Keep the Change: Coin Investing Preview
New asset class inbound: Coins are coming to fractional marketplaces.
Before we continue, I should clarify that we’re not talking about Doge, Shiba, or SafeMoon.
Now that we’ve cleared out the crowd who believes the only coins with value are prefaced with ‘crypto’, let’s explore the world of physical coin collecting.
The first question to answer is ‘why’. Why are some coins valuable while the majority are so invaluable that we uncaringly toss them into the water feature at the local mall?
Unlike the majority of alternative assets, and actually the majority of general assets, coins have historically carried value that is deeper than the simple answer of ‘because someone told me so’. Throughout history, the value of coins generally corresponded with their metallic composition. Coins throughout the early days of modern civilization, for example, were often comprised of valuable natural elements such as gold and silver, which correlated in tandem with the value of the coin itself. While the value of our coins today is not directly tied to the price of nickel or copper, there is a plethora of attributes and backstory that makes a small, button-sized object worth millions, while others are effectively worthless.
Coins that Break the Bank
So what is the 1952 Topps Mickey Mantle or the T206 Honus Wagner of the coin world and what makes it so valuable?
Currently, the undisputed champion of coins is the 1933 Double Eagle. When initially produced in 1933, the double eagle was actually not particularly rare. There were 445,500 double eagle’s minted but no examples were ever circulated due to the Gold Reserve Act of 1934. The law prohibited the circulation or private possession of gold coins which in turn, made the 1933 double eagle an illegal form of currency before it even became a useable form of currency. The coins, which are comprised of 90% gold and 10% copper, were ordered to be melted down with the exception of two which were to be stored at the Smithsonian National Museum of American History. An estimated 20 coins survived though and today, only one is still privately owned.
Since escaping the melting pots in 1934, the single privately-held specimen has been well-traveled. The coin was once owned by King Farouk, the tenth ruler of Egypt, and then disappeared before reemerging as the centerpiece of controversy that involved acclaimed coin dealer Stephen Fenton and the U.S. Secret Service. Fenton attempted to sell the coin to an undercover agent and while charges were eventually dropped, the double eagle ended up in the possession of the United States government, who stored the coin in the World Trade Center treasury vaults until July 2001, just two months before the September 11th attack on the Twin Towers. In 2002, the coin was sold at a public auction to collector Stuart Weitzman for $7.59 million. At the time, the final bid was nearly double the price paid for any other coin to date and would remain the most expensive coin sold until 2013. After holding the coin for nearly 20 years, Weitzman sold the double eagle at Sotheby’s for $18.9 million on June 8, 2021, which in turn, once again made the 1933 double eagle the world’s most expensive coin.
The only other coin that has sold for at least eight figures is the 1794 Flowing Hair dollar. The Flowing Hair dollar was the first coin issued by the United States federal government after the U.S. Constitution granted Congress the power to ‘coin currency and regulate the value’.
The U.S. Mint in Philadelphia struck 1,758 of these coins in a single day: October 14, 1794. There are approximately 300 still in existence with an estimated 100 examples privately owned. Often considered the most important coin ever minted, there has not been a sale for one since 2013. That sale, which occurred on January 24, 2013, struck a hammer price of $10 million. The record-breaking sale made the 1794 Flowing Hair dollar the first coin to attract an eight-figure price and would stand as the record until the 1933 double eagle sale. In October of this year, that exact 1794 coin re-appeared at an auction hosted by Legend Auctions in Las Vegas but ultimately went unsold after failing to attract a minimum reserve bid.
So you think you have a few coins in your collection that might be worth something? The first step, similar to comic books, sports cards, and video games, is to have your collection authenticated and graded. Currently, there are four primary grading agencies that specialize in coins.
ANACS is the oldest coin grading service in the United States and specializes in conservation and composite mint sets. Independent Coin Graders (ICG) is a newer grading company founded in 1998 that also offers authentication and rating services for cryptocurrency physical tokens. The Professional Coin Grading Service (PCGS) and the Numismatic Guaranty Corporation (NGC) are the two most recognizable firms in the space and have graded over 50 million coins combined since their respective inceptions.
NGC is the largest coin grading company by volume and the official grading company of the American Numismatic Association. NGC uses the Sheldon Scale to assign a numeric grade to each coin they review and also specializes in ancient coins, such as the mint that will be fractionalized this week. The Sheldon Grading Scale is a 70-point system that assesses the quality and condition of a coin similar to a 10-point scale used by sports card agencies such as PSA, BGS, or SGC.
