Curious Speculations: Collectibles & NFTs

Caption: ‘Gambling by Wireless’ (1906)

Quite the prediction of how technology and wireless communications would lead to a proliferation in gambling.

“Illustration shows a vignette cartoon of scenes about the activities of stock exchanges and gambling on sporting events on ocean liners once they are equipped for wireless transmission.”

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Visualizing History

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From the Archives

The History of Hen Fever (1855)

“Never in the history of modern ” bubbles,” probably, did any mania exceed’ in ridiculousness or ludicrousness, or in the number of its victims surpass this inexplicable humbug, the ‘hen fever.’

Kings and queens and nobility, senators and governors, mayors and councilmen, ministers, doctors and lawyers, merchants and tradesmen, the aristocrat and the humble, farmers and mechanics, gentlemen and commoners, old men and young men, women and children, rich and poor, white, black and gray, — everybody was more or less seriously affected by this curious epidemic.

The press of the country, far and near, was alive with accounts of ‘extraordinary pullets,’ ‘enormous eggs’ (laid on the tables of the editors), ‘astounding prices’ obtained for individual specimens of rare poultry; and all sorts of people, of every trade and profession and calling in life, were on the quivive, and joined in the hue-and-cry, regarding the suddenly and newly ascertained fact that hens laid eggs sometimes; or, that somebody’s crower was heavier, larger, or higher on the legs (and consequently higher in value), than somebody else’s crower. And the first exhibition of the society with the long name came off duly, at last, as agreed upon by the people, and myself.”

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Sunday Reads

Good to be back after a few weeks off! Today we are going to catch up on all the speculation and madness that has surrounded Non-Fungible Tokens (NFTs) in recent weeks. However, I want to begin the post by describing a scenario to you:

Following the aftermath of a rare and transformative event causing societal upheaval and mass unemployment in certain professions, policymakers stepped in with government issued payments to help citizens cope with their liabilities while unemployed. Quickly, however, this “free money” and more idle time produced speculation in bizarre “assets” like collectibles. Soon a mania unfolded in collectibles where particularly rare items fetched increasingly higher and higher prices to the point of madness.

Of course, I am not talking about COVID-19, stimulus checks, and NFTs / sports cards…. but the Japanese Meiji Revolution of 1868 and ensuing speculative mania in rabbits. I’m sure you all could guess that anyway, though, right?

The Meiiji Revolution & Rabbit Mania

After the Meiji Revolution of 1868 in Japan, the newly established government in Tokyo made widespread economic and political reforms. One of the most profound reforms was destroying the Japanese class system (samurais, merchants, farmers, etc.). For Samurais specifically, the government continued providing them with their compensation, but were instructed to establish new businesses or locate investment opportunities in order to put their compensation to a productive venture.

Shortly after this societal shakeup unfolded, ‘some foreign merchants started to import rare foreign rabbits for pets to Japan.’ Before long the rabbits became wildly popular in Japanese celebrity circles, and the price of these en vogue rabbits started rising. As you probably guessed, the newly idle samurai class armed with capital they needed to deploy began buying/selling rabbits, as well as raising them for profit. In Tokyo, the number of bunny auctions started… well… multiplying like rabbits (sorry). Like with any speculative bubble involving collectibles (Tulips, beanie babies, etc.), rabbits with rarer features fetched higher prices. For example, some rabbits might have yellow ears. In fact, ‘even the champion rabbit ranking list (below) was created, which is resembled to the champion ranking list of Japanese sumo wrestlers.’ However, there were many ‘rare’ rabbits that turned out to be anything but, as this September 1872 newspaper from Japan explains:

“Rabbit selling, popular for the first time since the Bakufu days, has recently reached a level beyond all reason, and industry is being lost. Dishonest merchants ask outrageous prices and ensnare the ignorant in their schemes. The common technique is to use Western paints to disguise the color of a rabbit’s fur, pass it off as a unique species, and sell it to someone from a remote area.”

