How the most profitable NFT collectors decide what to invest in

It’s hard to understand why a banana taped to a wall sold for $120,000 in 2019. Similarly, who knows why a cartoon picture of a rock — which also happened to be attached to a crypto token — sold for $2.9 million last month? This is art we are talking about. It’s not supposed to make sense.

But with the NFT art markets rising so rapidly in value, they’re giving crypto traders headaches.

“I have no data for understanding when Pudgy Penguins was going to take off,” Alameda Research co-CEO Sam Trabucco said recently on the UpOnly podcast. “If you presented me with five NFT projects and told me one of these was going to take off next week, I would just have no idea which of them was correct.”

So we asked those who have found success in the NFT world — whether through sheer luck or tactical decision making — how on earth they make their decisions.

Searching for fundamentals

While the underlying value of NFTs is more intangible, there are a number of elements that can be used to price them, according to Pranksy, the pseudonymous NFT collector who has managed to rake in the most profits of any collector, based on data from Nansen.

Pranksy said there are five main factors that he considers when valuing NFTs: 

• The historical significance of the project
• The blockchain it exists on
• The quality of the NFT metadata
• Visual appeal/unique selling points
• Quality of the work/how difficult it was to produce

In terms of historical significance, this looks at whether the NFT is from an early collection, something that may make it more valuable. The classic example is CryptoPunks, which are seen as the OG NFTs and were one of the first-ever made on Ethereum in 2017. 

This kind of thinking has also seen projects like EtherRocks, which launched shortly after CryptoPunks, come back from the dead. On August 4, 2021, only half of this collection of 100 rocks had been minted (since the prices rise on a bonding curve, making mints more expensive). But, when investors realized the rocks could be a similar opportunity to CryptoPunks, they snapped the rest up in a single day — and they’re now selling for millions.

Pransky’s approach is matched by Zonked, an NFT collector who ranks 11th in all-time profitability on Nansen. He said he looks at a similar range of factors that depend if it’s an old or a new collection. These are:

• Is it historically relevant?
• Does it move the space forward in any way?
• Who is behind the project/who is the artist?
• And who is part of the community?
• Is the artwork or information to generate the artwork written on-chain in some way?
• Do I like the artwork?

Which NFT projects are moving the space forward? This is a bit of an ongoing debate. While CryptoPunks is unique and the first to do what it did, it has spawned a range of knockoffs on Ethereum, such as “Fast Food Punks” and even the rather dubious “TalibanPunks.” Other blockchain platforms such as Binance Smart Chain and Solana have even seen direct clones (with different colored backgrounds in the case of the latter). The idea here is that these projects won’t carry the same weight as something that’s original and innovative.

0x541nt — who ranks 18th on Nansen in terms of profitability and comes in at third by number of NFTs purchased — said that hype is one of the most important metrics, although paid hype has the opposite effect.

0x541nt also pointed to important data points such as the number of NFTs in the collection, their price point and the historical value. They added that it’s helpful to observe what whales are up to — particularly if you don’t want to miss out on an NFT collection. Collaborating with friends can help too.

It’s worth noting that there are also rarity traits that can in theory be used to determine which NFTs in a collection are more valuable. But these mostly relate to comparing an NFT with others in the same collection and don’t necessarily mean that NFT — or any of the others in its set — will have any value.

Investing in NFT blue chips

A common strategy by big NFT investors is to focus on what are called “blue chip” NFTs. The concept is that the value of certain projects that are more established may hold over the long term. This strategy leans away from trying to value certain projects for their qualities in the way that Pranksy, Zonked, and 0x541nt do — although it does overlap when it comes to historical significance.

While there isn’t a clear consensus over which projects count under this umbrella term, there are a few projects that tend to stand out for collectors. UK crypto artist and NFT collector Nathan Head said he views CryptoPunks, Bored Ape Yacht Club and Art Blocks as blue chips. All rank highly in terms of all-time trading volume and market cap. 

Big investors seem to be taking the blue-chip approach. "Our thesis is simple, we believe the best way to gain exposure to the cultural paradigm shift being ushered in by NFTs is owning the top pieces from the most desired sets." tweeted Vincent Van Dough, an NFT investor working with Three Arrows Capital founders Su Zhu and Kyle Davies on what he hopes will be a $100 million NFT fund. 

Three Arrows Capital CEO Zhu Su explained the firm’s rationale for investing in Art Blocks, which is a collection of programmable and on-demand generative artwork from a range of artists, to The Block last month: 

“We believe we are at the forefront of a multi-decade generative art movement, being ushered in by Art Blocks, and we think the best way to gain exposure to this trend is by collecting the defining pieces from the highest regarded sets such as Ringers, Fidenzas, Archetypes, and Subscapes.”

Similar thinking may have prompted payments company Visa to splurge $150,000 on a CryptoPunk for its first NFT purchase, rather than going for a newer or cheaper project.

So there you have it, folks. There are at least two ways to value NFT art. You can either look at a range of factors surrounding the piece, spanning the community itself to the changing prices, and consider them all together — or you can simply stick with the NFT projects that seem to have solidified themselves as established hoping they are safe havens. 

Failing both of those ideas, you can always take Punk6529’s advice: “Buy art that you like.”