How a Big NFT Auction at Sotheby’s Ended in Mystery

(Bloomberg) -- It was supposed to be a triumph.

Sotheby's first ever standalone live, in-person auction last week devoted to NFTs—104 of the famous CryptoPunk series, grouped into a single lot that carried an estimate of $20 million to $30 million—was trumpeted to be historic. It was enough to get an expectant crowd to trek to Sotheby's York Avenue salesroom on Manhattan's far East Side to bear witness to an auction that might last just minutes.

“It doesn't get bigger than this,” the auction house tweeted about the sale, writing in a further post that “CryptoPunks were experimental, but are now antique masters. Owning one is symbolic. Owning 104 is iconic.”

By this, Sotheby's was referring to the fact that CryptoPunks are one of the most established series in the world of non-fungible tokens or NFTs, a shorthand for digital artworks tied to smart contracts. Created in 2017 by the studio Larva Labs, CryptoPunks number 10,000 items, each different from the next. And even though their market has slumped in recent months—the 30-day average price has sunk around 47% from its November 2021 high of about $510,000, to roughly $270,000 in late February, according to market researcher Nonfungible—CryptoPunks still represent one of the closest things to a safe investment in the NFT space.

But as the anonymous consignor of the 104 CryptoPunks discovered on Wednesday, a safe investment is not always the same as a good investment. Twenty minutes after the sale was supposed to begin, a loudspeaker in the salesroom announced that the auction was canceled. In the face of all the hype, Sotheby's or the consignor determined for unspecified reasons that it wasn't a good time to sell.

Sotheby's declined to comment on what went wrong; the consignor, who goes by the handle 0x650d, did not respond to multiple requests for comment via their Twitter account. In an emailed statement, Sebastian Fahey, Sotheby's managing director of EMEA and executive lead for Sotheby's Metaverse, wrote:“This is not a reflection of the broader NFT market, nor of the inherent desirability of CryptoPunks. Floor prices for CryptoPunks remain steady and sales continue apace and at ever increasing values.” Ultimately, Fahey continued, “the decision on behalf of the consignor to ‘hodl' suggests the collector's confidence in their value and in the future market for Punks remains strong.”

Still, the sale's cancellation could have serious, long-term implications for traditional auction houses, along with the NFT market in general.

The Auction

On the night of the sale, Sotheby's New York salesroom was filled with a youngish crowd serenaded by a DJ wearing a CryptoPunks mask. It was the first time attendee Brandon Buchanan, founder and managing partner of Meta4 Capital, ever been to a live auction. “I didn't even know what to wear,” Buchanan says. “I ended up wearing a suit, but everyone was mostly in jeans and a sweater.”

One thing Buchanan was sure about was how much he was willing to spend. CryptoPunks had been selling, on average, for a little more than $270,000 apiece, meaning that all 104 of them, purchased on the open market, would cost in the range of $28 million—near what Sotheby's pegged as the high estimate.

But if Buchanan wanted to buy 104 NFTs, he already could: There was no shortage of people holding CryptoPunks who were willing to sell. The only reason to bid on a lot containing so many, he'd determined, was if he could get a bargain. “It was going to take a very specific type of bidder,” he says. “You would need to be an investment fund that was going to need a significant discount, to then be able to go flip the CryptoPunks over an extended period of time.”

Buchanan arranged for a line of credit from an institutional lender that specializes in crypto, in preparation for making a bid on the lot. He says he was planning to offer from $13 million to $15 million. With auction house fees that could account for about 20% of the sales price, “That would be $15 million to $18 million, all-in,” he says.

Buying, Selling, Then Buying to Sell

It's clear that both Sotheby's and the consignor, which the auction house has confirmed tweets via Twitter account @0x650d, thought they could make far more.

On Aug. 9, in an apparent reference to the recent purchase of the 104 CryptoPunks, the account tweeted out a thread that started: “Why did I spend $7MM on 104 floor punks? Easy: because I choose wealth. /1” and included the post “So why buy 100 floor punks instead of a single rare one? The short answer is liquidity and diversification. 5/”

Then, on Aug. 28, in another tweet thread, the collector announced that the collection would be fractionalized, a term that describes putting all of the CryptoPunks in a digital “vault” and then selling tokens that represent a fraction of the total value of every Punk. “After spending time with the wonderful punk community on Discord, I believe that this will help many, many people share the upside of my collection,” tweeted @0x650d.