Predictably, there is no shortage of examples describing the ‘mania’ surrounding rabbit speculation. To name a few:

• ‘A Japanese news paper even reported that some wanted to sell their daughters in order to purchase rabbits.’
• The Times of London ‘reported a story that a man killed his farther because the father refused $150 for a rabbit which they possessed, but which unfortunately died before morning.’

In terms of prices, there were records of a rabbit being traded for 600 Yen. For context, average monthly rent in 1872 was a mere 0.58 Yen. Fearing the societal impact of rampant speculation and the prospect of a bankrupt samurai class, the government levied a ‘rabbit tax’ that effectively ended the rabbit market overnight. Rabbits that had been selling for hundreds of Yen were no suddenly worth as little as 0.2 Yen.

Victorian Cabinets of Curiosities

Humans love playing status-seeking games and opportunities to flaunt their wealth or power. Whether it be purchasing million dollar artwork or buying a mansion, you get the picture. Throughout history, technological progress (internet, smart phones, etc) often makes it easier to participate in a greater number of status-seeking games. Even just owning the latest tech innovation is a form of status-seeking.

This same phenomenon existed in Victorian England with the introduction of new forms of transportation (railroads) and innovations in communication like the telegraph. Individuals could suddenly travel greater distances and communicate with others around the world with relative ease. All of this coincided with the period of Pax Britannica, an era of relative peace among the world’s great powers in which the British Empire became the dominant global power. This period reflects the famous saying “the sun never sets on the British Empire”. With control of so many colonies around the world, British citizens began clamoring for imported oddities and “curiosities” from within her majesty’s realm. In short order, Britons began showcasing their exotic and rare collectibles in “Cabinets of Curiosities”, described in more detail below:

“In part due to the period’s affinity for unusual objects, Victorian antiques are often considered “odd” or even “creepy” by modern definition. In literature and film, Victorian relics are commonly used to increase suspense and mystery: a sepia-tone portrait in a dusty gold frame or an abandoned glassy-eyed doll effectively sets a bone-chilling cinematic scene. Victorian architecture is also used to create a haunting atmosphere: the iconic “Addams Family” mansion is eternally shrouded in an eerie mist, and the spooky manors depicted in the “Scooby Doo” television series are packed with dusty nineteenth century furniture – and monsters. Many of today’s Victorian antiques, cherished in their time, would be common finds in a cabinet of curiosities.

A cabinet of curiosities, also known as a wunderkammer or “kunstkammer,” is the equivalent of a zoo full of exotic animals in the world of antiquing. A practice that began in the 13th century, a kunstkammer was a place for collectors to house miscellaneous trinkets, oddities, and museum-worthy specimens. A cabinet of curiosities was especially popular among collectors in the Victorian era to display trophies from travel and gifts from faraway lands.”

Entire industries and businesses flourished by capitalizing on this growing demand for foreign rarities. For example, here’s a fun fact for you… do you know how the Royal Dutch “Shell” company got its name? Well, it is related to a popular Victorian “curiosity”: Decorative Shell Boxes.

“It all started in 1833 when Marcus Samuel Sr began a small business in the East End, dealing in antiques and curiosities as well as painted seashells, fashionable in Victorian Britain.

The enterprise was lucrative, and grew into a flourishing import-export company. Samuel organised bilateral trade between the UK and the Far East. Textiles and machinery for industrial development were shipped from the UK in exchange for rice, coal, silk, copper and porcelain. Trading partners multiplied, and Samuel was soon dealing globally in food, sugar, flour – and shells.”

From there, the “Shell” Transport and Trading Company was founded in 1897 by his two sons Marcus Samuel and Samuel Samuel. From a little shop of imported curiosities in Victorian England to a global oil behemoth. What a story!