Before the coin is provided a numeric ranking, it receives a two-letter code that describes its method of production, or ‘strike’. The most common strike types are Mint State (MS) and Proof (PF). Mint State coins are struck were struck for circulation while Proof coins were struck specifically for collectors.
For ancient coins, NGC uses a process known as the adjectival system. This system applies a grade abbreviation that correlates with a range of numeric grades on the Sheldon Scale.
For example, Rally will offer a unique coin from the Byzantine Empire that is known for being the first depiction of Christ on a coin. Rally’s coin has earned a grade abbreviation of ‘Ch MS’ which stands for Choice Mint State. The Sheldon Scale equivalent for a coin that carries a grade of Ch MS is between 63-64 out of a possible 70. In essence, the Rally coin would be similar to a sports card that receives a PSA 9. Speaking of sports cards, collectors know that attributes such as centering, corners, edges, and surface are the primary features that impact the grade of a card. For ancient coins, collectors value a trio of traits known as the Three S’s: Strike, Surface, and Style.
Strike is scored on a 5-point scale and reviews the quality of the coin’s production. Are there any signs or adjustment marks, double strikes, or any issues with the evenness of the coin? To receive a ‘5’ the strike does not necessarily need to be perfect, but it does have to be in the top 20% of the total graded population.
Surface grades are probably easier for those coming from the sports card world to understand since this trait is similar to the surface grade given to a card. Does the coin display signs of damage such as corrosion, silvering, or scratches? The surface grade is also on a 5-point scale and a coin that receives a 5 is in the top 20% of the population.
Style is not reviewed and recorded via a point scale but instead can earn the coin additional designations. Some coins also carry a star designation for exceptional eye appeal that is displayed on the label.
So now that we have established some knowledge regarding the top coins in the space and the process of authenticating them, it is time to answer the real question on everyone's mind. Are coins historically good investments? Art Market Researcher tracks a variety of indices including watches, jewelry, and English coins. As of the fourth quarter of 2020, coins outpaced each of those luxury goods over the last ten years and when compared to other alternative asset offerings, only trailed returns from rare whisky.
The average annual return for all coins graded Mint State 65 -70 from 1979-2016 was 11%, compared to the return of the gold bullion which was 5.2%, and treasury bonds which were 8%. Coins graded slightly lower, between 63-65, closed that 37 year period with an average annual return of 9.3%. The 1.7% difference between the coins emphasizes the importance of grading but also shows the strength of the overall market.
Investments in alternative assets are often about more than just performance through. As a hedge against inflation, coins have demonstrated impressive performance matched with one of the best inflation correlations on the market.
In an independent study completed by Raymond Lombra from 1979 through 2016, the value of rare coins were found to have a strong correlation to inflation compared to other investment vehicles such as stocks, bonds, and gold. It is also worth noting that Lombra knows his stuff. He’s a Professor of Economics at Penn State University who is cited in numerous publications and has worked as a consultant for the Federal Reserve, International Monetary Fund, and Congressional Budget Office. When investors are trying to hedge against the market, they often look for assets with a low correlation to the S&P 500. The opposite is true though if you want to correlate with inflation. In times of high inflation (i.e. right now), investors looking to hedge will seek out markets that move in lockstep with the rise and fall of monetary purchasing power. The more positively correlated an asset is, the more it will match the progressive increase in prices. In the 37-year study completed by Lombra, rare coins that earned Mint grades between 63-70 carry a correlation to inflation of 0.59. For reference, gold’s correlation is 0.28 while treasury bonds are -0.10.
Although coins may never be as relatable or attractive to modern investors as sports cards and video games, they do offer a unique investment vehicle that combines much of what investors look for in an asset class. First and foremost, coins have a performance track record that dates back to the mid 20th century similar to the art and fine wine market. There are also grading agencies that authenticate and assign a numeric score to the coin, similar to sports cards and video games. Last and certainly not least, coins can carry an unmatched level of history and impact. Take the 1933 double eagle, for example, a coin that signaled a shift in our monetary policy or the 1794 Flowing Hair dollar, which is tied directly to the founding of the United States. As new markets have emerged over the last few years, we have all had the same thought at some point. ‘Why did I throw out all those boxes of sports cards I had piled in my closet for years’ or ‘Why did I rip open my copy of NBA Jam instead of keeping it sealed’.
As coins continue to develop as an asset class, you might start to think twice before you tell the cashier to ‘keep the change’.
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