In our latest article, analyst Sara Ali looks at the profound impact NFTs have had on the contemporary art market and assesses whether or not it is a good idea to invest in them despite the many risks associated with crypto-media.
If you have an interest in the art market, or even if you have just been following tech news recently, you may have found it difficult to escape the recent phenomenon at the intersection of the tech and art world, the rise of non-fungible tokens or NFTs. NFTs are the latest trend taking the tech world by storm and are touted by their proponents as being the digital alternative to collectibles.
Over the last year and a half, it has become clear that the contemporary art market has a lot to thank NFTs for. After sales fell by a third in the first half of 2020 because of the pandemic, contemporary art auctions have seen a remarkable recovery, with sales of up to $2.7 billion (an all-time high) and this can be directly attributed to the boom in NFTs. Understanding of what an NFT actually is, however, remains low outside of tech and digital art circles and despite their undeniable growth, many are sceptical about how viable and stable NFTs are as investments.
Demystifying the Non-Fungible Token
So what is this mysterious type of digital asset that’s taking the art world by storm? To fully understand what a non-fungible asset is, it is important to understand what it isn’t. A fungible asset or commodity is one that can be replaced by another, identical one without a change in how much it is worth. For example, money is an example of a fungible asset as it can be interchanged without a loss in its value; a £20 can be exchanged for another £20, or two £10 notes and this makes no difference to the value of the £20. Other examples of fungible assets include bitcoin, gold and shares.
A non-fungible asset on the other hand, is a one of a kind item which cannot be replicated without a decrease in its value. Art, for example, is non-fungible. This is because if you are able to copy, replicate or reproduce a work of art, the copies will not have the same value as the original. Similarly, property, baseball cards and diamonds are also examples of non-fungible goods.
Non-fungible tokens or NFTs are certificates of ownership of any product that can be stored digitally. This can be a piece of digital artwork, a video clip or even an mp3 file of music. If something can be stored digitally, it can be minted into an NFT. This certificate of ownership can be stored on a blockchain ledger, which is encrypted and cannot be destroyed, changed or stolen. It can also be viewed by anyone who wishes to view it. The fact that blockchain technology can confirm and authenticate ownership is at the heart of the appeal of NFTs, as they are essentially collector’s items that exist only in the digital world.
NFT and the Contemporary Art Market
As an industry that traditionally relies mainly on travel and in person deals and contact, the art market was hit extremely hard by Covid-19. Galleries were closed, and exhibitions, auctions and art fairs were either postponed or cancelled during the pandemic. A report by Art Basel and UBS Global on the effect the pandemic has had on the art market found that art gallery sales had dropped by 36% in the first half of 2021.1 Similarly, earlier research by ArtTactic revealed that sales from auction houses also fell by 49% during the same period.2
The art world had to think of ways to mitigate the devastating impact of the pandemic and needed to adapt quickly and move away from a model that depended almost entirely on objects that existed in the physical world. As a result, the industry was forced to digitalise and move online from the middle of 2020 onwards. In these conditions, NFTs provided much needed recovery and rejuvenation to the industry by moving at least a percentage of art sales to the digital world. By the middle of 2021, it had become abundantly clear that NFTs were the way forward, at least temporarily, with the market growing by over 800% since the beginning of the year.3
Risk and Reliability
Although NFTs did play a big part in rejuvenating the art market in a post pandemic world, many remain sceptical about their stability. It is entirely possible that the boom in NFTs is merely a bubble that will sooner or later pop. Although some might be tempted to take advantage of the current hype to make a quick profit right now, it might not be a good idea for novices to get involved in case they lose their money. Indeed, the instability of the NFT market can be seen by the market’s volatility; in April 2021, the average price of NFTs dropped by 67%, down from a high of $4,300 just two months prior.4
Of course, it is true that the art world in general is a risky avenue for investment and this is not just limited to NFTs. Whether or not an investor will get any return on a piece of art simply cannot be guaranteed, even in the real world. However, it is even more of a gamble when it comes to NFT’s specifically because of the unique problems that come with it.
One such example is excess supply. In the world of art, a significant part of an item’s worth comes from its rarity. A piece of art is more valuable if it is unique and if its supply is limited. As any image, video or sound can be turned into an NFT the amount of NFTs that can be created is virtually unlimited. These days, there is still a novelty factor attached to the sale of NFTs, but once more and more artists, musicians and entrepreneurs jump on the bandwagon, there is a real chance that their value will drop drastically.
Another problem with NFTs is that the laws surrounding them are not yet set in stone. Intellectual property is one such area where there are no structured regulations in place to protect copyrighted material. As anything can be turned into an NFT, there is nothing to guarantee the legitimacy of one’s purchases as the realm of NFTs is not governed by copyrights or regulations. Similarly, there seem to be very few protections for creators and artists as well. Recently, there have been incidents where artists have found their work turned into NFTs and sold for a profit to a third party, completely without their consent.5
Lastly, critics of cryptomedia have also pointed out that NFTs poses a real risk to the environment because of how energy intensive the process of minting one is.6 It is said that NFTs are at least partly to blame for the millions of tonnes of carbon emissions generated by the cryptocurrencies that are used for their transactions.7 Quite apart from being very concerning from an environmental point of view, this also indicates that NFTs might face restrictions in the coming years as the world becomes more and more environmentally conscious and this could affect their status as good investments.
Regardless of how you feel about NFTs and digital art, the fact remains that it is slowly but surely gaining legitimacy, even in more conventional channels and institutions. Earlier this year, the world saw the first-ever auction of a digital art piece by a major auction house when Christie’s sold an NFT art piece by the American graphic designer known as Beeple for $69 million in March 2021.
Although it might be tempting to dismiss NFTs as a bubble or a temporary fad, this in itself is a good enough reason to keep a close eye on their rise and to capitalise on it where possible. As the world moves towards digitalisation in most other respects, it is perhaps not that outlandish to assume that NFTs could represent a very real, and possibly long lasting, shift in the world of modern art. Now that it is clear that the world is not going back to normal any time soon, ignoring NFTs could be a mistake as they represent an opportunity for the art world to adapt to change.
Furthermore, even if the current hype dies down eventually, which it most probably will, the fact remains that NFT technology solves real problems. Different applications for it could be found and utilised in the future. Although it is true that one should think long and hard before investing in digital art, it would serve us well to keep an eye on NFTs and any new developments that may emerge over the coming days, months and years.
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