NFTs, Speculation & Modern Cabinets of Curiosity

You would be forgiven for wondering what the hell all of this has to do with NFTs and modern markets, but hopefully it will soon make sense. First, for anyone that doesn’t know, here is a brief overview of NFTs (but really just think digital collectible):

“A couple of days ago, the musician Grimes sold some animations she made with her brother Mac on a website called Nifty Gateway. Some were one-offs, while others were limited editions of a few hundred – and all were snapped up in about 20 minutes, with total takings of more than US$6 million.

Despite the steep price tag, anybody can watch or (with a simple right-click) save a copy of the videos, which show a cherub ascending over Mars, Earth, and imaginary landscapes. Rather than a copy of the files themselves, the eager buyers received a special kind of tradable certificate called a “non-fungible token” or NFT. But what they were really paying for was an aura of authenticity – and the ability to one day sell that aura of authenticity to somebody else.

NFTs are a cultural answer to creating technical scarcity on the internet, and they allow new types of digital goods. They are making inroads into the realms of high art, rock music and even new mass-markets of virtual NBA trading cards. In the process, they are also making certain people rich.

How NFTs Work

NFTs are digital certificates that authenticate a claim of ownership to an asset, and allow it to be transferred or sold. The certificates are secured with blockchain technology similar to what underpins Bitcoin and other cryptocurrencies.

A blockchain is a decentralized alternative to a central database. Blockchains usually store information in encrypted form across a peer-to-peer network, which makes them very difficult to hack or tamper with. This in turn makes them useful for keeping important records.

The key difference between NFTs and cryptocurrencies is that currencies allow fungible trade, which means anyone can create Bitcoins that can be exchanged for other Bitcoins. NFTs are by definition non-fungible, and are deployed as individual chains of ownership to track a specific asset. NFTs are designed to uniquely restrict and represent a unique claim on an asset.

And here’s where things get weird. Often, NFTs are used to claim “ownership” of a digital asset that is otherwise completely copiable, pastable and shareable – such as a movie, JPEG or other digital file.”

With that understanding, we can turn to focusing on how this relates to the historical anecdotes we’ve covered. First, the modern frenzy for collectibles and rare items is similar to the Meiji Revolution story in that much of the mania is being driven by speculators armed with government stimulus checks and idle time due to COVID-19 restrictions. As The Spectator magazine stated in 1890, “With good information and cheap money, a man may be bankrupt in a week.”  While there are no Samurai’s speculating on rare rabbits, the same principles apply.

Second, it should be clear that the 19th century “Cabinet of Curiosities” have now merely evolved from physical cabinets to gigabytes on our smart phones and hard drives. Whether it be the NFTs we buy and sell, sports cards, Twitter followers, podcasts, e-books, whatever, phones and technology now act as the Cabinet of Curiosity that we humans utilize to play status-seeking games and flaunt our wealth. An expensive shell imported from East Asia in the 19th century has now become the digital artwork like that pictured below, an NFT recently selling for $6.6 million.

SO! Today’s post is going to focus on some bizarre and more normalized examples of speculation in rarities and collectibles throughout history.

Let’s dive in!

Tulip Mania: The Classic Story of a Dutch Financial Bubble Is Mostly Wrong

“Tulip mania was irrational, the story goes. Tulip mania was a frenzy. Everyone in the Netherlands was involved, from chimney-sweeps to aristocrats. The same tulip bulb, or rather tulip future, was traded sometimes 10 times a day. No one wanted the bulbs, only the profits – it was a phenomenon of pure greed. Tulips were sold for crazy prices – the price of houses – and fortunes were won and lost. It was the foolishness of newcomers to the market that set off the crash in February 1637. Desperate bankrupts threw themselves in canals. The government finally stepped in and ceased the trade, but not before the economy of Holland was ruined.

Yes, it makes an exciting story. The trouble is, most of it is untrue.

My years of research in Dutch archives while working on a book, Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, told me a different story. It was just as illuminating, but it was different.”

