First published on April 28, 2021
Several people have asked me about the impact of NFTs (“Non-Fungible Tokens”) on the art market. I don’t buy the hype. Here’s why…
Let me start by saying that I’m going to look at NFT transactions in digital art in the context of value. By this I mean sustainable value that a collector may feel is important but which for institutions – insurers, lenders, wealth managers – is essential.
So, the current question is whether the value of a piece of digital art transacted via an NFT will hold up. The easy answer is it is too early to tell. But you’re not reading this for non-answers. My take is, don’t be fooled by the speculative craze. We’ve seen this before and we’ll see it again. What I do know is that other market frenzies (say, internet stocks in 1999) habitually produce a few big winners and a ton of losers.
I don’t get the euphoria over NFTs let alone how value in these transactions will be sustained. Let me be clear, I understand NFTs as a platform for transacting in digital art. I understand how NFTs confer ownership of a piece of digital art despite said art being readily accessible to the masses. I understand the benefits of ownership security and usage rights. However, I don’t understand how this all translates into a collector’s willingness to pay exorbitant prices today and the risk being taken that the value is sustainable.
Maybe it’s the first-to-own effect. I certainly don’t have millions to burn, but it still seems illogical to think that the value of these works, bought during a period of stratospheric demand, will hold up.
Furthermore, it is difficult to determine what exactly is driving the art NFT craze. Right now, seems like the technology and the mode of delivery are much more important than the art itself.
Here are a few red flags:
- Assumptions about mainstream artist adoption are too simplistic – until now, digital art was a niche. Yes, a few mainstream artists are well positioned, but to expect painters and sculptors to suddenly start generating digital art devalues the creative effort.
- Gallery investment in NFT platforms is capital intensive – to get in the game, galleries will need to build or buy, while also incurring the costs of augmenting how they do business; thus, they’ll need to see a level of market sustainability first.
- NFT- collected royalties may not work as portrayed – To really matter, an artist’s secondary market would have to skyrocket, I can count on one hand how many times a year this happens. Plus, by bypassing dealers, the artist loses an established price point today and assumes the risk betting on a higher reward – royalty flow – tomorrow.
- The benefits of NFTs are already being questioned – it’s early, but thanks to hackers, the media are already poking holes in their previously- championed invincibility.
To make matters worse, everything is happening at warp speed and so what I typed in this first paragraph could be obsolete by the time I type my last word. In the meantime, here are some very insightful resources:
- A comprehensive article by Artnet that details the impact of NFTs.
- If you are a bit of a natural skeptic like me and are looking for an explanation a bit more sardonic, check out The Verge.
- A short video talking about the impacts of NFTs for digital artists.
If you would like me to drill into any of the concepts from above, get in touch.