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Leverage is an extremely powerful tool, the dangers of which have been demonstrated time and time again, particularly since the turn of the millennium.
Heck, for a recent example, we only need to go back a few months to FTX's undoing at the hands of leverage - with an added ingredient of apparent, massive fraud - and the crypto dominoes that fell (and continue to fall) in the aftermath.
How do you think NFT collectors reacted to the leverage-stricken carnage that plagued the crypto space?
"Hold my ape." Literally.
Recent weeks have seen the number of collateralized NFTs on NFT lending platforms like BendDAO and NFTFi consistently grow, coinciding with rising floor prices for many popular projects. In mid-November, there were about 268 Bored Apes collateralized on BendDAO. Today, that figure is closer to 356, up 33% after peaking at 396 last week. The current collateral represents over $42 million in value. That's just one platform and just one project; many other "blue-chip" projects can be used and are used as collateral for borrowing.
That's not to pick on NFTs (though the fact collateralized NFTs effectively skyrocketed in the immediate aftermath of FTX and associated rubble is confounding), as lending and borrowing activities are hardly isolated to the space. In fact, there are entire departments of the world's largest banks dedicated entirely to lending against clients' fine art collections.
There are of course a few key differences. The art loan sizes are often eight or nine-figures to clients with significant balance sheets, and the collateral generally consists of institutionally-regarded collections with long track records of marketability. Moreover, because of those factors, the borrowing cost is more easily-hurdled than the APYs seen in the NFT space, which bottom out in the low double digits and commonly cross 20%.
When lending and borrowing can be done, enterprising parties will almost always pursue it. Card and comic book auction players and marketplaces are growing ever more active in the exploration of liquidity solutions, ranging from cash advances to outright lending. Recall PWCC established a $175 million credit facility in 2022 to support its lending businesses. It seems likely that leverage, whether there or elsewhere, has played some role in many of the massive failed flips we've seen in recent months.
Unlocking liquidity from valuable assets can absolutely be a useful tool. But when those valuable assets can become 50% less valuable in months or even weeks, the danger is real and the negative impact can be severe and widespread. If that lesson can't be learned even in the immediate aftermath of FTX, well, then we guess it probably never will be.
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