Art NFTs – Ephemeral fad or art market revolution?
Beeple took the world by storm with the sale of his art NFT ‘First 50000 Days’ for USD 69,000,000 at Christie’s in 2021.
Beeple took the world by storm with the sale of his art NFT ‘First 50000 Days’ for USD 69,000,000 at Christie’s in 2021.
But NFTs are hardly ‘a new kid on the block’ since NFT economy is at least a decade old[1]. As we live in the grip of progress in all realms of life alongside technological innovation and AI it is of no surprise therefore that the NFTs also penetrated the art market. As we all grapple with various novelties, the concept of and the nuances around NFTs still are covered with a veil of mystery.
What exactly are non-fungible tokens and how do they fit in the art world? What legal and commercial factors are important for an art collector?
Essentially, when we think of Art-NFTs we think of digital art that is marketed and sold as non-fungible tokens. Non-fungible tokens or nefts, as they are colloquially known, are simply units of computer code stored on a blockchain. The latter is, in layman terms, a sort of a digital register of ownership and whilst originally it mainly recorded transactions in bitcoin, it now has many other commercial applications including registration of ownership of an Art-NFT.
As soon as an Art-NFT is registered by the artist on the blockchain (‘minted’) it can be traded. Sales usually occur on authorised trading platforms, and each transaction can be inspected by anyone and the chain of ownership (provenance) traced back all the way back to the artist. This is precisely why the NFT construct became attractive for digital artists because it somewhat removes the risk of the underlying artwork being easily replicated. By linking digital artwork to the blockchain using NFT, a digital artist creates rarity and scarcity and prevents the artwork from being easily reproduced thereby increasing their power of monetising on such artwork: there can only be one ‘First 50000 Days’ as created and minted by Beeple.
Anyone thinking of starting an art-NFT collection, ought to bear in mind certain key legal and commercial considerations.
One of the greatest pitfalls of owning an art-NFT is the fact that what you actually hold as a collector is not a physical artwork but merely a link to a digital artwork that sits on a third-party site. If such site ceases to exist, or becomes corrupt and the link ceases to exist and its content cannot be accessed elsewhere on the internet? Would you potentially be at risk of a significant loss? What remedies might you have and who against?
As alluded to above, which many may see as a downside is that you won’t be able to take pleasure in the physical enjoyment of an artwork owned as Art-NFT. The traditional sensory element of owning art is largely removed when we speak of Art-NFTs. On the other hand, the defenders of all things tech may argue that Art-NFT collectors are not in the business of connoisseurship but rather ability to trade digital art as an asset easily and quickly.
Nefts could also be vulnerable to the uncertainty of permanence: if Art-NFT is a link to digital artwork and it is hosted on a third-party site what happens if that site suddenly ceases to exist in the future or the link becomes corrupted? This is of course disconcerting for any collector as they are left to fear for the fate of their investment.
On the flip side, the big four auction houses now have specialised Art-NFT trading departments where both primary market sales and consignments for sale from secondary market take place. As reputable institutions, they provide authenticity guarantees and therefore a greater degree of comfort and confidence for an Art-NFT buyer.
Another difficulty in owning an Art NFT stems from the fact that an Art NFT owner does not own copyright to the underlying digital artwork. In practice therefore, in order to display a printed copy of the artwork, the buyer would need to seek permission of the artist: a ‘license to use’ to ‘reproduce and circulate’ the image. Whilst it is not impossible to achieve, certainly may prove cumbersome. Owning physical art does not pose similar issues and owners are free to display artworks freely.
Art-NFT world embraced also a possibility of tokenising digital art whereby a buyer can own a fraction of the artwork and therefore share the risk and size of investment. This concept of art tokenisation is not completely nouvelle as we recall art funds making possible the ownership of shares in blue chip artworks. Art-NFTs tokenisation is a similar construct whereby artist mints a series of NFTs each representing a fraction of the whole NFT of the artwork and registers them on the blockchain ready for trade. One key advantage for the market is the accessibility even with a modest investment by a buyer making it also highly attractive to any investor looking to diversify their portfolio but erring on the more risk averse side of things.
The scheme of art tokenisation does not seem hugely widespread at the time of writing this article and the current key players include Unic.ly, Fractional.art, Gate.io, and Otis[2].
Again, a similar risk profile applies as above and a thorough pros and cons assessment must be carried out by any buyer.
Another interesting use for Art-NFTs is making it possible to to own digital shares in traditional blue-chip artworks. Such initiative has been introduced to the art market by an art investment firm Artemundi in partnership with Sygnum bank (first digital asset bank fully regulated in Switzerland). Essentially, the ownership rights to a share in a blue-chip artwork are offered to a public blockchain by a regulated bank allowing investors to acquire Art Security Tokens (ASTs) or shares in blue-chip artworks. Fillettee au beret by Picasso was the first painting offered by means of ASTs in 2021[3]. This share ownership model bypasses the regulatory requirements of a standard art fund structure and uses technology to transfer bank-grade securities into tokens. It also lowers the high barrier of entry into rare art as a collector by significantly decreasing the investment level.
It remains to be seen how successful such structures are in the long-run and indeed how lucrative for a buyer. From the risk perspective, given a regulated bank acts as the backer with its own dedicated NFT trading platform, buyers could get more comfort and peace of mind.
The financial risk and reward remain key considerations when it comes to owning art as an asset or for pure enjoyment. How can a collector ascertain the ROI (return of investment) on their digital artwork? Art-NFTs are still fairly new and their market is yet to stabilise enough to understand whether they are capable of holding value and/or gain in value. We have seen numerous examples where Art-NFTs totally outdid the traditional physical art assets (works of digital artists such as Beeple, PAK and Fewocious). On the other hand, these could be ‘one-offs’ resulting from the initial market hype rather than the true reflection of the position of the asset in the market long-term. Art-NFT market is in early stages and remains fairly unpredictable. Other major financial risk is of course the possibility of falling a victim of cyber-fraud. Digital assets and crypto media are what they are – susceptible to hackers or other cyber fraud schemes. In instances when this happen, the value of the underlying Art-NFT may well fall to zero which of course is an extremely dramatic but not completely implausible outcome.
All in all, Art-NFTs are an exciting new addition to the art market palette as they redefine our understanding of value, and let us explore the boundaries of creativity both from the perspective of the artist and the viewer. They also fit well with the art democratisation propagation as they facilitate much quicker and accessible art trade. However, any buyer must fully appreciate the inherent risks that Art-NFT carry and this can only be achieved by research, staying well informed as regards the market fluctuations and seeking professional advice from specialised art advisory firms to help navigate somewhat overwhelming digital (art) space and to mitigate risk(s).
Whilst neither an ephemeral fad, nor an outright art market revolution, according to the Knight Frank Global Wealth Report 2023[4], market is evenly split in their opinion on the future and value of Art NFTs as an alternative investment: ‘I never had confidence in them’ versus ‘I still think there is a lot of potential in them’. Watch that space
[1] https://medium.com/blockchain-thought-leadership/why-would-99-of-nfts-fail-123d91d66195
[2] https://insights.masterworks.com
[4] https://content.knightfrank.com/resources/knightfrank.com/wealthreport/the-wealth-report---apr-2023.pdf
