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How a Sotheby’s NFT Auction Ended in Mystery

When bidders were already there, a collection of 104 CryptoPunks was hurriedly removed off the auction block. What does this mean for the industry as a whole?

It was meant to be a resounding success.

Last week’s Sotheby’s first-ever standalone live, in-person auction solely to NFTs—104 of the famous CryptoPunk series, combined into a single lot with a $20 million to $30 million estimate—was hailed as historic. It was enough to draw a crowd to Sotheby’s York Avenue salesroom on Manhattan’s far East Side, where they would witness an auction that may last only a few minutes.

“It doesn’t get any bigger than this,” the auction house said in a follow-up tweet, adding that “CryptoPunks were experimental, but are now antique masters.” Having one is a status symbol. “Being the owner of 104 is legendary.”

Sotheby’s was referring to the fact that CryptoPunks is one of the most well-known series in the world of non-fungible tokens, also known as NFTs, which are digital artworks linked to smart contracts. CryptoPunks are a collection of 10,000 things created by the firm Larva Labs in 2017. Each item is unique. Despite the fact that their market has plunged in recent months—the 30-day average price has dropped around 47% from a high of nearly $510,000 in November 2021 to around $270,000 in late February, according to market researcher Nonfungible—In the NFT world, CryptoPunks are still one of the closest things to a secure investment.

However, as the anonymous consignor of the 104 CryptoPunks learned on Wednesday, a safe investment is not always a good investment. The auction was cancelled 20 minutes after it was scheduled to begin, according to a loudspeaker in the salesroom. Despite the hoopla, Sotheby’s or the consignor decided it wasn’t the right time to sell for undisclosed reasons.

Sotheby’s declined to comment on what went wrong, and the consignor, known as 0x650d on Twitter, did not respond to several requests for comment. “This is not a reflection of the broader NFT market, nor of the inherent attractiveness of CryptoPunks,” Sebastian Fahey, Sotheby’s managing director of EMEA and executive lead for Sotheby’s Metaverse, stated in an emailed statement. CryptoPunks’ floor pricing have remained stable, and sales have continued at a rapid rate, with ever-increasing values.” “The consignor’s decision to ‘hodl’ implies the collector’s faith in their value and in the future market for Punks remains robust,” Fahey said.

Nonetheless, the cancellation of the auction could have major long-term consequences for traditional auction houses and the NFT sector in general.

The Public Auction

The Sotheby’s New York salesroom was packed with a youngish crowd on the night of the auction, serenaded by a DJ wearing a CryptoPunks mask. Brandon Buchanan, the founder and managing partner of Meta4 Capital, has never gone to a live auction before. “I had no idea what to dress,” Buchanan admits. “I ended up wearing a suit, although the majority of the attendees were dressed in jeans and a sweater.”

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Buchanan was certain about one thing: how much he was willing to spend. On average, CryptoPunks were selling for a little more than $270,000 each, implying that if all 104 of them were purchased on the open market, they would cost almost $28 million—near Sotheby’s high estimate.

But if Buchanan wanted to acquire 104 NFTs, he could already do so: there were plenty of people wanting to sell their CryptoPunks. He’d determined that the only reason to bid on a lot with that many was if he could get a good deal. He explains, “It was going to take a very specific type of bidder.” “To be able to flip the CryptoPunks over an extended period of time, you’d have to be an investment fund that needed a substantial discount.”

In order to make a bid on the lot, Buchanan secured a line of credit from an institutional lender that specializes in cryptocurrency. He claims he intended to make an offer ranging from $13 million to $15 million. “That would be $15 million to $18 million, all-in,” he says, estimating that auction house fees may account for around 20% of the sale price.

Purchasing, selling, and then purchasing to repurchase

It’s evident that both Sotheby’s and the consignor, as confirmed by the auction house’s Twitter account @0x650d, thought they might make a lot more money.

The user tweeted a thread on Aug. 9 that began, “Why did I spend $7MM on 104 floor punks?” in an apparent allusion to the recent purchase of the 104 CryptoPunks. “So why buy 100 floor punks instead of a single rare one?” and included the post “Easy: because I chose wealth. /1” and included the post “So why buy 100 floor punks instead of a single rare one?” Liquidity and diversification are the short answers. 5/”

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The collector then announced that the collection would be fractionalized on Aug. 28 in another tweet thread, a word that describes storing all of the CryptoPunks in a digital “vault” and then selling tokens that reflect a percentage of the overall worth of each Punk. “I feel that this will help many, many people share the upside of my collection,” tweeted @0x650d after spending time with the fantastic punk community on Discord.