Visualizing History:

“When the crash came, it was not because of naive and uninformed people entering the market, but probably through fears of oversupply and the unsustainability of the great price rise in the first five weeks of 1637. None of the bulbs were actually available – they were all planted in the ground – and no money would be exchanged until the bulbs could be handed over in May or June. So those who lost money in the February crash did so only notionally: they might not get paid later. Anyone who had both bought and sold a tulip on paper since the summer of 1636 had lost nothing. Only those waiting for payment were in trouble, and they were people able to bear the loss.

No one drowned themselves in canals. I found not a single bankrupt in these years who could be identified as someone dealt the fatal financial blow by tulip mania. If tulip buyers and sellers appear in the bankruptcy records, it’s because they were buying houses and goods of other people who had gone bankrupt for some reason – they still had plenty of money to spend. The Dutch economy was left completely unaffected. The “government” (not a very useful term for the federal Dutch Republic) did not shut down the trade, and indeed reacted slowly and hesitantly to demands from some traders and city councils to resolve disputes. The provincial court of Holland suggested that people talk it out among themselves and try to stay out of the courts: no government regulation here.”

The Factors Driving Long Term Returns on Wine

This paper analyses 36,271 wine prices from 1900 to 2012, and calculates the returns of this niche asset class. The authors find that from “1900-2012, we estimate a real financial return to wine investment of 4.1%, which exceeds government bonds, art, and investment-quality stamps.” Quite the claim. However, much of the high-net worth investment world are already well aware of this ‘asset class’ offering an attractive alternative investment, with a Barclays report claiming roughly 25% of the global High-Net Worth population own a wine collection, and it represents about 2% of their wealth. There are even a number of wine funds dedicated to investing in this area, but more on that in a minute.

The most interesting aspect of this paper is the quantitative approach it takes to measuring the predictors of wine’s returns.

“Presenting a simple and stylized model of price dynamics… the model proposes that, in general, a wine’s fundamental value is governed by the maximum of three measures:

1. The value of immediate consumption.

2. The present value of consumption at maturity plus the non-financial ownership dividends received until consumption.

3. The present value of lifelong storage (i.e., the value as a collectible).”

In line with this ‘factor-esque’ approach to investing in wine, Quality is a significant determinant of performance, as one would imagine. “The model delivers different predictions for the price patterns of low-quality and high-quality wines (or vintages) over their respective life cycles.

“High-quality vintages appreciate strongly for a few decades, but then prices stabilize until the wines become antiquities [collectibles], after which prices start rising again. For low-quality vintages, prices are relatively flat over the first few years of the life cycle, but then rise…”

In other words, a low-quality wine initially lose money, since there is little ‘consumption value’ (a.k.a it tastes bad), but prices eventually go up over time as the wine becomes attractive for it’s value as a collectible. Conversely, high-quality wine gains money out the gate, and continues this trend for roughly 40 years while its ‘consumption value’ increases as the wine ages to a certain point of maturity, when prices then stabilize. However, like the low-quality wines, the high-quality wines then increase in price again as they become attractive for their value as a collectible.

The two chart’s below sum up this dynamic perfectly:

The article is filled with analogies for investment lessons and principles today. Consider the below excerpt:

“We should expect that trading volume at auction stays high for a longer time for a good vintage, as these bottles are best consumed at a later age. Dealers may also cater more explicitly to wine drinkers, and therefore sell a wine from a poor vintage at a younger age than a wine from a good vintage.”

To me, there is a clear analogy to investing in high-quality companies over a long time horizon, versus trading low-quality companies in the short-term. Sticking with the analogy, this would particularly apply to buying the stocks of new public companies after they IPO. The performance of different wine vintages also sounds very similar to Value investing, as the authors state: “highest returns [are] observed for maturing high-quality wines.”

