Original Title: All Markets Are Not Created Equal: 7 Factors To Consider When Evaluating Blockchain-Enabled Collectibles Marketplaces (BECMs)

Original Author: Vishal Kankani, Eli Qian, Multicoin Capital

Original Translator: TechFlow

The collectibles market is booming. Today, more than a third of Americans consider themselves collectors, and the collectibles market is expected to reach nearly $500 billion by 2024. The collectibles industry is booming—and blockchain is making its way into it.

A growing 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 have generally evolved from digital classifieds to all-in-one stores to vertical markets, they have not yet evolved to serve these traders in the most efficient way possible.

In order for flipping to be 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 Chrono24 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, such as 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 a constant 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 Marketplaces” (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 because 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 significantly expand the Total Addressable Market (TAM) for the entire collectibles market as more traders, liquidity, inventory, and markets 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 investable. 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 a dedicated marketplace or exchange 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 BECMs 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 markets, the markets for wine and spirits, handbags, and watches have the greatest potential for improvement. These collectibles are traded primarily on the black market, lacking liquidity and price discovery, leaving the existing market in a state of disruption.

The Right Price Point

In order for a collectible category to have investment value, its collectibles should be cheap enough so 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 overlap in demand.

On the other hand, the price of a collectible needs to be high enough so that owning it brings 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. Additionally, the price point should 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 to make the unit economics justifiable. However, cheap collectibles do not provide enough social status to attract collectors to form a liquid market.

We believe that the prime price range for a BECM that is suitable 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: VC investability 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, classic cars

Seen as a store of value

Collectors are buyers seeking status. They are called "firm holders". Their presence is critical to maintaining a healthy price floor in the collectible market. This shows 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 continue to be culturally relevant for a long time to come, it is likely to be seen as a store of value. Collectibles that are seen as stores 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 is reasonable to assume that people will continue to enjoy 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 post-iPod generation will continue to value vinyl 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 good investable categories. It is 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 solve these problems, you would 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 would face insurance headaches.

If custody of a particular collectible category is trivial, it may still be profitable to establish a BECM, but the barriers 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 the 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 environmentally sensitive and require special vaults that control temperature, humidity, light, and other factors (our investment in Baxus is addressing this problem). Cars require large garages - most people have trouble 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 solving the physical custody problem, BECMs must also solve the authenticity problem to attract investors.

Today, collectors face a serious trust problem; buyers and sellers in group chats rely on recommendations from the community and anonymous administrators to vet their counterparties. Scams are commonplace in almost 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 from collectors, alternative asset investors, and speculators.

There are two types of authentication:

1. In-house authentication:This requires domain expertise and is more complex operationally. If the marketplace misauthenticates an item, it will have to compensate the collector. However, this can be a good moat, especially when collectibles are difficult to authenticate. Marketplaces that conduct in-house authentication need to manage potential conflicts of interest and require some oversight to maintain buyer trust.

2. Outsourced authentication:This is simpler but reduces the profits that the marketplace can earn. Therefore, outsourcing makes more sense when the collectible category is easier to authenticate. Another benefit is that outsourced authentication naturally provides a separation between the marketplace and the authenticator, mitigating potential conflicts of interest.

If BECM can establish trust and provide a money-back guarantee, it can establish 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.

The Emotional Axis

Provenance of Time and Brand

In the context of collectibles, provenance is how an item derives its value. For collectibles, it is usually time-based or brand-based.

Time-based provenance means that the 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 asset is often unique or available in a handful of copies. This feature can limit secondary market activity as collectors do not need ongoing funds to purchase new issues and collectors who hold on firmly suppress the supply available for trading. Constitution DAO is a good example - the copies of the Constitution they bid on have not yet returned to the secondary market. Other collectibles with a time provenance include antiques, fine art, cars, and guns.

Brand-based provenance, on the other hand, is when a brand has built up prestige over time and the market has come 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 on the strength of their brand value. Brand-based collectibles have a central, profit-seeking issuer that continually issues new items. 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.

Brand-based BECMs are therefore more VC-attractive than time-based BECMs.

Existence of a Passionate Collector Base

Venture capitalists want to see that people have strong feelings about a collectible; this is a precursor to having committed holders. Without them, it is difficult to achieve organic liquidity. As a result, 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 – subreddits, forums, and group chats.

The Cambrian Age of Collecting

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 opening new markets for all kinds 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 back in 2019 in Helium, which pioneered the concept now known as DePIN. We learned a lot from our early involvement in DePIN and share some of our thoughts on the DePIN market opportunity here.

Original link

欢迎加入律动 BlockBeats 官方社群：

Telegram 订阅群：https://t.me/theblockbeats

Telegram 交流群：https://t.me/BlockBeats_App

Twitter 官方账号：https://twitter.com/BlockBeatsAsia