More than 1,800 unique wallets, or people, bought about 17.9% of the total supply of that token, named PUNK Floor, according to the site Fractional.art. According to a tweet by @0x650d, an additional 30% of the total supply of PUNK Floor was sent to a decentralized exchange, a kind of exchange for cryptocurrencies that does not require an intermediary between buyer and seller.

According to blockchain data analytics firm Nansen, @0x650d's wallet deposited 516 ETH (the cryptocurrency Ether, whose value can fluctuate dramatically on a minute-by-minute basis) into the same decentralized exchange to help with the liquidity of PUNK Floor's trading. The same wallet then received trading proceeds of 1,462 ETH, meaning that the collector seems to have made 946 ETH in total.

In early December though, when Ether was near its all-time high, @0x650d bought back all the NFTs for 8,836.9131 ETH. Since @0x650d had a majority ownership of the PUNK Floor tokens, that buyback cost only 520 ETH, which was paid to other PUNK Floor token holders, Nansen's data show. This means that collector @0x650d kept 8,317 ETH.

It's not a straightforward process, but the collector's profits, according to Nansen, were clear: @0x650d gained 426 Ether from the exchange, which is worth roughly $1.3 million, according to Ether's price on March 2.

“I've got plans,” tweeted @0x650d at the time of the buyback. A month later, the collector tweeted to announce the sale at Sotheby's.

Auction Houses + NFTS

Ever since Christie's sold a $69.3 million NFT, Beeple's Everyday: The First 5,000 Days, in March 2021, traditional auction houses have been a megaphone through which various NFT collectors have advertised and promoted their holdings.

“I do believe that Sotheby's and Christies and even Phillips have established a certain price level for NFTs,” says Nanne Dekking, founder and chief executive officer of the blockchain-based digital art registry Artory and a former vice chairman of Sotheby's. “A price record at Sotheby's and Christie's means more for the value of your artwork than at the [NFT marketplace] OpenSea, currently.”

As the Beeple sale demonstrated, a surefire way to get people to pay attention to your NFT is for it to sell for a record price. (In fact, the purchaser of Everydays was a Singapore-based crypto entrepreneur who had already invested heavily in Beeple's work.)

“Our NFT sales over the last year have consistently set new benchmarks and records for NFTs, showcasing how our approach to creating unique and thoughtfully curated sales are set apart from other platforms,” wrote Sotheby's Fahey in the emailed statement.

This arrangement, wherein NFT owners bought and sold work for huge sums that were, in turn, breathlessly reported by international news organizations, including Bloomberg, benefited the owners. It also benefited Christie's and Sotheby's, which respectively sold $150 million and $100 million worth of NFTs in 2021. Last Wednesday night in New York, it was set to benefit @0x650d.

Bad News

Having already made an estimated $1.3 million from the initial self-reported $7 million purchase of the 104 CryptoPunks, it seems likely that, if the auction had hammered for $10 million, @0x650d would have made a substantial profit in less than a year. Had the lot sold for the high estimate, the profit would have been more than triple @0x650d's investment.

To render a potential windfall well above $14 million, in other words, just two people in the audience on Wednesday night had to decide that the 104 CryptoPunks were worth a slight premium over the going rate.

But the allure of CryptoPunks—namely, that they're an established, “safe” market—is the very thing that seems to have kept buyers from committing to such a high price.

For the past 365 days, around 5,000 active wallets have bought or sold CryptoPunks more than 11,600 times, according to Nonfungible. In other words, a relatively small community of people buy and sell the CryptoPunks back and forth, and they've established among themselves how much these CryptoPunks are worth. A single sale wouldn't be likely to change that.

“The only reason that would be a significant [auction] is if it would show demand from traditional contemporary art collectors—bringing them into the space,” says Buchanan. Those collectors, he continues, appeared not to have shown up, leaving an audience of passive spectators rather than bidders. “Most of the crowd was a crypto crowd,” he says. “You know, a lot of those folks were not people who were willing to bid on the item. They were just kind of there to see the spectacle.”

Perhaps for that very reason, the spectacle never happened. This raises the specter of a ceiling for NFT's popularity and a limit to the gravy train that traditional auction houses have enjoyed for the past 12 months. Perhaps NFTs are not, as their proponents assert, infinitely scalable. Perhaps, as Sotheby's canceled auction might indicate, they are for a select, devoted few.

“This sounds,” says Dekking, “like the traditional art market. Limited demand, people selling to one another, and once in a while there's an exception with huge prices.”