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

Collecting is big business. Today, over one-third of Americans self-identify as collectors, and, as of 2024, the market size for collectibles is now nearly $500 billion dollars. Collectibles are a booming industry—and blockchains are coming for them.

A growing subset of the world’s collectors are actually traders whose sole intent is to buy and sell billions of dollars worth of collectibles—from rare whiskeys to luxury watches to handbags—with the goal of flipping them and making a profit. And while online marketplaces have generally evolved from digital classifieds to everything stores to verticalized marketplaces, they have yet to evolve to serve them in the most efficient way.

For flip-trading to be maximally efficient, collectibles marketplaces need to have 1) instant settlement, 2) physical custody, and 3) authentication. None of the leading collectibles marketplaces today, such as Bring a Trailer, StockX, and Chrono24, offer all three. Cash settlement is not an option; instead, physical settlement is the default—with settlement times usually measured in days or weeks. For bigger collectibles, such as cars, physical storage also quickly becomes an issue (where do you put 20 cars while you flip them?). For smaller collectibles, often traded via vertical marketplaces like Facebook Groups, fraud is a persistent challenge. All of these factors make trading collectibles on today’s marketplaces highly inefficient.

We see a massive opportunity to create a new marketplace design, purpose-built for collectibles traders, called “Blockchain-Enabled Collectibles Marketplaces” (BECMs). These marketplaces offer instant trading via cash settlement, reduce settlement time from weeks to seconds using stablecoins, and use NFTs as digital representations of physical assets held by a trusted custodian or authenticator.

BECMs have the potential to reshape the billion-dollar collectibles market because they make it possible to: 1) unify markets and increase liquidity (vs. current fragmented, dark markets), 2) eliminate the need for personal physical storage, which encourages more trading, 3) increase trust by providing authentication, and 4) financialize collecting behavior by facilitating borrowing where borrowing wasn’t possible before. We believe the result of these efficiencies will be materially TAM expansionary for collectibles markets as a whole as more traders, liquidity, inventory, and marketplaces come online.

However, while it’s technically possible to build a BECM for any collectible category, not all BECMs will be created equal. The remainder of this essay will focus on what qualities make a BECM venture-investible. We will break down seven key characteristics along three design axes: the financial axis, real world axis, and emotional axis.

The Financial Axis

Lack of Verticalized Trading Venues

Today, most collectibles don’t have a dedicated marketplace or exchange to consolidate liquidity and facilitate public price discovery; instead, they trade over many disparate venues—WhatsApp chats, Facebook groups, auction houses, etc.—that scatter and fragment liquidity. This means there’s ample opportunity to serve underserved collectibles markets; however, if the existing market structure is already efficient, it will be hard for BECMs to compete. These marketplaces are not as attractive to venture investors.

Based on our initial assessment of the collectibles landscape, the markets for wine and spirits, handbags, and watches have the greatest potential for improvement. These collectibles overwhelmingly trade in dark markets and suffer from a lack of liquidity and price discovery, making incumbent marketplaces ripe for disruption.

The Goldilocks Price Point

In order for a collectibles category to be venture-investible, its collectibles should be cheap enough that collectors can own the asset outright. Having a claim to a fraction of an asset is fine for financial investments, but as a collector, having a claim to half a luxury handbag defeats the purpose of collecting. Additionally, uber-expensive collectibles reduce the overall buyer pool, making these collectible categories less liquid. For example, no one flips million-dollar Ferraris because there are no 24/7 coincidence of wants.

On the other hand, a collectible needs to be expensive enough that owning it reaps some social status, gives a sense of exclusivity, and provides an emotional high. If something is too cheap and can be held by anyone, it will not attract emotional and status-driven buyers, making the market less liquid. Furthermore, the price point should be high enough that it is worthwhile for would-be market makers to spend time researching the collectible category. If items are too cheap, they must turn over more times for the unit economics to make sense. But, cheap collectibles do not provide enough social status to attract collectors to form a liquid market.

We believe the goldilocks price range for investible BECMs is roughly $1,000 to $100,000. This would make collectibles like sneakers, watches, handbags, and antiques ideal candidates for BECMs. Collectibles such as fine art and cars are too expensive for most people to own. Collectibles such as records and stamps may be less suited for BECMs due to their low price point. Their nicheness, combined with low prices, make it hard for marketplaces to generate enough volume.

Sources: venture investibility is our subjective assessment, size of bubble corresponds to market size, sources here Records, Trading Cards, Stamps, Rare Books, Sneakers, Whiskey, Handbags, Watches, Antiques, Fine Art, Classic Cars

Perceived as a Store of Value

Collectors are status-seeking buyers. They are diamond-handed, so to speak. Their existence is critical for a collectibles market to have healthy price floors. This is a sign that a collectible is not a fad, but rather an item with lasting cultural relevance. This is because when enough people believe an item will be culturally relevant far into the future, only then can it have a shot at being perceived as a store of value. Collectibles that are stores of value have appeal across generations and are generally resistant to changes in technology.