But what about the market today? After I finished reading this paper, I was curious to find the answer to this question as well, and discovered that there is a Wine Stock Exchange of sorts, and numerous investment funds dedicated to this niche market. The exchange has multiple indices tracking different sections of the wine market, and some of the returns in recent years are staggering:

Visualizing History:

Notable Quote:

While you should certainly read the whole paper, I will offer one last fascinating excerpt about the soaring returns in World War II:

“Wine prices did not increase in real terms over the first quarter of the 20th century… [but] the value of wines boomed during the Second World War; prices increased by more than 600% between 1940 and 1945. Many factors probably played a role: the war upset the trade in high-end French wines, with the port of Bordeaux and many châteaus occupied by Nazi Germany; the U.K. government prohibited sales of wines and spirits by unlicensed auction houses; Christie’s had to limit its sales activities after its main offices were bombed; and many wine bottles were sold through Red Cross charity auctions that are not included in our data but may have pushed up price levels. The boom was followed by sharp decreases in wine valuations in the years after the end of the war.”

Bodies as Commodities: The Medieval Trade in Christian Saints’ Relics

“There has long been a tension in Christianity between economic concerns and providing a way to commune with the sacred. Nowhere was this more apparent in medieval Europe than with the bodies of holy persons (saints’ relics).

These bodies provided pilgrims with a focus, allowing them to direct their devotion to heaven by praying over the relics. But these bodies were not only sacred objects: they were also bought and sold for profit by enterprising merchants and monks who created vast trading networks throughout Western Europe to exchange them.”

“This research, therefore, argues that relics are best understood as ‘inalienable commodities’, or economic objects that could be traded but which were only valuable in a specific location.

Looking at the economic status of relics in studies such as this gives us valuable insights into the rise of markets in the era before the modern industrial and consumer economy. The medieval economy was not entirely based on a monetary system of exchange, but it was diverse and the objects that circulated within that economy were conceived of by their contemporaries in a myriad of ways.”

Down on The Farm

“Although big generalized manias in financial instruments tend to receive the most press coverage, history is rife with speculative frenzies in specific agricultural commodities which, despite their smaller scale, have been just as ruinous for those involved. This section rounds up several such examples, ranging from the Merino mania of 1809–10 to the ostrich feather bubble of the late 19th and early 20th centuries.”

Visualizing History:

How the Collapse of an Economic Bubble Helped Charles Darwin Prove His Theory of Evolution

“Not many people remember the chicken bubble of the mid-1800s. Variously referred to as ‘The Fancy’ or ‘Hen Fever,’ the movement saw thousands of newly-minted middle class families rush to purchase rare varieties of chicken. Those birds came with wondrously exotic names such the ‘Sultans’ imported from Istanbul, ‘Great Javas,’ or ‘Cochin-Chinas,’ which were rumored to resemble ostriches in their size and feathered legs.

Hen Fever reached its height by 1849, with breeding pairs of ornamental birds going for thousands of dollars in modern money at poultry shows. Across the U.S. and Great Britain (Where Queen Victoria’s early passion for a couple of of rare chickens had helped ignite the craze) polite parlours were apparently filled with fluffy-feathered talk of hen breeding.”

“Never in the history of modern ” bubbles,” probably, did any mania exceed’ in ridiculousness or ludicrousness, or in the number of its victims surpass this inexplicable humbug, the ‘hen fever.’

Kings and queens and nobility, senators and governors, mayors and councilmen, ministers, doctors and lawyers, merchants and tradesmen, the aristocrat and the humble, farmers and mechanics, gentlemen and commoners, old men and young men, women and children, rich and poor, white, black and gray, — everybody was more or less seriously affected by this curious epidemic.

The press of the country, far and near, was alive with accounts of ‘extraordinary pullets,’ ‘enormous eggs’ (laid on the tables of the editors), ‘astounding prices’ obtained for individual specimens of rare poultry; and all sorts of people, of every trade and profession and calling in life, were on the quivive, and joined in the hue-and-cry, regarding the suddenly and newly ascertained fact that hens laid eggs sometimes; or, that somebody’s crower was heavier, larger, or higher on the legs (and consequently higher in value), than somebody else’s crower. And the first exhibition of the society with the long name came off duly, at last, as agreed upon by the people, and myself.”

 

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