Floor is Rising Ep 4 - Price Manipulation in NFTs, What is it and How is it done
Primer: Learn about the darker side of the NFT marketplace where price manipulation and price-fixing is a known secret. Find out if there are such equivalent behaviour in the traditional art world and why do people persist in such actions. Read on to uncover the unspeakable inside the world of NFTs.
Price manipulation is a known secret
Price manipulation is a controversial topic
The most popular reason why people don't want to get into NFTs - thinks it is a manipulated market
Not much discussion because
Promoters of NFTs don't want to talk about this because it will damage the NFT market
Others just don't collect enough NFTs to know anything about this
Hard to do due diligence due to anonymity
This is not an isolated event in the NFT world
Anonymous / pseudo-anonymous identity makes it hard to do due diligence on artists and collectors that is done manually in the traditional art world
Examples
Beeple's "Everydays: The First 5000 Days"
Everyone knows that the highest NFT sale in history is Metakovan's purchase of Beeple's "Everydays: The First 5000 Days" at around 70 million USD
Before that purchase, Metakovan bought twenty 1/1 Beeple artworks using different proxy bidders to acquire nearly every single piece of it to form B.20 Fund
A few weeks later, he bought the "Everydays: The First 5000 Days" artwork by Beeple for 70 million USD
Strategic plan to acquire Beeple's works and also to raise the value of all his holdings
Crypto Punks and Rarible platform
Most famous NFT collectible - Crypto punks
The floor price went from just over 1 ETH to 6 ETH from Jul to Sept/Oct 2020
One reason for the huge price increase is that the Rarible platform just opened
Rarible incentivised the usage of the platform through the distribution of RARI tokens for buyers and sellers
The more buying/selling you do on the platform, the more RARI tokens received
This encouraged people to trade in bigger volumes - results in huge sales of Crypto punks on the Rarible platform, which had never happened before
"Now, I would definitely call that price manipulation to a certain extent. But it's not sort of the classic we're going to dump worthless works on people but it was kind of strategic transactions that happened to take advantage of certain events that happen at that time"
- Sabretooth
The price of Crypto punks skyrocketed during that period of time
Still worthwhile for people to do because the RARI tokens received for the sales more than compensated for any loss of opportunity
Famous people buying Crypto punk
Famous people like Daryl Morey, President of basketball operations at Philadelphia 76ers, bought a bunch of Crypto punks with headbands,
This relates to what he is doing as a career - which is basketball
He discloses the purchase and the price of headband punks went up
Basically whatever attribute of the punks he bought and subsequently disclosed, the price went up
Selling out works even before a show had begun
In traditional settings, you have an art calendar where there is an auction, Biennale, art fair, festivals and such every month
There are cases where works had been sold out way before a show even began
There is a secondary market activity where people on the auction side is already looking for potential buyers when the show is promoted to the general public
This is market fixing or price-fixing - determining the market in advance for an event that hasn't happened yet
A lot of NFT actors are behaving in a similar way
Functions of gatekeeping
Gatekeeping when done properly will filter out unsavoury actors
Prominent galleries will sometimes rebuff collectors even if they have the most money
Sometimes they will rather place artwork from a fast-rising artist in a smaller museum because it will be better for the long term career prospects of the artists
Not good if one or a cartel of collectors are the only ones that have access to the work because artists gain traction by being exhibited in different contexts.
Many artists are initially supported by a small group of private collectors, but eventually, they need more exposure to museum shows, art fairs etc for a wider audience
If the price of art rises too fast, it might attract flippers, hence the price might collapse irreversibly when these flippers disappear in the next auction
Peace of mind
Traditionally, collectors are small, contingent and of an unknown quantity
These days the collectors entering the market have money and are pseudo-anonymous but very active
If Guggenheim decides to do a show on one of the artists and you have 50% of the works held by private hands, and you have no idea who has the most important work, you can't loan from them and you have no show
There is peace of mind associated with the fact that collectors are respectable members of society and will not just flip the next auction and disappear
"So that's the kind of price-fixing I think that is appreciated, or that's the kind of collusion that I think most people would agree is beneficial for all players in the sense that it does build sustainable long term career for the artists for the dealer. And of course, the question is like, well, do we want these legacy structures to be replicated?"
- Kizu
This kind of collusion is appreciated because it is beneficial for all players, leading to a more sustainable long term career for both artists and dealers
Is this legacy structure replicated in the digital world?
Yes - legacy structure and the gatekeeping mechanism is replicated in the NFT world
There are plenty of incentives to recreate such structures in the digital world
All platforms want to become a gatekeeper so that they have a moat to attract investors and users
Or there are individuals that gained a lot of notoriety and influence on social media so that they themselves can become that curator and the tastemakers
Will be able to do special deals and have the power to offload works they had purchased at a higher price
Physical vs Digital world
The difficulty of replication in the physical world
In the physical world, it takes a kind of serendipity to have everything just right, so it is hard to replicate
E.g. NYC Soho - where all the artists spontaneously appeared at the same place, built from there, became famous enough to have museums shows and foundations under their name
Why?
Rent is cheap - rat-infested loft in Soho
Trade works with each other, couldn't sell
Happened in the early 90s where galleries are catering to the rising middle class
There is a general awareness that contemporary art is something of a status symbol that could be collected by wealthy individuals
Hard to replicate this again
The ease of replication of the digital world
If crypto punks prices are too high, Bored Ape Yacht Club can come along and try to do something new
The barrier to entry is very low, which helps to serve as a check against the gatekeepers
Will always have a demand for people to build a separate community from scratch
Hence easier to replicate in the digital world
Conclusion
Price manipulation is essentially happening in every single sale of the NFT market
People who get wrecked are those who base their decision solely on the price action of the NFT
"And I think the people that will get absolutely wrecked are the people who are sort of trading NFT on a short term basis. Because you know, when you're trading NFT on a short term basis, you are subjected to these market vagaries to a much bigger extent. And unless you're sort of the top market manipulator, it's just very easy to be left holding the bag, so to speak"
- Sabretooth
You can even say that because price manipulation happens so frequently, it is actually transparent to all players
People who survive and thrive are those that still use a non-price action as a fundamental driving force behind the collections
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