Fine art is a great example. Humans have enjoyed art for thousands of years and it is a safe bet to assume people will continue to enjoy art thousands of years from now. Vinyl records are a more ambiguous example. They had wide appeal to older generations, but it remains to be seen if the generations that grew up post-iPod will continue to value them.

The Real World Axis

Storage is Hard

Collectibles that occupy meaningful physical space or that are prone to degradation in regular home environments are prime candidates for BECMs, and therefore represent good investible categories. It is hard for a regular 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 concerns, you quickly run into space constraints—it would be unwieldy to store more than 50 paintings or 100 bottles of wine in most peoples’ homes. And even if you could magically remove space constraints, you would run into insurance headaches.

If custodying a collectible category is trivial, it may still be profitable to build a BECM, but the barrier of entry will be much lower leading to more competition, liquidity fragmentation, and lower pricing power. NFTs are the best example in this category: they are not environmentally sensitive nor do they take up any physical space, and transparent provenance on blockchain makes fraud almost unlikely thereby making it hard to build a defensible NFT marketplace.

Source: The Block

We think collectibles such as wine, whiskey, and cars have the greatest challenges around storage and therefore collectors of those stand to gain the most from BECMs. Wine and whiskey are extremely environmentally sensitive, requiring special vaults that control temperature, humidity, light, and other factors (our investment in Baxus is tackling this precise problem). Cars require large physical garages—most people would struggle to store more than 3 or 4 cars at home. Trading cards, sneakers, watches, and handbags are less difficult to store—collectors of these can still benefit from outsourced storage, but the marginal improvement is smaller.

Trust Issues Exist

In addition to solving physical custody, BECMs must also solve the authenticity problem as well to appeal to investors.

Collectors today suffer from major trust issues; buyers and sellers in group chats rely on community testimonials and anonymous moderators to vet their counterparty. Scams are, expectedly, commonplace across nearly every collectible. It is very hard for market participants to be 100% confident in their purchases. Creating market standards and trusted authenticators is essential to attract liquidity from collectors, alternative asset investors and speculators alike.

There are two ways to go about authentication:

1. In-house – This requires domain expertise and is more operationally complex. If the marketplace incorrectly authenticates items, it will be on the hook to compensate collectors. However, it can be a great moat, especially if the collectible is tricky to authenticate. That said, marketplaces that do authentication in-house will have to manage potential conflicts of interest and there will need to be some oversight to keep buyer trust.
2. Outsourced – This is easier, but decreases the margin the marketplace is able to command—thus, 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 authenticator, alleviating potential conflicts of interest.

If a BECM can build trust and provide money-back guarantees, it can develop a moat that makes it venture investible. Collectibles such as watches, handbags, and wine are flooded with fakes. BECMs have a great opportunity to increase trust and onboard new collectors who are reluctant to collect due to fraud concerns.

The Emotional Axis

Time- vs. Brand-Based Provenance

Provenance, in the context of collectibles, is how an item gets its value. For collectibles, it is typically either time-based or brand-based.

Time-based provenance means an asset appreciates from age and historical context. Rare books are an example of this category. Assets with time-based provenance only trade on secondary markets—there is no central issuer, assets are usually one-of-ones, or one of a few. This quality can constrain secondary market activity because collectors do not continuously need capital to purchase new issuance and the diamond-handed collectors suppress the available supply to trade. Constitution DAO is a great example of this—the copy of the constitution they bid for has yet to return to the secondary market. Other collectibles with time-based provenance include antiques, fine art, cars, and guns.

On the other hand, brand-based provenance is where a brand has built prestige over time and the market has come to regard their products as valuable. Watches are a prime example of brand-based provenance. The top luxury watch manufacturers—Rolex, Patek Philippe, Richard Mille, and Audemars Piguet—are able to command nearly half of the luxury watch market because of the value associated with their names. Brand-based collectibles have a central, profit-seeking issuer that continuously issues new items. This category of collectible, unlike time-based provence collectibles, encourages secondary market activity because collectors require capital to purchase new supply and turn to secondary markets to sell.

Brand-based BECMs are therefore more attractive candidates for a venture investment than time-based BECMs.

Passionate Collector Base Exists

Venture capitalists want to see people having strong emotions for a collectible; it is a precursor to having diamond-handed collectors. Without them, it is hard to have organic liquidity. Consequently, a BECM with a weak community will struggle to attract volumes and lose its investment appeal.

The best signal of a thriving community is passion to the point of arguing. We want to see car collectors debate the best supercar of all time or handbag lovers advocate for what they believe are the most underrated brands. 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 investible categories.

The opportunity for BECMs is to light up new markets for all sorts of collectibles, improving access to a new class of alternative investments.

We’ve long been interested in how crypto can touch the real-world going as far back as 2019 with our initial investment in Helium, which pioneered what is now known as DePIN. We learned a great deal from being early in DePIN, and shared some of our thoughts on DePIN market opportunities here.

BECMs, like DePINs, offer another such opportunity and will fundamentally redefine what it means to own and collect. If you are building in this space, we would like to hear from you. Please reach out to either of us here or here.

(Title: h/t Bill Gurley)