According to the website Fractional.art, more than 1,800 distinct wallets (or persons) purchased around 17.9% of the entire supply of the PUNK Floor coin. According to @0x650d’s tweet, an additional 30% of the entire supply of PUNK Floor was delivered to a decentralized exchange, which is a type of cryptocurrency exchange that does not require a middleman between buyer and seller.

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

@0x650d, however, bought back all the NFTs for 8,836.9131 ETH in early December, when Ether was near its all-time high. According to Nansen’s data, because @0x650d owned a majority of the PUNK Floor tokens, the buyback cost only 520 ETH, which was distributed to other PUNK Floor token holders. This means that @0x650d was able to keep 8,317 ETH.

It’s not an easy operation, but the collector’s gains were evident, according to Nansen: According to the price of Ether on March 2, @0x650d acquired 426 Ether from the exchange, which is worth nearly $1.3 million.

At the time of the buyback, @0x650d tweeted, “I’ve got plans.” The collector tweeted a month later to announce the Sotheby’s transaction. Auction Houses + NFTS

Traditional auction houses have provided a megaphone via which various NFT collectors have advertised and promoted their holdings since Christie’s auctioned a $69.3 million NFT, Beeple’s Everyday: The First 5,000 Days, in March 2021.

“I believe Sotheby’s, Christie’s, and even Phillips have established a price level for NFTs,” says Nanne Dekking, founder and CEO of Artory, a blockchain-based digital art registry and former vice chairman of Sotheby’s. “A price record at Sotheby’s or Christie’s implies more for the worth of your artwork than it does at the moment at the [NFT marketplace] OpenSea.”

As the Beeple auction revealed, selling your NFT for a record price is a certain method to catch people’s attention. (In fact, the buyer of Everydays was a Singapore-based crypto entrepreneur who had already put a significant amount of money into Beeple’s efforts.)

“Our NFT sales have constantly set new standards and records for NFTs over the last year, demonstrating how our approach to create distinctive and meticulously curated sales sets us apart from other platforms,” Sotheby’s Fahey stated in an emailed statement.

The owners benefited from this system, in which NFT owners bought and sold work for large sums that were then enthusiastically covered by foreign news organizations. It also helped Christie’s and Sotheby’s, which sold $150 million and $100 million in NFTs in 2021, respectively. It was supposed to benefit @0x650d last Wednesday night in New York.

Unfavorable News

@0x650d would have made a considerable profit in less than a year if the auction had been hammered for $10 million, having already made an estimated $1.3 million from the initial self-reported $7 million purchase of the 104 CryptoPunks. If the lot had sold for the high estimate, @0x650d’s investment would have been more than double.

In order to generate a potential windfall of more than $14 million, only two persons in the audience on Wednesday night had to agree that the 104 CryptoPunks were worth a modest premium above the going pricing.

However, the attractiveness of CryptoPunks—namely, that they’re a well-established, “secure” market—seems to have deterred buyers from paying such a high price.

According to Nonfungible, over 5,000 active wallets have bought or traded CryptoPunks over 11,600 times in the last 365 days. In other words, a small group of people buy and sell CryptoPunks back and forth, and they’ve determined how much these CryptoPunks are worth among themselves. That is unlikely to alter with a single sale.

“The only reason that [auction] would be relevant is if it demonstrated interest from traditional contemporary art collectors—bringing them into the space,” Buchanan says. He goes on to say that those collectors did not appear, leaving an audience of passive onlookers rather than bidders. “The majority of the attendees were crypto enthusiasts,” he explains. “You know, a lot of them people weren’t interested in bidding on the item.” They were only there to witness the spectacle.”

Perhaps it was for this reason that the show was never staged. This suggests that NFT’s popularity may have peaked, and that the gravy train that traditional auction houses have been riding for the previous 12 months may be coming to an end. Perhaps NFTs aren’t as infinitely scalable as their proponents claim. Perhaps they are just for a select, devoted few, as Sotheby’s aborted sale suggests.

“This sounds like the typical art market,” Dekking explains. Limited demand, people selling to one another, and the occasional outlier with exorbitant prices.”

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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