There’s been a lot of chatter lately about being a “collector”. Youtube videos with millions of views, tweets about being a collector abound. Just Google “how to become a [XYZ] collector” or read through NFT Twitter and you’ll find a bunch of “thought leadership” about how to do it right.
Perhaps the dissonance I sense right now is that there are a lot of people who call themselves collectors, but are really investors. They expect a return on their spend. I have a sneaking suspicion that the majority of those jumping into “collecting” are actually what I would call investors.
Collectors are those that acquire items because they either love them or receive an intangible enjoyment those items are connected to. They acquire multiple items that are focused on a specific motif, object, subject, idea, or topic. Their enjoyment isn’t tied to social validation. They’re often willing to sacrifice — be it time or money — to build the collection.
In many cases, the collector has income to spend - or really - the collector is required to have disposable income to fuel their collection. Interesting and unique things often attract people who are looking for them. It’s very human to acquire the things you enjoy, and if you have the money to spend you’ll spend money on those things.
Investors collect, but may not be collectors. Collectors invest, but not solely in search of ROI.
The problem with investors masquerading as collectors is that they assert two forces on price. Collectors will spend as much they deem available. Resale isn’t on the collector’s mind as they make their purchase. They’re buying for joy. Investors, on the other hand, need to see something in return for their purchase. This could be in the form of productivity, social capital, or a financial return.
Where collectors have the ability to both set initial prices in a given market and determine its healthy ceiling, investors love finding spaces where collectors exist – by total dollars available to spend. In short, collectors are value-builders, and investors are value-extractors. Collectors are productive, investors are exploitative. Wendell Berry was right:
The exploiter is a specialist, an expert; the nurturer is not. The standard of the exploiter is efficiency; the standard of the nurturer is care. The exploiter's goal is money, profit; the nurturer's goal is health -- his land's health, his own, his family's, his community's, his country's.
The ratio of current-investor-capital to available-collector-capital determines the volatility of a given market. While the collector’s market is validated by the investor, the investor creates extrinsic value, while simultaneously stripping away intrinsic value.
VALIDATION AND AUTHENTICATION SYSTEMS
Validation and Authentication are related, but separate, disciplines. Understanding the difference is key to understanding the current state of the NFT craze, and how it contrasts with the physical collectible market.
Authenticity is part of validation, and is critical for both Collectors and Investors. Authentication is confirming that an item is what it claims to be, whereas validation is confirming the value of an item. Collectors need authentication, but self-validate. Investors need both authentication and outside validation. Authentication has always proven tricky, and matures over time as technology and techniques improve. Entire professional fields are built around this key part of the validation chain. Improvements in authentication have impact on intrinsic value, as we saw with Salvator Mundi.
The most recent season of Malcolm Gladwell’s podcast, Revisionist History, covers the concept of Dragon Psychology, and how it applies to art. (A primer on Dragon Psychology: dragons hoard treasure, deep in their lairs. They don't show it off to their neighbors.)
The podcast unpacks the history of art validation, and how collectors worked hand-in-hand with authenticators to build institutions called Museums. Museums then rolled collection and authentication into a single entity — which ultimately creates validation machines.
Sneaker marketplaces have made this more efficient over time. StockX, Grailed, Stadium Goods, and the others in this category have created stockpiles of goods that are authenticated. Then they went “direct to collector” by adding a system for collectors to find and acquire those goods from investors. It’s as if the Met and Christie’s merged. Investors can purchase shoes knowing there’s safety in the floor of a validated source, and a ceiling as large as collectors’ wallets. Which in the sneaker world, has proven to be billions of dollars.
Collectors (limiters) –>Experts (authentication) –>Investors (limit finders)
Hype cycles and bubbles can happen when investors improperly gauge the size of actual collectors’ appetite to spend. Correction happens when collectors limit out or lose interest. The more dangerous bubble is when investors are disguised as collectors because it’s nearly impossible to know the actual collector wallet size.
In this scenario, speculation reigns Supreme (pun intended).
VALIDATION IN EVERYDAY COMMERCE
Ecommerce has built intrinsic brand value at scale. Think about it, our current systems for consumer validation (confirming the value of the price) of everyday items include:
- Expert reviews (Authentication)
- Social proof, Celebrity endorsements (Validation)
Other factors that have psychological impact on our validation systems for everyday product value creation:
- Price elasticity testing (e.g. discounting)
- Scarcity (stock availability, restocks, presales)
The problem with almost all of these is that they don’t really take into account the ceilings collectors provide. In fact if brands ever revise prices, it’s almost always down - for a discount. I’m hopeful that as we put even broad market product’s prices into the hands of consumers that the brands who create products worth collecting will reap the benefits.
NFT marketplaces are an interesting place to observe the authentication/validation cycle at work. Authentication is provided by etherium or other blockchain, which eliminates part of the validation process. There are still some authentication concerns with NFTs because artists’ work is being ripped off prior to minting and authorship is difficult to determine in the pre-NFT web. This concern may subside as we progress toward minting literally everything.
With authentication baked into the technology, what remains is validation, which explains the current volatility of the market. We jump straight to figuring out how much collectors are willing to spend. If Malcolm Gladwell taught me anything, certain types of collectors have a boundless appetite. As more NFTs are minted in more markets, expect to continue to see surprising trends and headlines about return multiples.
NFTs also impose arbitrary limits; a sort of faux-scarcity. Do man-made boundaries count as real boundaries? Yes. And no. We’ve seen this in the real world with shoes (a very tangible example for those struggling with the digital goods angle) - re-releases to combat stockpiling that drives down the going market price. Or in gaming, “limited” item drops will be followed by another limited drop at a later date. Marketplaces that enforce limits on initial minting will provide security for investors and collectors alike.
It’s not about hype cycles, it’s about testing limits. Those limits are set by Collectors, and those limits are tested by Investors.