed all cryptopunks, mainly due to the publicity that a Mashable article created. Not much later though, it was found that the smart contract had a crucial bug. Cryptopunks were not tradable as the buyer could buy a cryptopunk without paying the seller for it with ether. Therefore, Larva Labs launched a new smart contract on the 23rd of June without the trading bug, but referring to the same image of 10.000 cryptopunks as did the original smart contract. Larva Labs gifted these new cryptopunks via airdrop to the original cryptopunks claimers and these acquired the status of official cryptopunks. The original cryptopunks continued to exist under the radar until, in January 2022, FrankNFT developed a “wrapper” smart contract that made the original cryptopunks tradable. Consequently, 20.000 cryptopunks exist: 10.000 original ones (V1 punks) and 10.000 official ones (V2 punks).

Cryptopunks mainly know their historical significance and even mainstream fame as the first PFPs. Although there are older NFTs that were used as PFPs, such as Twitter Eggs on the Namecoin blockchain, Cryptopunks was the first defined set of PFP-NFTs. In 2021, Cryptopunks propelled the NFT hype. First, it acted as a prototype for other PFP projects, namely the amount of 10.000 and some attributes return in other collections. Second, it popularized the use of NFTs as PFPs for identification on social media, such as Twitter. Moreover, it can be argued that Cryptopunks is the first generative art to be collected via an NFT (see MoonCatRescue on generative art).

The story-narrative

Hopefully, this introduction to Spells of Genesis, Rare Pepe and Cryptopunks makes at least one thing clear: there can be rich narratives behind tokenized hypermedia with cultural significance rooted in technological innovation. In this concluding section, I reflect on stories or narratives and highlight their important role, which in turn is a story or narrative itself and can therefore be called the story-narrative. Still, one can legitimately wonder about the relevance of this imaginary fabric for investors....

A conservative view of investing requires financial compensation for offering your capital. For instance, you can buy government or corporate debt (bond), a part of a company (stock) or real estate. Respectively, you receive an interest payment, a share of the profit (dividend) or rent in return. When companies, countries or real estate do not provide financial compensation, they still generate at least cash flow, which functions as input for quantitative analysis. If cash flow is missing, than you can judge to better allocate your capital in things with utility. Products like toilet paper and raw materials like lithium have some value because people use them (within a production process). Yet, some even invest in things which derive their main value not from utility but from stories. For instance, gold is valuable because we consider it a store of value and we prize artworks of which we believe write art history.

NFTs belong to the latter category. Like other valuable things, you can lend NFTs as a financial instrument to receive a compensation or use them as collateral for a loan. In addition, a digital certificate can in theory mean anything as the functionality of tokens is programmable at will. Consequently, allocating your capital in an NFT does not preclude a financial compensation or an analyzable cash flow. Some projects already offer some utility to NFT owners including in the form of access to a community, voting rights and benefits in the digital world or beyond. In practice and to date, we have to rely mostly on narratives to justify any value of NFTs. This applies a fortiori to the NFTs which I place at the center of this text and of which I claim are investment-worthy.

The importance of the story factor does not diminish the value of something because all investments depend on it – unless perhaps investing outsourced to computer algorithms. The story component appears more to the fore, when an investment product has no cash flow and hardly any utility. Yet even in investment products with financial compensations, narratives cannot be ignored. A template for a typical story reads "I am buying a share of company X, because of geopolitical situation Y and a competitive advantage within sector Z". Financial media outlets spout such stories as predictions about the future or to retrospectively give meaning to the capricious past.

Not just investments but all of human civilization is permeated by stories. Yuval Noah Harari calls stories intersubjective realities in his book Sapiens, a Brief History of Humankind. This type of realities is neither objective (e.g. gravity) nor subjective (e.g. individual experience) but exists in the collective consciousness of multiple people, such as money, religion, limited liability companies, brands, art, ... In this way, the capacity for intersubjective realities possibly marks the main distinction between homo sapiens and the rest of the animal kingdom. Believing the same stories namely enables humans to live and work together in larger groups. This gives homo sapiens an evolutionary advantage that underpins our planetary dominance. Correspondingly from an existential point of view, Viktor Frankl argues in his book Man's Search for Meaning that human beings first of all seek for meaning in their lives – the premise of logotherapy.

Despite the fundamental human longing or demand for stories, people can only organize themselves around a limited amount of stories (see Punk6529 on cultural object framework). The supply of (potential) stories therefore exceeds aggregate human demand. Testament to this is the amount of content, of which only a fraction grows into intersubjective entities which people recognize significantly on a global or local level or within a niche. Creators can today monetize their content by using a central party or decentralized platform. Consider, respectively, an influencer who promotes brands via Instagram or an artist who sells works by attaching an NFT to them. Even such content, which has a price tag, is rarely valuable. Underneath, an ongoing battle for limited human resources rages with some dominant intersubjective realities as winners.

In this text, I described three models to inform a value proposition for NFTs. Despite their innovative nature, NFTs are sick in the same bed as internet stocks, fungible tokens and contemporary art: most are already or will become worthless, but a minority are likely to endure and appreciate in value. Still, I believe we are more likely to invest successfully in NFTs. A subset of NFTs namely has such an intuitive competitive advantage over the rest. NFTs with historical significance are likely to be valuable, if NFTs play a role in our society. Most NFTs are dead, long live innovation and historically significant NFTs!