Investing in digital art: faddish bubble or the chance to get in early on a valuable new collectables market?

by Jonathan Adams
digital art

In March, the artist Mike Winklemann, known professionally as Beeple, sold a piece called Everydays: The First 5000 Days, at a Christie’s auction. The artwork, a collage of 5000 images which include a Buzz Lightyear with breasts and a pregnant cyborg Michael Jackson, fetched $69 million (around £50 million), catapulting Beeple to third on the list of the most expensive sales by a living artist.

But in stark contrast to other works of art sold for tens of millions, The First 5000 days is not an oil painting, a watercolour, or a sculpture made of marble, steel or any other physical material for that matter. The piece is made up of pixels and only exists in digital format.

What is digital art?

Of course, digital art is not a new phenomenon. Designs created from digital pixels have been around in some form or another for as long as personal computers have been. And evolved in its sophistication alongside our electronic devices and the software they run on.

But digital art has never sold for significant sums before. Why is down to the fundamental economic principle of supply and demand.

Because digital images can be infinitely replicated at the click of a button at practically no cost at all, anyone could acquire a file identical to the original. Whatever the demand for digital art, the supply was unrestricted. That absence of scarcity kept prices at rock bottom.

NFTs have created scarcity and originality in digital art

A relatively recent technological development has suddenly introduced the possibility for the same forces of scarcity and ‘originality’ that drive up the value of physical artworks to do the same for digital pieces. That technology is blockchain – a kind of self-regulating digital ledger software used to create NFTs – non-fungible tokens.

What is an NFT?

NFTs are certificates of ownership stored on a blockchain. Blockchain technology also allows a digital artist to ‘lock’ a file as a one-and-only original so no exact copies can ever be made. Of course, the image held in the file can be copied almost identically and the replication look exactly the same to the naked eye.

But it will never be the exact same file and examination of the source code would reveal tiny differences. Much the same way as a skilful forgery of a physical painting can only be identified by experts who know what to look for.

A copy of an original work of art (whether legally replicated like a print or a forgery created to deceive) is never held in the same regard as the original. It becomes an accessory or design element rather than a genuine work of art.

Thanks to NFTs, the same can now be said of digital art. There are original pieces and there are replicas and the distinction between the two is as clear as it would be for physical art. The appearance of blockchain technology, originally developed as the underlying technology the digital cryptocurrency bitcoin runs on, and digital art in the form of NFTs, has seen a new market for digital art appear almost overnight.

The market for digital art in the form of NFTs

Research cited in a trading report by NFT Investments, an NFT-based digital art investment vehicle reportedly planning an imminent £25 million London flotation, estimates a market worth $400 million over the past 18 months. The fact half of that sum, which accounts for most of the $500 million it’s estimated has been spent on NFTs in total to date, has been spent on digital art since Christmas 2020, shows a new market in a period of hockey stick growth.

That’s reinforced by art-insurance specialists Hiscox who believe the value of the NFTs market will grow tenfold in the next year. Aon, also an insurance company, reports a “growing number” of clients they insure art for “developing into the digital space”.

How and where is digital art sold?

Beeple’s £50 million NFT sale was made at an auction run by Christie’s, one of the world’s two big-name auction houses alongside rival Sotheby’s. The latter has also taken the plunge into digital art and announced its own first NLP auction, selling works by another popular digital artist that goes by the tag Pak, the week after the record Christie’s sale.

That the biggest traditional art auctioneers have been quick to embrace digital art is quite possibly influenced by the fact the traditional market for physical works of art and antiques has been badly hit by the Covid-19 pandemic. It was, according to The Art Market Report, published earlier this year by Art Basel and the investment bank UBS, down 22% in 2020 to a value of £36.1 billion. That represents the biggest fall the market has experienced since the global recession in 2009.

But regardless of suspicions the likes of Christie’s and Sotheby’s may have been slower to dive into digital art in more affluent times, their involvement has given the new NFTs market for digital art a heightened profile and credibility.

