Valuing Physical Art in the Age of NFTs

December 8, 2021

In 2017, Leonardo Da Vinci’s Salvator Mundi broke records at auction when it sold for $450 million, more than doubling the previous record. And while Beeple’s $69 million auction sale for the NFT piece The First 5000 Days doesn’t come close, it does point to the sheer speed with which NFTs are catching up to blue-chip art sales. Oh, and it’s the third-highest price ever fetched by a living artist, after Jeff Koons and Damien Hirst.

The thing is, art valuation (traditional or digital) is as much an art as a science, a process that has long vexed art buyers, investors, and auction houses. And with NFTs shaking up the art world, it’s worth asking whether the old rules of art valuation still apply.

Here’s a look at NFT valuation compared to traditional art valuation and whether the two should be measured against each other (or if that’s like comparing a Matisse to a Man Ray).

What are NFTs?

Non-fungible tokens, or NFTs, have been alternately called the future of the art world or a waste of money (depending on who you ask). Either way, there are still many people out there scratching their heads.

NFTs are a type of digital asset supported by blockchain technology. Like cryptocurrency, these assets have no physical equivalent, though an NFT certificate could represent ownership of a physical asset. But what makes an NFT different from a PDF or Googled JPEG is the unique digital signature which makes the asset one-of-a-kind and impossible to copy.

Think of them as a computer file with proof of ownership and authenticity, like a digital deed. And like a traditional painting, NFT transactions are recorded in blockchain, making it easy to trace a piece’s legitimate provenance and value over time.

Digital artists have flocked to NFTs for that reason. For the first time, they can earn money on art they previously had little hope of selling online unless the photo represented a physical artwork the buyer would purchase.

Why are NFTs so Expensive?

So, why are NFTs so expensive? The short answer, like traditional art, is that NFTs are expensive because buyers agree that they should be.

Unlike other digital creations, which exist in infinite supply, NFTs bring an element of digital scarcity comparable to what you might see with a one-of-a-kind painting. Theoretically, the law of supply and demand kicks in—where there’s a limited supply, demand should go up, assuming there was demand for it in the first place.

This is where buyer consensus comes in, another feature NFTs share with the larger art world. The art world as a whole is a global consensus machine. Art buyers look for quality signals, and because they’re all looking at the same quality signals, they start to agree on who is most valuable.

So, to return to the original statement: NFTs are valuable because buyers agree that they should be.

The Art of Valuing Art

Physical art valuation is based on several factors working in tandem, such as:

  • Materials
  • Size
  • Provenance
  • Attribution
  • Historical significance
  • Social status
  • The thrill of the auction

However, the same basic laws apply in the traditional art world as with NFTs. Remember, an artwork isn’t a machine or a practical object. Its value signals are subjective on the part of the observer. And if a lot of observers agree in an auction setting that art should be worth millions, they’ll outbid each other to own it. Thus the record-breaking Salvator Mundi.

This is why things like provenance (who owned the artwork before) matter in art valuation. In other words, art derives value not just from its innate qualities, but also from the social status of its previous owners. That’s why the so-called Rockefeller Rothko sold for $72.84 million even though Rockefeller himself bought it for a mere $8,500 ($59,000 in today’s dollars).

Why Some Art is So Expensive

It’s worth noting that not all art is expensive. In fact, most art isn’t.

First, there’s the basic price of entering the market. For an artist, that’s around $100,000 (the total cost of your average fine art MFA program, where most gallerists shop around for young talent to represent). Emerging artists’ works are generally priced based on size and medium, so a larger painting is generally priced between $10,000 and $15,000. Canvas goes for more than works on paper, which in turn sells for more than prints.

If the artist is represented by a well-known gallery, that can give the work a solid price bump regardless of whether the artist is unknown. But almost all galleries take 50% of the sale.

However, it’s worth remembering that demand for art is not evenly divided among living artists. In fact, many people go after works by a small number of artists, driving up the overall value of their works. Just 0.2% of artists have works that sell for more than $10 million.

Invisible Drivers of Value

It’s also worth noting that physical art, unlike NFTs, is subject to invisible value drivers. Much like gravity, we can’t see their effects, but we certainly feel them. In fact, this invisible pull is responsible for the majority of art world economics.

Basically, these are the artworks that have not, cannot, or will not come to market but nonetheless exert an invisible gravitational pull on the artworks that do hit the market. There are two major players on this front: museum accessions (those infamous black holes into which art vanishes never to hit the market while driving up the value of the art still available) and philanthropic giving.

Should the Value of Traditional Art Be Measured Against NFTs?

So, should the value of physical art be measured against NFTs?

While some of the basic economics are comparable, the truth is that physical art isn’t an entirely comparable animal to NFTs. Some of the biggest value drivers for physical art simply do not apply to NFTs, at least not yet, and the NFT market doesn’t exert a visible pull on the physical art market since NFTs don’t exist in the physical world.

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