Digital& NFT

NFTs and Crypto Adding Risks Within All Collectibles

All asset prices can rise to the point that they form a bubble. Speculative stocks saw their shares surge in 2020 and 2021 in a manner that resembled the dot-com bubble which burst some 20 years earlier. Bonds had record high prices and record low yields during the pandemic as interest rates went closer to 0.00% (and negative yields in Japan and Europe). And home prices have hit levels in 2020 and 2021 that make buyers cringe.

While all of this was happening in the so-called real economy, the prices of alternative assets also saw their values rise in 2020 and into 2021. This included the likes of Bitcoin and other cryptocurrencies, it included high-end baseball and basketball cards, rare comic books, and stamps and coins. And then came the wave of non-fungible tokens (NFTs) and semi-fungible tokens (SFTs).

Collectors Dashboard has been monitoring the digital sales and purchases of CryptoKitties, digital avatars like Meebits and digital art that have all been sold as NFTs (and SFTs). Ditto for sports collectibles and other collectibles which have become digitized. The primary goal is to be agnostic in choosing any type of asset class and any asset within alternative asset classes. That is for any buyer to ultimately decide. Like any assets, they are only worth what you or others are willing to pay for them at any point in time.

The Collectors Dashboard is also not about hoping (nor will it project) that any asset class only rises in price over time. Perpetually rising prices generally come with worries of a bubble in prices. And rightfully so, with stock market and real estate history as prime examples. It is important for collectors and investors alike to be able to keep a portfolio of assets that can be tracked and where the transparency is maximized at all times (good and bad!).

A primary rule of thumb in investing in any asset is that there is no such thing as a guaranteed profit. Stocks and bonds can lose significant values under many circumstances. Imagine what happens to the value of speculative assets when hard asset prices hit the floor. And then imagine the risks of newer asset classes like crypto and NFTs which are not even fully adopted or even recognized by the public.

The risks in virtual assets such as anything tied to crypto became very evident during mid-May of 2021 when Elon Musk of Tesla Inc. (TSLA) backpedaled on endorsing and accepting Bitcoin payments for Tesla cars. The move was a 180-degree shift away from what had been heralded in prior weeks by millions of people who owned cryptocurrencies. His subsequent move of speaking with miners to address environmental and sustainability concerns did manage to help cryptocurrencies recover, but the severe damage was undeniably seen in the prior week.

Where crypto-anything and blockchain prices could suffer the most pain is that many of these are quoted in Ethereum prices or in other cryptocurrency units. Bitcoin had risen to above $60,000 earlier in 2021 and on May 19 it was under $35,000. Ethereum prices went above $4,000 earlier in May of 2021, and by May 19 they were down under $2,500 with a one-day loss of about 25%. Even though the recovery on May 25, 2021 saw some cryptocurrencies up 20% and 30%, this is not representative of a true currency. Most banana republic currencies are not even that volatile.

If the price of virtual assets experience price shocks in the more known cryptocurrency and blockchain assets, imagine what happened in the lesser known names. BinanceCoin, Polkadot, BitcoinCash, Litecoin, Uniswap, Stellar, EthereumClassic and others were down over 30% mid-day on May 19. Most others were down at least 20% during that day.

The rise of Dogecoin also showed what was happening in May of 2021. This cryptocurrency, which has no caps nor limits at all and was founded effectively as a joke, had been boosted by Elon Musk and others in 2021. Its price rose from under $0.01 at the start of 2021 to a very brief peak above $0.70. After a 25% drop on the morning of May 19 the Dogecoin price was back at $0.35 and had briefly traded even lower. As with any other virtual asset, it’s ultimate value can be higher or even as low as zero again.

It seems possible that NFTs bring one of the greatest risks of all within collectibles as an alternative asset class. Most investors and collectors did not even know NFTs by name nor by their acronym prior to March of 2021. It was the record-breaking $69.3 million digital artwork sold as an NFT by Beeple that jolted millions of collectors and what we will call crypto-lovers into looking deeper in this space.

One significant issue in the record-breaking Beeple NFT price was that the buyer known as MetaKovan may have simply been promoting the NFT and crypto arena higher and in a wider scope. That does not mean that laws were broken in the process, but it may also have been capitalizing on a gold rush and on the value of the digital ecosystems more than representing a revolution within art and collectibles.

Another big risk in the NFT market has come to light recently. This legal argument may sound like a hard sell, but there is already a potential game-changing legal challenge that needs to be given deep consideration by anyone buying or selling digital assets like NFTs. Dapper Labs is the developer behind the NBA’s Top Shot NFT push, and the group is now reportedly being sued for selling NFTs as unregistered securities. Dapper had already raised unicorn valuation capital as NFT demand exploded, and the case argues that the securities aspect comes as prices depend on their success. This is not going to be a simple case at all. It will need to be watched closely as many collectibles (cards, cars, fine art, uniforms and so on) have already been securitized in share offerings by popular apps and websites.

One serious question that needs to be asked about any NFT is just how unique and valuable each one really is. If any star player has a video moment captured in a NFT video clip, will that same player never have another great moment in the future? Professional basketball players have many dunks and three-pointers in their careers. Baseball players have many great hits and homers. Football players have many great plays and touchdowns in their careers. So even if a NFT is based on one great play or one great moment, there may be many more great plays (or even better plays) coming in the days, weeks, months and years ahead that can all be turned into NFTs or limited editions virtually.

And in the case of NFTs for baseball, Topps has been selling its Series 1 NFT collection using 70 years of card designs with new players and old players alike in various officially licensed Topps MLB NFT collectibles. In this case, there could be hundreds of potential mix-and-match possibilities. Topps can simply change the photos of player poses or in-action shots. Many of these are available for resale already — some at high prices and some for less the equivalent of $1.00, and some at prices that are going to be hard to justify even for the biggest fans of NFTs and “anything crypto.”

Heritage Auctions hosted a May 2021 auction that also included 3 LeBron James NFTs which all had relevance with Kobe Bryant in the NFT from the NBA Top Shots series. The lot of 3 NFTs had been given an estimate of $1,000,000+ in the Heritage mailer, but it did not reach its goal and the item did not sell and Heritage changed its offer to a “Buy Now” price of $1,200,000 that included the buyer’s premium. These were the three NFTs up for auction:

  • 2020 LeBron James NBA Top Shot (Series 1) From The Top – Dunk #26/59
  • 2019 LeBron James NBA Top Shot (Series 1) Cosmic – Dunk #41/49
  • 2020 LeBron James NBA Top Shot (Series 1) NBA Finals – Dunk #42/79

The real issue in treating collectibles as an alternative asset class is that money that would have headed into stocks, bonds, exchange-traded funds and mutual funds might be heading into assets that have been historically less liquid and riskier. Whether you believe that owning shares in Apple, Microsoft, Tesla is a riskier proposition than buying rare coins, cards, comics, and stamps is up to you. It certainly seems that adding NFTs, SFTs and other crypto assets into the mix in such a short period of time can bring yet another risk to more traditional collectibles as they are also competing for the same inflow of money.

Collectors Dashboard is intended to be used as a tool that can help keep collectibles in check with other asset classes on a transparent basis. Many services have launched in recent months and years that are tracking the pricing of these alternative assets. Our aim is to provide some tracking of what is happening in the industry around each facet of the collectibles sector. That allows for more transparency and should help buyers and sellers have more that much more information when it comes time to make a decision to buy or sell any alternative asset.

As always, particularly as new subcategories of assets try to fight for their role within an asset class, caveat emptor!