Is the Boom in the Sports Cards Collectible Market Sustainable?

Buy the rumor; sell the news

Many years ago, I was obsessed with baseball cards. I recall going to baseball card shows in the early ‘90s just to buy specific cards that I had not been able to buy in the larger packs that you would buy. Multiple copies of Ken Griffey, Jr’s rookie card lie somewhere deep in the bowels of my mother’s basement.

I started thinking about this because I recently read a post about an effort to make sports card collectibles into more of a coherent alternative asset.

What is an alternative asset?

At its simplest, “alternative asset” refers to any financial instrument that is not a stock, bond, or certificate of deposit. Within the category of “alternative assets” are many sub-categories, among them being familiar assets such as real estate, private business interests, and music royalties. Other alternative assets are more rare or unusual, such as certain collectibles, commodities and derivatives thereon, and intellectual property portfolios.

The company that would change this market

The company in question is called Alt. “Alt,” of course, is shorthand for “alternative asset,” and collectibles are certainly a kind of alternative asset.

Alt claims to support the development of a coherent sports card collectibles industry by focusing on three main areas:

Alt Platform - Alt allows for easy research, tracking, and management of alternative assets with real-time valuation using Alt’s proprietary Alt Value.

Alt Insurance - Alt provides a dynamic insurance product to protect assets. A customer’s insurance policy is scheduled and updated automatically via its connection to the Alt Platform and the Alt Value, ensuring complete coverage based on the holdings’ market values.

Alt Vault - Alt provides a “vault as a service” where customers can physically store and transact with them through Alt’s platform.

(The above block quote is taken from the blog post I mention above.)

This all sounds very interesting, but I am skeptical that it will work. This is not to say that there is no value in sports cards: there sometimes is, for certain cards, at certain times, and under certain conditions.

The ephemeral nature of fame and collector desirability

The ephemeral nature of fame makes it hard for sports cards to maintain their value over long periods of time. For every generational talent like Michael Jordan, whose rookie card appears to have maintained its stratospheric value over the decades, there are many others, like Clyde Drexler, a near peer of Jordan’s, whose rookie card does not command anywhere near the same value. And, the value of players’ cards in subsequent years quickly falls off a cliff.

This means that, for any given player, a chart of card value by year of issue would show an exponential decline towards zero: most players’ cards, in most years, are worth next to nothing. It is the outliers—the Michael Jordans, Mike Trouts, etc.—whose rookie cards generate almost all of the returns to be had in collecting sports cards. And, it’s not clear that these players’ card values sustain themselves over time: Ken Griffey, Jr’s, rookie card appears to have declined in value over the years, and no serious fan of baseball could argue that he is not, like Trout, a generational player. The durability of value for a given card is a function not of the player’s skill or the rarity of the card, but rather, it is a function of the player’s popularity over time. Michael Jordan was always a much more popular player than Clyde Drexler.

In addition to all of the foregoing qualitative issues, there are fundamental reasons why the sports card collectibles market does not function like most other markets. The rest of this blog post contemplates these issues.

Liquidity

Liquidity is something that a lot of people talk about, but few really seem to understand. In its most simple formulation, liquidity refers to the ease with which a given asset, such as a sports card collectible, can be converted to cash. Liquidity is therefore a spectrum: one asset is more or less liquid relative to other assets. The most liquid assets are the world’s major currencies, followed by publicly traded stocks and bonds in major markets, etc. The most illiquid assets tend to be interests in privately held businesses, real estate, and, yes, collectibles.

The degree of liquidity can be measured by the spread between the bid price and ask price: the smaller the spread, the more liquid the asset, all else equal. Collectibles, in general, are known for wide spreads between bid and ask. Anyone who has gone to a wine auction, for example, can regale you with tales of bottles estimated to sell for, say, $5,000, which “only” sold for $2,500. That spread of $2,500 is equal to the selling price of the bottle itself! That’s certainly not a liquid market. (A friend tells me that the bid/ask spread for Rolexes is tighter than it is for most collectibles. As ever there are always exceptions to every rule.)

A natural question arises: what makes the spread between bid and ask compress? Why, for example, is the spread between bid and ask for Microsoft shares so small, while that of rare wines so large? This gets to the other aspect of liquidity: market depth. In order for an asset to be very liquid, the market needs a large number of participants competing with each other to buy and sell the asset. The size of the bid/ask spread is a function, then, of the number of market participants buying and selling that asset. There are many thousands, if not millions, of people buying and selling Microsoft’s stock; therefore, the spread between its bid and ask prices is small.

On the other hand, there are very few people who collect wine (or sports cards). Therefore, the size of the bid/ask spread will always remain large, and the degree of liquidity will be small.

The inviolate relationship between supply, demand, and price

One of the fundamental rules of economics is that supply, demand, and price are intimately related. If supply increases and demand remains the same or falls, price will decline. If supply declines and demand remains the same or increases, price will rise. If supply increases and demand increases, then price will remain the same or increase.

So if the demand for sports card increases, but the supply does not, then you would have an asset whose value is durable and sustainable. On the other hand, if the suppliers of sports cards see the increased demand, and increase production as a result, then prices will crash. And, here’s the kicker: sports card collectors have no ability to control the supply in the market. And producers have no incentive to restrict supply: they’re in the business of selling as many sports cards as they can.

What does this all mean?

Unfortunately for the would-be sports card mogul, he is making a bet on an asset for which supply is near-infinite, over whose production he has no control. No centralized trading platform can ensure scarcity any more than can a collector. Scarcity arises from exogenous factors that neither Alt nor its collector-customers can control. And, since the card manufacturers have no incentive to maintain artificial scarcity, card values will, in general, decline over time. Jordan (and possibly Trout) are outliers.