How sneakers took a grip on investment portfolios
Collectible sneakers from top brands have become a popular alternative asset class, fueled by the power of scarcity. But given our tendency to be guided by emotions when we perceive something to be scarce, can investing in kicks ever be rational?
By most accounts, sneaker culture began in the 1970s when basketball shoes made the transition to the nascent hip hop movement. Converse had dominated the courts for decades with its Chuck Taylor All Stars, but as sneakers began to permeate youth culture, brands like adidas and Puma started muscling in on the action by releasing collaborations with athletes and rappers.
What cemented the place of sneakers in popular culture, however, was Nike’s collaboration with basketball player Michael Jordan in his rookie year, releasing the Air Jordan 1 to the public in 1985. As Jordan’s legend grew, so did the cachet of Air Jordans, which became the longest continuous signature sneaker line ever.
Early Air Jordan models became prized collectibles because they embody so much cultural significance – they played a seminal role in sneaker culture as well as representing the golden era of basketball. But what sets the really valuable ones apart is scarcity.
At the extreme end of the scarcity spectrum are Air Jordans worn by “His Airness” in pivotal games. These make up the bulk of the 12 most expensive sneakers ever sold.
Fueling FOMO
Sneaker brands, and especially Nike and adidas, regularly apply a sales strategy of creating scarcity around limited releases of new models, known as “drops”. The scarcity creates hype, which is amplified by media, celebrities, fashion-forward influencers and genuine collectors.
Scarcity, whether real or perceived, can fuel a fear of missing out (FOMO) that leads consumers to act impulsively – an extreme example was the irrational rush for toilet paper during the pandemic.
A FOMO-fueled turning point for the sneaker world came on February 23, 2005. The New York Post’s front page that day was emblazoned with the words “Sneaker frenzy,” directing readers to a story about the melee that broke out at the launch of Nike’s latest sneakers in the city.
Only 150 pairs of the new model, dubbed the NYC Pigeon, were ever produced. They originally retailed for USD200, but as of May 2024 were selling for up to USD38,000.
While shoe brands do not benefit directly from the appreciation of limited-edition products on the resale market, the hype reinvigorates demand for the brands in general and the specific line the new model release is based on.
This allows the brands to cash in by ramping up supply of other models. The drop strategy is used regularly by Nike to drive sales of its Jordan, Air Force 1 and Dunk lines, and by adidas on its Yeezy, Samba and Gazelle lines. It has created a thriving sneaker resale market, which in recent years has been transformed by innovation.
Friction-free sneaker reselling
From 2015, the advent of dedicated online sneaker resale platforms such as StockX, GOAT and Stadium Goods turbocharged the secondhand market, which is now estimated to generate around USD10 billion in annual sales.
Prior to these new marketplaces, the most popular online platform for reselling sneakers was eBay. “The listings were so disorganized, and it was kind of like the Wild West – people could put anything in a listing title,” explained Dylan Dittrich, Head of Research at Altan Insights, a provider of data and quantitative analysis for collectible assets.
The new resale marketplaces introduced single product pages for models. “You could now go and look at a specific Air Jordan 1 in your size, and you'd see what the lowest available price is, rather than having to wade through a morass of listings,” said Dittrich.
The new marketplaces also address the authentication problem. This is critical, because as Eric Witschen, Founder and CEO of Neustreet, which provides data and analytics for collectibles markets, pointed out, “the fakes have become as good as the real ones. This applies to watches, handbags and, increasingly, sneakers”.
To help mitigate this issue, sellers must first send their sneakers to platforms like StockX, GOAT or Stadium Goods, where experts spend up to two days verifying the goods before shipping them to buyers. In 2023, authenticators at StockX alone rejected more than 325,000 products for failing to meet verification standards.
Still, authentication is not yet foolproof. Nike filed a lawsuit against a sneaker resale marketplace in 2022 alleging, among other things, that a sneaker collector and reseller had bought 38 pairs of sneakers through the platform that turned out to be counterfeit.
“Visual inspections and current commercial methods often fail to detect high-quality fakes,” said Witschen.
Ultimately, what might solve the authentication problem is incorporating near-field communication (NFC) chips in sneakers and other fashion items, which some brands have begun rolling out, he added.
“Provenance is crucial for collectors – not just for art but also for sneakers and trading cards. Although NFC chips cost about USD7 each, they offer a viable means of authentication for higher-priced items.”
