It's The Inequality, Stupid!

How could it possibly make sense to "pay $69M" for a link to a link to a JPEG? Follow me below the fold as I try to answer this question.

Pumping Cryptocurrencies

Cryptocurrencies are rife with both the kind of pump-and-dump schemes (P&Ds) analyzed by Tao Li, Donghwa Shin and Baolian Wang in Cryptocurrency Pump-and-Dump Schemes:

P&Ds have dramatic short-term impacts on the prices and volumes of most of the pumped tokens. In the first 70 seconds after the start of a P&D, the price increases by 25% on average, trading volume increases 148 times, and the average 10-second absolute return reaches 15%. A quick reversal begins 70 seconds after the start of the P&D. ... For an average P&D, investors make one Bitcoin (about $8,000) in profit, approximately one-third of a token’s daily trading volume. The trading volume during the 10 minutes before the pump is 13% of the total volume during the 10 minutes after the pump. This implies that an average trade in the first 10 minutes after a pump has a 13% chance of trading against these insiders and on average they lose more than 2% (18%*13%).

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And also the larger scale pump-and-dumps caused by the issuance of billions of USDT, a "stablecoin" that can only be used to buy cryptocurrencies, and against which almost all trading in cryptocurrencies is done. As I wrote here:

Who would believe that pushing a billion "dollars" a month that can only be used to buy cryptocurrency into the market might cause people to buy cryptocurrency and drive the price up?

Not to mention Elon Musk pumping his $1.6B hoard of Bitcoin by announcing that Tesla would accept BTC, then selling enough to realise a $101M profit, then backing away from the idea, or using his Twitter account to pump Dogecoin.

As Finn Brunton documents in Digital Cash, cryptocurrencies originated among the cypherpunks, many of them believers in Austrian economics — the idea that a limited supply of currency ensures that its value will increase over time. As I wrote here:

Consider a currency whose price is doomed to increase. It is a mechanism for transferring wealth from later adopters, called suckers, to early adopters, called geniuses. And the cypherpunks were nothing if not early adopters of technology.

Sure enough, a few of the geniuses turned into "whales", HODL-ing the vast majority of the Bitcoin. The Gini coefficient of cryptocurrencies is an interesting research question; it is huge but probably less than Nouriel Roubini's claim of 0.86.

The concentration of wealth in cryptocurrencies is indeed astounding and, as Jemima Kelly points out, it means that they are very thinly traded:

For a start, it is estimated that about 20 per cent of bitcoins have been lost in various ways, never to be recovered. Then there are the so-called “whales” that hold most of the bitcoin, whose dominance of the market has risen in recent months. The top 2.8 per cent of bitcoin addresses now control 95 per cent of the supply (including many that haven’t moved any bitcoin for the past half-decade), and more than 63 per cent of the bitcoin supply hasn’t been moved for the past year, according to recent estimates.

Kelly notes that the result is quite small trades can move the price a lot:

The excellent crypto critic Trolly McTrollface (not his real name, if you’re curious) pointed out on Twitter that on Saturday a sale of just 150 bitcoin resulted in a 10 per cent drop in the price.

That is, a sale of 0.0008% of the stock of BTC, or less than $5M, crashed the price by 10%. As Kelly writes, this means that:

the idea that you can get out of your bitcoin position at any time and the market will stay intact is frankly a nonsense. And that’s why the bitcoin religion’s “HODL” mantra is so important to be upheld, of course.

Eventually, the whales HODL-ing the vast bulk of the Bitcoins want to spend their ill-gotten gains on Lamborghinis or other accoutrements of the crypto-bro lifestyle. Very little of these goodies can be bought with Bitcoins, so they need to sell for fiat currency gradually over a long period. During that time they need the notoriously volatile price to stay high. Doing things, even things that cost them some of their HODL-ings, that don't involve selling for fiat but increase demand for Bitcoin would be a worthwhile investment.

What Really Happened?

In Metakovan, the mystery Beeple art buyer, and his NFT/DeFi scheme, Amy Castor outed "Metakovan" and provided a pretty good account of, and background to, the transaction. Apparently, the auction ended up in a bidding war between Justin Son, founder of the Tron blockchain, and "Vignesh Sundaresan, a crypto entrepreneur who has been in the crypto landscape for about seven years". Both have been involved in shenanigans, Son for example in taking over the Steem blockchain, and Sundaresan for example in Coins-e, the defunct Canadian exchange. Castor writes:

Several Coins-e users have taken to social media to complain about losing money on Coins-e, calling it a scam and warning others to watch out. (See Reddit — here and here — and BitcoinTalk.)

