Original author: Vishal Kankani Eli Qian
Original translation: TechFlow
The collectibles market is booming. Today, more than a third of Americans consider themselves collectors, and the collectibles market is expected to be worth nearly $500 billion by 2024. The collectibles industry is booming—and blockchain is making its way into it.
An increasing number of collectors are actually traders whose sole purpose is to buy and sell billions of dollars worth of collectibles—from rare whiskeys to luxury watches to handbags—for a profit. While online marketplaces in general have evolved from digital classifieds to all-inclusive stores to vertical markets, they have not yet evolved to serve these traders in the most efficient way possible.
To make flipping as efficient as possible, collectibles marketplaces need to have 1) instant settlement, 2) physical custody, and 3) authentication. Currently, leading collectibles marketplaces like Bring a Trailer, StockX, and Chrono 24 offer none of these three. Cash settlement is not a viable option; instead, physical settlement is the default, with settlement times often measured in days or weeks. For larger collectibles, like cars, physical storage quickly becomes an issue (where do you put 20 cars to flip?). For smaller collectibles, which are often traded through vertical marketplaces like Facebook groups, fraud is an ongoing challenge. All of these factors make trading collectibles in today’s marketplace extremely inefficient.
We see a huge opportunity to create a new market design built specifically for collectibles traders, called "Blockchain-Enabled Collectibles Markets" (BECMs). These markets offer instant trades through cash settlement, reducing settlement times from weeks to seconds, use stablecoins, and leverage NFTs as digital representations of physical assets held by trusted custodians or authenticators.
BECMs have the potential to reshape the multi-billion dollar collectibles market as they make it possible to: 1) unify the market and increase liquidity (compared to the current fragmented black market), 2) eliminate the need for personal physical storage, thereby encouraging more trading, 3) increase trust by providing authentication, and 4) financialize the act of collecting by facilitating lending where previously lending was not possible. We believe the result of these efficiencies will greatly expand the total addressable market (TAM) for the entire collectibles market as more traders, liquidity, inventory, and marketplaces come online.
However, while it is technically possible to build a BECM for any collectible category, not all BECMs are created equal. The remainder of this article will focus on the qualities that make a BECM worth investing in. We will break down seven key characteristics along three design axes: financial, real-world, and emotional.
Financial Axis
Lack of vertical trading venues
Currently, most collectibles do not have dedicated markets or exchanges to centralize liquidity and facilitate public price discovery; instead, they are traded on many different platforms — WhatsApp chats, Facebook groups, auction houses, etc. — which fragment liquidity. This means there is a large opportunity to serve underserved collectible markets; however, it will be difficult for BECM to compete if existing market structures are already efficient. These markets are less attractive to venture investors.
Based on our initial assessment of the collectibles market, the markets for wine and spirits, handbags, and watches have the greatest potential for improvement. These collectibles are mainly traded on the black market, lacking liquidity and price discovery, making the existing market in a state of disruption.
The right price point
In order for a collectible category to be investment worthy, the price of its collectibles should be cheap enough that a collector can fully own the asset. Partial ownership of an asset is acceptable for a financial investment, but as a collector, owning half of a luxury handbag defeats the purpose of collecting. Additionally, ultra-expensive collectibles reduce the overall buyer pool, making these collectible categories less liquid. For example, no one is going to flip a million-dollar Ferrari because there is no 24/7 demand overlap.
On the other hand, the price of a collectible needs to be high enough so that owning it confers a certain social status, gives a sense of exclusivity, and provides emotional satisfaction. If something is too cheap and anyone can own it, it will fail to attract emotionally and status-driven buyers, making the market less liquid. In addition, the price point should also be high enough that potential market makers are willing to spend time researching the collectible category. If items are too cheap, they must be traded more frequently for the unit economics to make sense. However, cheap collectibles do not provide enough social status to attract collectors to form a liquid market.
We believe that the gold price range for a suitable BECM for investment is roughly between $1,000 and $100,000. This makes collectibles such as sneakers, watches, handbags, and antiques ideal candidates for a BECM. Collectibles such as fine art and cars are too expensive for most people, and collectibles such as records and stamps may not be suitable for a BECM due to their lower price points.
Figure: The investability of venture capital is our subjective assessment. The size of the bubble corresponds to the market size. Sources include records, trading cards, stamps, rare books, sneakers, whiskey, handbags, watches, antiques, fine art, and classic cars.
Considered a store of value
Collectors are status-seeking buyers. They are called “determined holders.” Their presence is essential to maintaining a healthy price floor in the collectibles market. It is a sign that a collectible is not a passing fad, but rather that it has lasting cultural relevance. This is because when enough people believe that an item will remain culturally relevant long into the future, it has the potential to be considered a store of value. Collectibles that are considered a store of value have appeal across generations and are generally resistant to technological change.
Fine art is a good example. Humans have enjoyed art for thousands of years, and it's reasonable to assume that people will continue to appreciate art for thousands of years to come. The example of vinyl records is more complicated. They have broad appeal among older generations, but whether the generation that grew up in the post-iPod era will continue to value vinyl records remains to be seen.
