The sale of a digital artwork based on a non-fungible token (NFT) by the artist Beeple in early March 2021, through Christie’s auction house, for $69 million, spurred intense interest in how to determine the value of digital art or collectibles, for trading and for building portfolios. It remains to be seen if NFTs will become an established example when answering the question, ‘What are alternative investments?’
The Christie’s sale raises questions about what is reliable price data for physical, real-world collectibles that can be traded, such as wine, classic cars and sports and pop culture trading cards. The latter item – trading cards – has also migrated to cyberspace as a traded collectible.
Spoilt for choice
Just as they would be in the physical world, more collectibles are created and issued than singular works of art, and each are valued accordingly, in part based on scarcity, making them appealing assets within an alternative investments portfolio. NFTs use blockchain technology to verify authenticity and uniqueness of the digital items and their ownership. Although unique, the digital asset represented by an NFT might be one of a series, each one only a few pixels different from the others. Fortunately, because of the blockchain proof of the creation of the NFT, the provenance and date of creation in relation to other similar works will be possible to distinguish.
To have a market that functions well, investors and traders need reliable and trustworthy data. Even for collectables created in a decentralized, trustless blockchain environment, having an institution, a framework or a reputable source for price information about the assets being traded is essential. While all nodes on a blockchain contain the details of all transactions, a set of data that is available to be fed into alternative investment management systems is also required for collectables that might be held as part of a portfolio. The matter becomes more complex when looking to securitize such assets. Even for some physical real-world assets this has proven challenging. For instance, securitizing physical real estate. UK-based IPSX was the first to receive regulated status in 2019 as an exchange for institutional grade, securitized commercial real estate. No one beforehand had truly got to grips with it, and yet the valuation of property is a well-established practice.
Price data reliability varies for alternative investments
For digital commodities or collectibles outside the realm of alternative investments with roots in finance, like IPSX’s real estate shares, price data reliability and the solidity of price sources vary depending on the type of asset.
Valuation data for classic cars, for example, seems authoritative since it comes from sources like the National Automobile Dealers Association, can be found in well-known guides such as a version of the Kelley Blue Book for classic cars or from the driving advocacy group Hagerty.
The collectible wine market and its data are less organized. However, the New Zealand-based website Wine Searcher is a prominent source, listing “the most expensive wines in the world.” Other groups also offer data, like Wine Owners, a trading community with a pricing database, and Vinovest, which promises to simplify collectible wine valuation and investment through a market that generates prices (and can store bottles until investors want to turn them from investments into purchases and get their actual bottles).
While there is a digital marketplace for NFT artworks, Nifty Gateway, NFTs are much more widely traded in collectible form, as explained by Gavin Aydt of risk management company FactRight. CryptoSlam! compiles data on transactions for items such as NBA Top Shots, which are NFTs containing short pro basketball video packages. Its listings rank NFT collectibles by sales volume, and it does provide numbers of transactions, so one could work out a price per item or at least an average price for a certain type of NFT collectible. However, no established financial institution so far seems to be backing their pricing or anyone else’s pricing of NFT collectibles.
Overall, there is still a lot of skepticism about the value of collectibles as alternative investments. To overcome that skepticism, it will likely require greater financial industry involvement in compiling, scrubbing and distributing data on collectibles and high-value item markets.