At an evening sale in February organized by Sotheby’s, the auction house was shocked when a representative of the house announced that the only lot of the night had been drawn.
It turns out that the lot of 104 “CryptoPunks”, highly prized NFTs that often sell for millions, had instead been used to secure an $8.3 million loan by the owner of the lot, an anonymous character who goes by 0x650d on Twitter.
The loan was made possible by NFTfi, an NFT-backed lending marketplace, and MetaStreet, an NFT liquidity scaling startup. “We contacted 0x650d shortly after learning that they were pulling out of the Sotheby’s sale,” said Conor Moore, co-founder of MetaStreet.
“He didn’t even know this market really existed until we started talking,” said David Choi, another MetaStreet co-founder who has a background in art history and traditional art funding. “I think the upside potential of the loan quickly became more apparent. He was really quite happy to take that avenue rather than the sale, given the tax implications and things like that.
Although 0x650d is not the first to receive a large loan using NFTs as collateral, it is certainly the largest known loan of its kind. And the NFT loan market only seems to be getting hotter.
According to NFTfi, the company recently surpassed $100 million in lending volume since its launch in June 2020, including $70 million generated in 2022 alone, as of April 14.
However, it is still an emerging market. The art lending business is currently valued at approximately $25 billion. Joe Charalambous, of art finance company TPC Art Finance, which provides traditional art-secured loans and has considered entering the NFT finance space, said demand for loans has exploded.
“We have seen a large increase in requests and overall demand for art funding since the start of the Covid lockdowns which have continued until now,” Charalambous said. “We have also received requests for loans against what I assume are considered blue chip NFTs, CryptoPunks and things like that. But we would like to see more stability before entering this market.
Charalambous explained that at TPC Art Finance, the firm looks closely at the price history of a given work or that of an artist on the secondary market. The older the work, the more information there is about how a work might perform in the market, although the company considers works that have only been on the market for a year.
The information collected aims to answer a key question: “If we were to sell the collateral in a default situation, what do we think we would get at an auction on a typical day?” said Charalambous. However, he concedes that judging the value of a work is often very subjective.
Choi and Moore of MetaStreet look at loans from a strictly quantitative perspective. “It’s less about provenance and more about data science,” Choi said.
Moore added, “There is this joke that three months in crypto equals one year in traditional markets. With CryptoPunks, there are typically 10-15 trades per day and around $15-20 million in volume traded per week, and everything is traceable.
This means that there is indeed a lot of data to sift through. “We are able to track the volatility and liquidity of different NFTs, which informs what would be deemed creditworthy. You can get a good idea of real-time pricing,” Moore said.
But even with all of this data, NFT markets, and cryptocurrency value in general, are a notoriously volatile market.
“The term of this $8 million loan is 90 days,” TPC Art Finance’s Charalambous said of the 0x650d deal. “I think that says a lot. Investors might be comfortable with the short-term valuation of NFTs, but take a more conservative view of the market in general.