Crypto Exchange Targets NFT Art Lending Market
Back in March, Bridge Oracle CEO Sina Estavi bought a non-fungible token (NFT) of now-former Twitter CEO Jack Dorsey’s first tweet for $2.9 million. How much would you loan him with it as collateral?
U.S.-based cryptocurrency exchange Kraken CEO Jesse Powell intends to find out.
Like many other exchanges, including Changpeng “CZ” Zhao’s Binance, Brian Armstrong’s Coinbase and Sam Bankman-Fried’s FTX, Kraken is launching an NFT marketplace in which they can be bought and sold. Unlike Coinbase and FTX, Kraken is also looking into establishing a lending service where people can borrow against it, he said in an interview with Bloomberg.
“If you deposit a CryptoPunk on Kraken, we want to be able to reflect the value of that in your account,” Powell said. And if you want to borrow funds against that,” Kraken would like to be able to give you a dollar value.
Non-fungible token means each one is unique and cannot be replaced by any other. So, a can of tomato soup is fungible; Andy Warhol’s picture of a can of tomato soup is non-fungible. These variations of cryptocurrency are designed to hold data, generally media of some sort, that is written onto it when the token is minted. Once that’s done, its written onto a blockchain — that vast majority are on Ethereum — that data cannot be changed, and its provenance is never in doubt.
(Well, the provenance of the NFT is never in doubt; whether the person who minted it actually owns the rights to the media stored on it is another question entirely.)
Given that he blasted it all over Twitter, Dorsey’s first tweet was legitimate, and Estavi owns “just setting up my twttr” sent at 3:50 p.m. on March 21, 2006.
Of course, it still lives here on Twitter, where anyone and see and copy it.
Pricing an NFT
From Powell’s perspective, NFTs are now in the second of three growth phases, starting with speculation and growing to buying art and supporting artists. Phase three will be the functional uses.
And indeed, while an NFT can hold anything from a share of stock to a fraction of a house, the vast majority are art, avatars, and in-game items — and lately metaverse property.
Art is the one everyone’s heard about thanks to Christie’s $69.2 million sale of a collage called “Everydays: The First 5,000 Days,” by digital artist Mike “Beeple” Winkelmann. There are a staggering number of avatars — basically portraits of an imaginary person or thing — but the top are CryptoPunks and Bored Ape Yacht Club (BAYC), where rare items have sold for millions.
The top five, according to DappRadar, start with Axie Infinity NFTs, which are in-game items, with 11.5 million sales having raked in $3.8 billion. Then comes CryptoPunks, with 19,402 sales for $2.3 billion. No. 3 is Art Blocks, which are actual artworks by various artists, 134,000 for $1.1 billion. Fourth is BAYC, with 23,309 sales for $877 million.
Fifth place, however, is NBA Top Shots. These short video clips — basically a mashup of trading card and highlight reel — brought NFTs to mainstream attention through basketball’s frequent mention of them in broadcasts and the drawing power of the stars — a LeBron James dunk was the top seller at $535,000. Fully 11.4 million have been bought, sold, and bought again for $750 million.
Valuing an NFT
Yes, but what is an individual Top Shot or CryptoPunk worth?
A lot of it depends on rarity. CryptoPunks were a limited run of 10,000, and some variations — like aliens and zombies — are very rare.
At the same time, any piece of art — like bitcoin — is only worth what someone’s willing to pay for it. And with art sold at auction and rarities sold at auction, a bidding war is what runs up the price, for a Warhol or a Beeple.
One point in Kraken’s favor is that the art loan market is very strong at the high end. In August, Bloomberg reported that Bank of America, a leading art lender, saw its business grow 15% year over year at the end of Q2 2021 — to $7.3 billion. At the top end, lenders generally give 50% of the appraised value, while charging 2% to 9%, CNBC said.
That 50% figure sounds pretty good, but keep in mind, they’re talking about Picassos and Warhols, which have a long track record of value.
Borrowing against cryptocurrency collateral generally require a 150% deposit over the amount of the loan.