Before the auction houses got in on the act most art NFTs were being bought and sold on new blockchain platforms set up by entrepreneurs for exactly that purpose. That will likely continue to be the case with only some high profile works and collections being sold by established names like Christie’s and Sotheby’s.

Nifty Gateway, founded by entrepreneurs Duncan and Griffin Cock Foster then acquired by cryptocurrency exchange company Gemini, owned by the Winklevoss twins of Facebook fame, is one. Crunchbase estimates the platform had over half a million visitors in March, up from just 160,000 a month earlier.

Another platform, OpenSea, is even bigger and saw its visitor numbers increase from around 400,000 in February to 1.125 million in March. It also raised £16 million in March from investors that included Pinterest chief executive Ben Silbermann, the Reddit co-founder Alexis Ohanian and the billionaire entrepreneur Mark Cuban.

Who is buying digital art?

Currently, the wealthy collectors paying up to tens of millions of dollars for NFTs are predominantly entrepreneurs from the world of blockchain and cryptocurrencies. The winning bidder in the £50 million auction for Everydays was revealed as the Indian entrepreneur Vignesh Sundaresan. Sundaresan, originally a coder who has founded a handful of crypto and blockchain start-ups himself and is an investor in many more, won a bidding war with Justin Sun, the Chinese founder of cryptocurrency platform Tron.

NFTs can also be other digital assets other than art. The digital ‘original’ of Twitter founder Jack Dorsey’s first ever tweet

“just setting up my twttr”, was purchased for $2.9 million by Sina Estavi. Another enthusiastic investor in digital assets, Estavi is chief executive of Malaysia-based Bridge, a start-up built on Tron’s blockchain and offering technology to “bridge blockchain ecostystems”.

Should I invest in digital art?

With its close connections to the cryptocurrency market, it is perhaps not surprising that many analysts and art market commentators fear that the nascent market for digital art in the form of NFTs will be volatile and unpredictable. Sam Johnson, a managing partner at independent art advisors Beaumont Nathan, believes the digital art market is likely to be dominated by speculators rather than genuine art lovers in the near term. He comments:

“There will be an undertone of a gross market based on Keynesian economics of supply and demand of what people want and what is being produced, which will happen in the digital world to this new audience.”

Speculative markets can be exploited by savvy, experienced investors brave enough to ride the wave and trust themselves to get out at the right moment. But like any category of collectables, investing in digital art successfully will involve understanding the market and its trends. It’s not a traditional investment where fundamentals like revenues, profit, debt, future growth potential can be analysed to assign a concept of ‘fair value’ like shares in a company.

Collectables are also different to commodities, the demand for which is closely tied to economic cycles of production and consumption of products with utility. Art and other collectables don’t have utility in the traditional sense. Demand is based on far less quantifiable and predictable factors like the ebb and flow of an artist and their style’s popularity as trends in fashion, art and culture evolve. And digital art is far too new a market to have an established canon of ‘masters’ or even artists that have established a reputation over a number of years.

How can I invest in digital art?

For now, the main way to invest in digital art would be to acquire NFTs directly over the platforms that sell them. Like traditional physical art, the approach would be to either speculate on relatively unknown artists whose works are still relatively cheap gaining in popularity in future, or buy pieces from artists who have already established some kind of reputation in the hope demand continues to grow.

Alternatively, there are likely to be listed invested vehicles specialising in digital art. We’ve already mentioned NFT Investments, which plans a float. That would allow for hands-off exposure to digital art investments, leaving it to the experts to choose which artists and pieces to invest in.

Finally, the new market will undoubtedly lead to a new generation of start-ups looking to get in on the act raising investment through crowdfunding platforms or the tax-efficient EIS and SEIS schemes in the UK. More adventurous investors happy to take on high-risk punts might consider an equity investment in a still-private digital art market start-up.



Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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