The posts on r/dogecoin are the most alarming. Coins-e clients report having their dogecoin disappear. Wireguysny described watching 1.3 million DOGE evaporate and the frustration of being unable to reach tech support to get to the bottom of the matter.

Castor identifies Sundaresan’s interest in NFTs:

we first see the connection between Sundaresan’s startup Lendroid and NFTs in a blog post titled “Why DeFi Needs NFTs.” The post, written by his business partner Anand Venkateswaran, describes how NFTs solve the problems of DeFi, such as flash crashes, volatility, and governance. ...
Metakovan is also behind Singapore-based Metapurse, a crypto-based investment firm. Metapurse’s mission, according to its website, is to “democratize access and ownership to artwork.” The firm has been acquiring NFTs.

Metapurse hasn't just been acquiring any old NFTs, but specifically:

It purchased Beeple’s “Everdays: 20 Collection” artworks for $2.2 million in December.

Metapurse has taken Beeple’s multiple artworks, or NFTs, along with three virtual museums, and combined everything into a “massive bundle.” Would you like to invest in this wonderful package? You can. All you have to do is stock up on Metapurse’s new B20 token.
...
The name of this game is “number go up.” This is about pumping B20, so holders and Metapurse can benefit when they go to sell the token—i.e., get more ETH, buy more NFTs, rinse, repeat.

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Who would benefit from pumping the B20 token?

The token distribution is something to pay attention to. Metakovan has 59% of all the B20 tokens. Why does he own the majority of tokens? As he explains it, that is to prevent any single person from owning more than half of B20 tokens — and snatching up all this wonderful artwork for themselves. The idea is to decentralize and democratize art, only Metakovan controls the token supply.

Castor notes three interesting details. First, that it wasn't exactly an arms-length transaction:

What’s interesting is that Beeple, the creator of the artwork, is actually a business partner of Metakovan’s. He owns 2% of all the B20 tokens. I’m sure there is no conflict of interest here.

So, Metakovan spent a notional $60M and $9M in fees to buy a token created by his business partner:

At the end of the day, this is a straight-up initial coin offering-style index fund to speculate on NFTs, with a twist: Metakovan owns most of the tokens — and he has an existing business relationship with the artist.

I wonder if Metakovan anticipated having to pay this much ETH to Beeple for his “Everydays: The First 5000 Days”? Metakovan knew he needed the artwork for his index fund. But did he expect Sun to keep bidding the price up to the very last second?

Or did he have a deal with Son to bid the price up to an eye-catching number?

Castor's second fascinating detail is that the transaction transferring the $60M in ETH from Metakovan to Beeple and the $9M in ETH from Metakovan to Christie's never appeared in the Ethereum blockchain:

Anyhow, if both parties had Coinbase accounts, the exchange could just change the database records off-chain to flip account balances. In this way, Coinbase acts like a second layer, and you wouldn’t see the ETH transaction.

Castor's third fascinating detail is that no actual money changed hands:

Christie’s accepted its fees in ether — the native crypto of the Ethereum network. When Christie’s originally announced the sale, the auction house said it would accept crypto as payment, but the buyer’s premium had to be in real money. Later it changed its policy to accept ETH, according to Bloomberg.

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Christie's change of policy ensured that there was no sale of $69M worth of ETH, so no crash of the ETH market. Quite the reverse. The Beeple-fueled hype around NFTs is part of the reason for ETH's "price" surge from $1,792 the day of the sale to $4,085 in two months.

Why Did It Happen?

Castor sums up the reason why this all makes sense:

When all was said and done, the Christie’s auction turned out to be a sweet deal for Beeple who now has a reason to shill crypto to his 2 million Instagram followers. And Metakovan gets publicity for his ICO project, so his own personal B20 holdings rise in value.

Beeple's B20 holdings rise in value too.

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The pump and dump worked really well as a classic "buy on the rumor, sell on the news". On February 13^th the B20 token's "price" was $1.85. It rose steadily to $29.78 (+1610%) on March 9^th, two days before the sale. The day of the sale it closed at $18.59, and by May 5^th it was down to $1.43, a loss over 3 months of 30%. Metakovan's hoard went from a notional $10.9M to a notional $176M and back to a notional $8.4M. Quite the pump and quite the dump.

As I said, for a whale, doing things, even things that cost them some of their HODL-ings, that don't involve selling for fiat but increase demand for their HODL-ings, would be a worthwhile investment.