NFTs and Art Investing

October 12, 2021

Are NFTs the future of digital art? Are NFTs the next stage of fine art investing? Here’s what investors need to know about NFTs and art investing.

Some art world experts celebrated Grimes’ $5.8 million sale of her NFT art as one step in the blockchain revolution. Others rolled their eyes at the idea of paying thousands of dollars for a digital file that could just as easily be viewed online for free.

But whether you think NFTs are the future of art investing or a fad, one thing’s for sure: they’re shaking up the art world.

Here’s what investors need to know about NFTs and art investing.

What are NFTs?

Non-fungible tokens, or NFTs, are cryptographic assets on blockchain with uniquely identification codes and metadata. This means that unlike cryptocurrencies, NFTs cannot be exchanged on equivalency.

Picture a quarter. You can swap it out for any quarter and you’ll have the same value. The same goes for swapping a quarter for twenty-five pennies, or two dimes and a nickel, or five nickels—you get the idea. The same thing goes for cryptocurrency as well—you can exchange a unit of cryptocurrency for a unit of similar value.

NFTs don’t work like that. Every NFT is completely unique, which means it can’t be exchanged for a similar unit. Imagine trying to exchange a Banksy for a Da Vinci on the argument that they’re both paintings and you understand why. This is why digital art can be encoded as NFTs.

Why are NFTs Valuable?

However, that does not explain why some NFTs run for millions (looking at you, Grimes) while others are worthless.

To understand why that is, we have to visit an economic concept known as the subjective theory of value, or SVT. SVT states that the value of an item is not derived from its intrinsic worth or qualities. Instead, it derives value from how much a consumer values it. Basically, some items are more expensive than others because these items are more important to consumers. That’s why a Tiffany ring is more expensive than a big box jeweler’s ring.

SVT plus basic supply and demand helps explain why fine art masterpieces are so valuable—and why NFTs are valuable. A Da Vinci is valuable because consumers decide it’s important, and because it’s the only painting of its kind in the world. That pitches the supply-demand curve sharply in one direction, since demand will always far outstrip supply. And in an item that consumers decide is highly valuable, the seller can demand however high a price consumers are still willing to pay.

Basically, one of Grimes’ NFT paintings is valuable for the same reason a Warhol or Basquiat is valuable: people agree that it’s valuable and there’s only one painting like it in the world.

The Blockchain Assurance of NFTs

Before art investors shout in protest that an easily replicable computer file can’t have value like a Basquiat, remember that NFTs aren’t just digital files. They’re cryptographic files based in blockchain, and that’s why digital artists are now able to make money on files that they once posted online for free.

That’s also why NFTs might become a valuable asset for art investors.

As art investors know, the key to a valuable artwork is proving the value of the piece, which rests on proving its authenticity and provenance before anything else. You have to prove you have the original, not a cheap replica. With a Klimt, for example, you would do this by hiring an art expert to evaluate the work’s authenticity and verify its record.

NFTs don’t have paint or canvas to test, but they do have unique identifiers and metadata, and every transaction is entered in blockchain just like cryptocurrency. Blockchain is a decentralized ledger recording a series of transactions, where each transaction (a block) acquires a unique hash and timestamp when entered into the chain that links it to the blocks before and after it.

Basically, a blockchain is just a list. Except you can’t just scribble over it. Those hashes mean that in order to change the transaction details on a single block, you’d have to hack the entire chain (keeping in mind that most blockchains are open for anyone to view the transaction history, which makes it easy to spot forgeries).

This means that NFTs have unique identifiers that anyone can check for themselves, a verifiable purchase history that’s easily traceable from artist to buyer, and a secure method of travel between buyers, just like fine art.

Are NFTs the Future of Digital Art Investing?

So, are NFTs the future of digital art investing? Are they the brave new world of fine art investing? Should NFTs and art investing even be considered in the same sentence?

Well, like cryptocurrency as an investment asset, it’s complicated.

As of yet, NFTs are a very new phenomenon, and the idea of selling a digital artwork as if it’s a physical masterpiece (with the appropriate cost) is still quite new. Basically, NFTs aren’t fully established in the art world yet—right now, you’re mostly dealing with first-generation NFT buyers, and like any other fine art asset, the value of fine art comes from its resale value. It remains to be seen whether NFTs will offer the same economic growth as physical blue-chip art (and whether NFTs will qualify for inclusion as blue-chip art over time based on their transaction records).

One thing is for sure, though: NFTs offer an exciting (and profitable) avenue for savvy artists to earn money doing what they love.

Ready to Get Started in Art Investing?

Regardless of what the future holds for NFTs and art investing, blue-chip art remains an incredibly valuable investment asset. And now it’s possible for regular investors like you to own shares in multi-million-dollar artwork and profit off the sale of valuable art without the need for a Bezos-sized net worth. Let’s bring together your love of art and your passion for investing. Fill out your membership application today.

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