Real World Axis
Storage difficulties
Collectibles that take up significant physical space or are prone to degradation are prime candidates for BECMs and therefore represent a good investable category. It’s difficult for the average person to store delicate collectibles like wine and art for long periods of time without taking environmental precautions (humidity, temperature, light, etc.). Even if you could magically fix these issues, you’d quickly run into space limitations — storing more than 50 paintings or 100 bottles of wine in most people’s homes is impractical. Even if you could magically eliminate space limitations, you’d run into insurance headaches.
If custody of a certain collectible category is trivial, building a BECM may still be profitable, but the barrier to entry will be much lower, leading to increased competition, fragmented liquidity, and reduced pricing power. NFTs are the best example of this category: they are not affected by the environment, do not take up any physical space, and transparent provenance on the blockchain makes fraud almost impossible, making it difficult to build a defensible NFT market.
Figure: Ethereum NFT market transaction volume, source: The Block
We believe that collectibles such as wine, whiskey, and cars present the greatest challenges in storage, so the interests of these collectors will benefit most from BECMs. Wine and whiskey are extremely sensitive to the environment and require special vaults that control temperature, humidity, light, and other factors (our investment in Baxus is addressing this). Cars require large garages - most people have difficulty storing more than 3 or 4 cars at home. Trading cards, sneakers, watches, and handbags are relatively easy to store - these collectors can still benefit from outsourcing storage, but the marginal improvement is smaller.
Trust issues exist
In addition to addressing the issue of physical custody, BECMs must also address the issue of authenticity to attract investors.
Today, collectors face serious trust issues; buyers and sellers in group chats rely on community recommendations and anonymous curators to vet their counterparties. Scams are commonplace in nearly every collectible, and it is difficult for market participants to have 100% confidence in their purchases. Establishing market standards and trusted authenticators is critical to attracting market liquidity for collectors, alternative asset investors, and speculators.
There are two authentication methods:
1. In-house authentication: This requires domain expertise and is more complex to operate. If the marketplace misauthenticates an item, it will be required to compensate the collector. However, this can be a good moat, especially when collectibles are difficult to authenticate. Marketplaces that do in-house authentication need to manage potential conflicts of interest and require some oversight to maintain buyer trust.
2. Outsourcing authentication: This is simpler, but reduces the profits that the market can earn. Therefore, outsourcing makes more sense when the collectible category is easier to authenticate. Another benefit is that outsourcing authentication naturally provides a separation between the market and the appraiser, alleviating potential conflicts of interest.
If a BECM can build trust and offer a money-back guarantee, it can create a competitive barrier that makes it attractive for venture capital. Collectibles such as watches, handbags, and wine are rife with fakes. BECMs have a great opportunity to increase trust and attract new collectors who are reluctant to collect due to fraud concerns.
Emotional Axis
The origin of time and brand
In the context of collectibles, provenance is how an item acquired its value. For collectibles, this is usually time-based or brand-based.
Time-based provenance means that an asset has increased in value due to age and historical context. Rare books are an example of this category. Assets with time-based provenance are often traded only in the secondary market - there is no central issuer and the assets are often unique or in a small number of copies. This characteristic can limit secondary market activity as collectors do not need ongoing funds to purchase new releases and steadfast collectors suppress the supply available for trading. Constitution DAO is a good example - the copy of the Constitution they bid on has not yet returned to the secondary market. Other collectibles with time-based provenance include antiques, fine art, cars, and guns.
Brand-based provenance, on the other hand, is when a brand builds prestige over time and the market begins to view its products as valuable. Watches are a classic example of brand-based provenance. The top luxury watch manufacturers – Rolex, Patek Philippe, Richard Miller and Audemars Piguet – are able to control nearly half of the luxury watch market by virtue of their brand value. Brand-based collectibles have a central, profit-seeking issuer that releases new items on an ongoing basis. Unlike time-based provenance collectibles, these types of collectibles encourage secondary market activity, as collectors need funds to purchase new supply and turn to the secondary market for sales.
Therefore, brand-based BECMs are more attractive for venture capital than time-based BECMs.
There is a passionate collector base
Venture capitalists want to see strong sentiment towards a collectible; it is a precursor to having committed holders. Without them, it is difficult to achieve organic liquidity. Therefore, a BECM with a weak community will struggle to attract trading volume and lose investment appeal.
The best sign of a thriving community is passion to the point of debate. We expect to see car collectors arguing over the best supercar ever, or handbag enthusiasts defending what they believe to be the most underrated brand. A passionate collector base will be active in all corners of the internet – in subreddits, forums, and group chats.
The Cambrian Era of Collection
The future is not limited to BECMs for watches, handbags and wine. There are hundreds of other investable categories.
The opportunity for BECMs lies in creating new markets for a variety of collectibles and improving access to new types of alternative investments.
We have long been interested in how crypto is touching the real world, having made an initial investment in Helium, which pioneered the concept now known as DePIN, back in 2019. We learned a lot from our early involvement in DePIN and share some thoughts on the DePIN market opportunity here.
