Luke Choice is the Australian designer behind Velvet Spectrum based in Astoria, Oregon where he and his wife Morgan work in typography, 3D design, and animation.
What you'll need
Choice selected the Smudge tool and set the brush type to one with texture – Oil Pastel Large (Brushes > Settings > Legacy Brushes > Default Brushes from the Options bar). He set the Smudge tool Strength to the mid-90s and chose Sample All Layers.
To paint the letters, Choice added a new layer to the colorful image. Then, he drew the first letter, making sure to brush through as many colors as possible.
Once he drew the letter, Choice used the Move tool to drag the letter layer to the new document. To view both documents at once, Choice selected Window > Arrange > Tile All Vertically.
Back in the image source, Choice hid the first letter layer and created a new layer. Then he repeated the process to create the remaining letters and move each one to its own layer in the new document. To complete the composition, he added a Solid Color adjustment layer as the bottom layer.