At an evening sale in February held by Sotheby’s, the salesroom was shocked when a representative for the house announced that the night’s only lot had been pulled.
It turns out the bundle of 104 “CryptoPunks,” highly prized NFTs that often sell for millions, had instead been used to secure a loan for $8.3 million by the bundle’s owner, an anonymous figure who goes by 0x650d on Twitter.
The loan was made possible by NFTfi, an NFT-collateralized loan marketplace, and MetaStreet, an NFT liquidity scaling startup. “We reached out to 0x650d shortly after we heard that they pulled out of the Sotheby’s sale,” said Conor Moore, a co-founder of MetaStreet.
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“He didn’t even know that this market really existed before we started talking,” said David Choi, another co-founder of MetaStreet who has a background in art history and traditional art financing. “I think the upside potential of the loan quickly became more apparent. He was really quite pleased to take this avenue rather than the sale, given the tax implications and things like that.”
While 0x650d isn’t the first to receive a large loan using NFTs as collateral, this is certainly the largest known loan of its kind. And the market for NFT loans only seems to be getting hotter.
According to NFTfi, the firm recently surpassed $100 million in loan volume since it launched in June 2020, with $70 million of that generated solely in 2022, as of April 14.
This is still an emerging market, however. The art lending business is currently valued at about $25 billion. Joe Charalambous, of the art financing firm TPC Art Finance, which provides traditional art-secured loans and has considered entering the NFT financing space, said that the demand for loans has been skyrocketing.
“We saw a large rise in requests and overall demand for art finance since Covid lockdowns began that has continued to the present,” Charalambous said. “We’ve also had requests for loans against what I suppose would be considered blue chip NFTs, CryptoPunks, and things like that. But we’d like to see more stability before we enter that market.”
Charalambous explained that at TPC Art Finance the firm looks closely at the price history of a given artwork or that of an artist on the secondary market. The older the work, the more information there is on how a work might perform on the market, though the firm will consider works that have only been on the market for a year.
The collected information is aimed at answering one, key question: “If we had to sell the collateral in a default situation, what do we think we would get for it at an auction on a typical day?” Charalambous said. However, he conceded that the judgement of a work’s value is often very subjective.
Choi and Moore, of MetaStreet, look at lending from a strictly quantitate point of view. “It’s less about provenance and more about data science,” Choi said.
Moore added, “There’s that joke that three months in crypto is a year in traditional markets. With CryptoPunks there’s typically 10 to 15 transactions a day and about $15 to $20 million worth of volume traded a week, and it’s all traceable.”
That means there is indeed a lot of data to comb through. “We’re able to track volatility and liquidity of different NFTs which informs what would be deemed credit worthy. You can get a great sense of real time pricing,” Moore said.
But even with all this data, the markets for NFTs, and the value of cryptocurrency in general, is notoriously fickle market.
“The term of this $8 million loan is 90 days,” said TPC Art Finance’s Charalambous of the 0x650d deal. “I think that speaks volumes. Investors might be comfortable with the short term valuation of NFTs but take a more conservative view on the market in general.”
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