In traditional finance (or TradFi), blue-chip stocks refer to safe investments with long-term steady returns. These are generally related to solid, well capitalized companies with a strong track record (Amazon, Apple, Tesla to name a few).
Fun fact: the etymology of the word can be traced back to poker. In 3-colors poker sets with red, green, and blue chips, the third hold the highest value when compared to the other colors.
With the growing popularity of NFTs as new investment assets, the concept of blue-chips has been adopted also in this space, even though with significant differences. Let’s find out.
Blue-chips in the NFT market
Time is a key point when referring to blue-chip NFTs. While in traditional finance these refer to long time active companies, the same standard is barely applicable in the NFT space. Looking at Cryptopunks or BAYC for example, two of the most successful collections so far, they’ve only been active since 2017 and 2021 respectively.
This means that, when referring to blue-chips NFTs, these should be considered as projects likely to reach (or keep) a high valuation in the future, meaning that they will behave like a traditional blue-chip stock in prediction. But what are the criteria to define whether a project has the potential to become a blue-chip?
What makes an NFT project a blue-chip?
Among many others, there is a set of foundational criteria that helps identify which project has potential to become a future blue-chip. Although the following are mainly interpreted for the NFT art space, they are also applicable to all the emerging forms of NFTs spreading today.
1. The art
The art refers to the particular style of a project, likely to shape different interpretations of it. The uniqueness of the artwork, compared to existing initiatives in the market, is a key factor to drive attention and create hype. The pixel style of Cryptopunks is an iconic example, which has been referenced from other successful derivatives such as Cyberkongz and Cryptoadz. Similarly, the vector style of BAYC has been replicated by other well-known collections such as Lazy Lions or Hall of fame Goat Lodge.
2. The artist
The track record of the artists, their own style and how active they are in promoting their art are all key factors that influence the value perceived by the community. Collections such as Cool Cats (by Clon), Creature World (by Danny Cole) and Doodles (by Burnt Toast) are examples of concepts that became unique thanks to the great job done by their artists to promote their value. On another level, VeeFriends is among the best examples of a collection promoted by a personality outside the NFT art space (Gary Vee). The list of popular creators in the space keeps growing daily, with artists such as Fewocious, Takashi Murakami and Markus Magnusson.
3. The developers
Except for notable examples such as BAYC — created by a partially anonymous team, the core development team is an essential indicator of a project success, as it is responsible for the development of the smart contracts and the utility behind the NFTs.
A well-respected development team is a good sign of how solid the initiative is and what is the level of quality that the community can expect from its long-term roadmap.
Utility refers to the actual value that owning an NFT brings to the owner. There are many types of utilities offered by NFT projects. Below the most common ones.
* Yield tokens. Many communities offer tokens that will be dropped to collectors holding their NFT over the long term. Sometimes, this requires owners who receive tokens to stake their NFTs in a liquidity pool. The APE coin airdrop is probably one of the latest notable examples of this case.
* Token-gated merchandising. Sometimes projects release exclusive merchandising to holders of their NFTs as an effective medium to create awareness.
* NFT drops. It is common for NFT holders to receive additional NFTs dropped to their wallets, simply because of their ownership. Collaborations among initiatives are also frequent, where two or more communities are connected by rewarding holders with a second drop of the complementary project.
* Game related tokens. A great form of utility is the one for holders of games related NFTs, where these give a particular benefit to users within the game itself (other than being able to display their NFTs). Axie Infinity is a great example in this sense as a form of Play to Earn gaming NFT, providing holders with in-game power ups and benefits.
* Real life events. Access to exclusive events or parties is also a usual form of utility. The BAYC example comes again into play here with exclusive parties organized for APEs holders. Similarly, tickets rewarded to VeeFriends holders to access VeeCon events is another well-known case.
5. Floor price and sales volume
The floor price is the lowest price for an NFT within a collection. The higher the floor price, the more valuable the collection is likely to be. However, when considering potential blue-chips, it is worth looking not only at the floor price value but also at the growth (%) at which it is increasing. This is a first good indicator of how the collection is performing overtime.
Floor prices should not be considered as a stand-alone metric. Anyone can buy NFTs and then set their price higher than the purchase one. But if no one is then buying these NFTs, there is no real increase in project value. Therefore, sales volume is a key metric to validate if a project floor price represents the real value. When floor prices increase, the number of transactions is likely to decrease overtime but with higher values. If this trajectory is confirmed, it could be a good sign to spot future blue-chips.
Community is the foundation of any NFT initiative. A community is the mirror of both the excitement around a project and the long-term prospects of it, as people tend to aggregate where there is real value. A community itself can be considered a form of utility, as members can access to other members of the community and bond around their personal interests. Like in a reinforcement loop, the more the community bonds together, the more its strength around the project is visible and contributes to his value.
The endorsement from celebrities can also have a great impact on the community. There are many examples of celebrities buying notable collections, BAYC being one of them. However, it is important to put this into context and understand whether new members join the community mainly for short term returns or as long-term holders.
The lack of historically long track records for the top NFT projects on the market makes it hard to predict whether a collection is likely to become (or keep) a blue-chip standard. Having a good set of metrics to consider when evaluating their potential — although not exhaustive — surely helps to reduce the risk of incorrect valuations.