Witschen predicted that the advent of NFC-tagged sneakers could lead to further disruption in the sneaker resale market, potentially resulting in a shift away from centralized platforms charging substantial fees to a peer-to-peer trading model.
Data drives rational investing
One last way the new sneaker marketplaces made sneakers more investible is by displaying historical price information for each sneaker, helping collectors to make purchasing decisions based on data rather than emotion.
Although data is not yet comprehensive or sufficiently standardized to meet the needs of sophisticated investors, “It has developed by leaps and bounds from where we were 10 years ago,” said Dittrich. "But there's still a huge amount of market inefficiency caused by the fragmentation of data and marketplaces. We're in the very early innings of data becoming organized, widely available, accurate and reliable.”
Price movements on the secondary market provide valuable signals to Witschen – an avid collector himself with more than 150 pairs of sneakers. Witschen only buys on the secondary market, likening chasing drops on the primary market as more of a scattershot approach akin to angel investing.
According to Witschen, at launch, a sneaker’s price “almost always has a hype cycle where it goes up, goes down and then decides if it's going to go to obscurity or infinity.”
By observing a sneaker’s secondary market activity, he attempts to gauge its long-term potential. “I watch the performance, the volume of sales and velocity. I see how it changes, then I wait for the initial hype to die down, then depending on whether there’s still enough activity and cultural interest, make the decision to buy.”
When he does choose to buy, he plans to hold them for the long term, rather than trying to flip and make a quick profit.
Because the major sneaker resale marketplaces only deal in sneakers that are in flawless condition and haven’t been used, if you purchase sneakers with a view to eventually selling, you should ensure they are stored correctly. Keep them in a cool, dry place, preferably in the box they came in and with all the original packaging and tags.
When scarcity is only transitory
Apart from the truly scarce limited releases, the resale market features lots of models that may only be temporarily scarce, because manufacturers can always make more after the initial production run.
Unlike stocks and bonds, where supply numbers are clearly defined in advance, in the sneaker world, “unless it’s numbered editions, there is no truly defined scarcity,” said Witschen.
He added that this is a major reason for the current popularity of collaborations. “Because collaborations generally have a controlled scope and time, and usually if Nike collaborates with somebody, they don't produce unlimited amounts.”
Recent oversupply by some sneaker brands has dealt a serious blow to the resale market by diminishing perceived scarcity value. “In 2023, we saw a 25% decline in secondary market prices. And even worse, the number of sneakers trading above their MSRPs [manufacturer’s suggested retail price] on the secondary market fell from 80% to about 50%. That’s a dramatic decline in one year’s time,” said Witschen.
And while retro Nike and adidas models continue to make up the majority of primary and secondary market sales, they are losing share to brands once dismissed as “ugly”, such as ASICS, ON and Salomon. These “sportstyle” sneakers are rapidly making inroads among consumers and collectors.
Advice for would-be sneakerheads
Despite the recent headwinds faced by the sneaker resale market, there is no question that sneakers’ cultural significance will persist.
There are strong reasons to include scarce assets in portfolios. In addition to gold, some other commodities and natural resources, collectibles – ranging from fine wine and high-end art to sneakers, trading cards and dinosaur fossils – could fit the bill.
The standard advice for prospective buyers of collectibles is that they should be willing to make the purchases based solely on the satisfaction they would derive from owning them. Any investment profits earned should be treated as a welcome, though not expected, benefit.
Collectibles that have the potential can be found at “the intersection of things that are significant to you and things that are significant to others,” said Witschen.
Of course, many do attempt to gauge whether collectibles might appreciate. Both Witschen and Dittrich are from finance backgrounds and bring their analytical skills to bear.
”All of the macroeconomic factors that affect traditional financial markets are incredibly relevant here,” said Dittrich.
“Of course, because there are no underlying cash flows, fundamental analysis doesn't really apply as much to sneakers,” he added. “But what does apply is knowledge of how markets work in understanding investor and consumer psychology and market forces – you know, the things that can shape supply and demand and therefore prices on these markets.”
There remain many reasons for investors to be wary when eyeing the sneaker resale market, including limited liquidity, scarcity of supply, high transaction costs, and the risk of price bubbles that can burst with changes in tastes.
Still, limited liquidity and market inefficiency can also create opportunities.
“A lot of what's allowed people to be successful in some of these markets is being a willing buyer when there aren't any others at the moment, but having the confidence that at some point, another willing buyer will come along at a higher price point, particularly when that price point was the norm in moments of greater liquidity” Dittrich said.
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