An Institutional Guide to Buying CryptoPunks
I’ve fielded a lot of questions from investment managers on how to buy CryptoPunks for their funds. This guide is an attempt to go through the steps of buying, holding and reporting on CryptoPunks. Why is this necessary in the first place? Because CryptoPunks are the first non fungible token. Each CryptoPunk token is unique. This property makes the tokens less liquid and requires more thought when buying.
TLDR:
Dollar cost average into “floor” (the cheapest) CryptoPunks from the marketplace
Use this tool to see the market impact of your buying
Custody with Coinbase Prime, BitGo or self custody
Mark them to the floor price or a discount to floor price depending on your needs
Why buy CryptoPunks?
CryptoPunks are the holy grail of NFT’s. As the first NFT’s, they mark the point in time when art became digital. In crypto, value accrues to projects that create categories. Bitcoin is the first digital store of value. Ethereum is the first smart contracting platform. Both have captured the majority of value despite the thousands of Bitcoin and Ethereum “killers”. CryptoPunks created the idea of unique items in crypto, an transformative idea, and are set to reap the rewards.
Best of all, CryptoPunks are a finished project. There is no utility or execution risk. They’re simply a culturally significant work of art and technology.
Want to read more? Here’s a list of investment thesis.
Which CryptoPunks to buy?
The easiest and historically most profitable strategy is to buy the cheapest punks available. These are called “floor” punks. Floor punks tend to have the highest ROI, give buyers more flexibility to dollar cost average into a position, and better liquidity.
If you buy rare punks, you’ll find less liquidity and compressing multiples. Is that trade-off worth it? For a more in depth discussion see this twitter post.
How to buy them?
The best place to buy CryptoPunks is on the CryptoPunks marketplace. You’ll need a crypto wallet such as MetaMask or Coinbase Web Wallet. Here’s a step by step guide on the CryptoPunks website if you’re less comfortable transacting on chain.
Below is a widget to see the price impact of your desired investment amount. You’ll notice that liquidity is often thin. This poses challenges and opportunities. Depending on your investment size, you’ll likely want to average in over days, weeks or months. Some folks enjoy “sweeping” the floor and seeing the floor of that collection increase in price. It’s nothing more than slippage. Savvy buyers do not want to move the floor price. By buying in increments over a period of time you’ll be able to “average in” and minimize slippage.
However, there may be times when it makes sense to buy multiple CryptoPunks at once. Perhaps you want to get it over with and move on, or perhaps you think this is a particularly good time to buy in the cycle. In general, however, a lot of large sweeps is typically a sign of froth and not an ideal time to be accumulating.
Another option is to buy directly from holders. There is an active punk trader, Punks OTC who holds a large inventory of CryptoPunks. FlamingoDAO has a large collection. As does Yuga Labs. Here’s a ranked list of CryptoPunk holders.
There may be special situations where buying directly is better. However, in general, buying from the marketplace is often the best use of time. It’s difficult to pry CryptoPunks from holders. There’s a reason they’re not listed. Also, the more you discuss your plans with holders the more likely the market will react to your interest. Lastly, making OTC deals increases the risk of fraud in crypto.
If you’re worried about getting front-run by on-chain sleuths, use new wallets and transfer in ETH from an exchange as you’re ready to buy. Don’t have an on chain wallet sitting with all the ETH you plan to spend.
There is some volume on blur, but it’s a fraction of the volume on the CryptoPunks marketplace. For the sake of brevity and confusion I won’t dive into the details. If you’re interested, shoot me an e-mail and I can help.
Custody
BitGo is the only qualified custodian for CryptoPunks, to my knowledge. The other options are to use self custody or a hosted wallet such as the newly launched Coinbase Prime Web3 Wallet or FireBlocks. Whatever custody option you choose, it is highly recommended that you keep your CryptoPunks in a cold storage wallet that does not interact with smart contracts. This is standard practice but always worth noting.
Reporting
The simplest way to report the FMV of CryptoPunks is by taking the floor price from the CryptoPunks marketplace. A more conservative approach is to use a discount to floor price if you have a large collection or would need to liquidate them quickly.
If you buy mids or grails, you can mark it to the floor of that specific trait but I’d be cautious doing this. It adds complexity and can be misleading. For example, there have been 3 Beanie sales in the last year. Is the floor really the market rate?
One less obvious benefit of CryptoPunks is that there are no royalties. Many NFT’s enforce royalties. The second you click “buy” your investment could be down by as much as 10% if you sold it for the market price you just paid.
Depending on the fund structure marking to market could take different forms. If the fund is open and it must rebalance often and become a forced seller, a more conservative approach is likely needed. However, if it’s a venture fund then marking to floor or cost is likely sufficient as there is no carry being paid on unrealized gains.
Note: this guide is biased towards long term holders (3+ years). If you’re operating on shorter time frames and then parts of this guide may not be relevant.
Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. This post reflects the current opinions of the authors and is not made on behalf of Crypto Native Capital or its affiliates and does not necessarily reflect the opinions of Crypto Native Capital, its affiliates or individuals associated with Crypto Native Capital. The opinions reflected herein are subject to change without being updated.
