Essential Traits of an Investible Collectible

To be clear, this article shouldn't be read as financial advice. It's simply a study of the traits that any kind of collectible needs to have for it to potentially be a good investment. Read it as a theoretical paper based on what the collectibles market has proven over many, many years.

It begins with market interest

People turn all kinds of things into collectibles, motivated by a range of different reasons that I've written about here. These reasons include nostalgia and memories associated with a given item, its historical and cultural significance, knowledge and learning associated with the topic, the "Endowment Effect", and pure aesthetics and quirkiness of certain items.

What's interesting when considering people's reasons for collecting is that really any kind of item has the potential to spark an interest and become a collectible. Nostalgia and memories, for instance, are so personal that they can be tied to any object, whether physical or digital.

However, your highly personal collection of family memorabilia is unlikely to be interesting to anyone but you and thus won't have much value as an investment. On the other hand, something that evokes feelings of nostalgia in many people has a strong foundation for becoming collectibles. Think Pokémon or sports cards, comic books, action figures, etc.

There needs to be this market interest, whether it's fuelled by nostalgia or history or aesthetics, for something to be interesting as a collectible. For that item to potentially become really valuable, however, it needs more than that. It needs at least some of the traits covered in this article.

A quick note on NFTs: Many people still argue that digital collectibles don't have the traits covered below and thus don't make sense as investments. I will address this critique in an upcoming article, but I encourage you to consider it on your own as you read on.

Scarcity

For something to become valuable as a collectible, it needs to be sufficiently scarce. It's all about supply and demand. When 1,000 people want to buy a baseball card that only exists in 100 copies, those baseball cards have a strong foundation for becoming popular collectibles. The same applies to sneakers, cars, wines, or your latest NFT drop. Scarcity both drives up the prices and desirability:

We want what's exclusive and hard to get.

This exclusivity-fuelled desirability can further increase interested collectors' willingness to pay up, which drives up the price even more.

Provenance

Being able to trace the ownership of a collectible all the way back to its origin can be important for verifying its authenticity. This is particularly important for higher-priced collectibles and art. For a collectible to be sold at auction for millions of dollars, for instance, the buyer, not to mention the auction house, is likely to require proof of its provenance.

Another aspect making provenance important is the fact that past high-profile or celebrity owners often increase the value of a collectible. This is, among other things, related to the psychological phenomenon known as 'contagion', describing how we believe that the qualities of the previous owner of an item are transferred to the new owner. This helps to explain the popularity and prices of clothing and other items that used to belong to musicians, movie stars, or athletes.

(Proof of) ownership

The concept of ownership is implicit in the idea of provenance, and the ability to define the owner of an object is something we generally take for granted and don't consider the value of. Without proof of ownership, we have no provenance and no way of defining a seller or a buyer of a collectible.

It may seem straightforward: If you buy an item, having it in your possession is usually enough to prove your ownership. Especially with lower-priced items. Collectors who buy solely for speculation and never cease possession of an item are in a different spot. They need a legally binding contract stating that they're the rightful owner of a given item. This is still a solved problem though, although some will argue that the process can be improved with blockchain technology and smart contracts. Thus, the significance of provable ownership only becomes really clear when you consider the world of digital collectibles.

We're used to buying and "owning" digital files like music or eBooks, sure. But they're just copies of digital files, indistinguishable from each other. You can duplicate a file indefinitely and copy number 100 will for all intents and purposes be the same as the original. Thus, ownership has very little meaning in the digital world, because owning a given digital item doesn't prevent others from owning it at the same time. NFTs change this and suddenly enable digital collectibles. I will cover this in-depth in a future post.

For now, the important takeaway is this:

Owning an item in a way that prevents others from owning the same, and the ability to prove that you do so, are essential aspects of collectibles and investments in general.

Uniqueness

An item doesn't need to be unique to become valuable as a collectible, but some of the best investments are. In the case of sneakers, trading cars, or certain digital collectibles, for instance, you'll see items in a series identified as "X of Y" (e.g., "number 128 of 1,000"). This makes each item unique, going beyond the scarcity already introduced by the limited production of "identical" items.

Even physical collectibles that aren't numbered may be unique if they're handcrafted or show signs of wear and tear. The same is even being built into certain digital collectibles. And if an item isn't identifiably unique in and of itself, its provenance may make it so.

In summary

For something to become interesting as a collectible in the first place, it needs to have a certain level of market interest fuelled by nostalgia, historical significance, beauty or quirkiness, or one of the other reasons behind people's desire to collect.

For that collectible to potentially be a good investment though, it needs more than that. First of all, it needs to be scarce enough that demand doesn't outpace the supply. Additionally, being able to verify an item's provenance is key, particularly for the most valuable ones. Something that goes hand in hand with provenance is the ability to prove ownership of a given item, which becomes especially interesting in the world of digital collectibles.

Finally, although collectibles don't need to be unique, owning a one-of-a-kind is certainly appealing to many collectors and speculators. Numbered, limited-edition items are found in sports cards, sneakers, comic books, digital collectibles, and more.