Have you ever wanted to invest in art? Were you deterred by the high cost to buy a single piece, by not knowing what to invest in, or by concerns about how to store or display it properly to preserve its value?
These are key reasons why many people haven’t invested in art, but art tokenization could be changing the market. It eliminates these problems by letting investors securely purchase the rights to a fraction of an artwork, not unlike owning a share of a public company’s stock.
How Art Can Be Tokenized
Artwork has distinguishing characteristics that make each piece “nonfungible.” You can’t swap out one Monet for another; each is unique, and a reproduction is not the same as the real thing. By contrast, stock certificates (or, these days, their digital equivalents) are fungible: they’re all the same.
Nonfungible items can be tokenized into what’s called a “nonfungible token.” To tokenize an item means to create a virtual representation of it on a blockchain. Through tokenization, ownership of a large and/or valuable item can be divided among many people. Their ownership stakes are secured by digital tokens that are recorded on a blockchain.
Because the blockchain’s record is permanent, unalterable, and verifiable, you can trace the ownership of a nonfungible token to make sure it is valid. Does it really represent ownership of the asset you think it does or is it a fake? You can uncover this information before purchasing it. And when you want to sell it later, you can prove its value to an interested buyer.
Tokenization of Physical Art: 14 Small Electric Chairs
The top global auction houses sold more than $12 billion worth of art in 2018. Now, tokenization is opening up the art market to people who can’t afford or don’t want to risk tens or hundreds of thousands of dollars on a single work.
In 2018, a 31.5 percent stake worth $1.7 million in Andy Warhol’s “14 Small Electric Chairs” sold through Maecenas, the first blockchain platform for investing in art — specifically, valuable post-war and contemporary art. This 1980 work is a silkscreen on canvas. The auction was a private beta launch of the Maecenas platform.
The Dutch auction was conducted via smart contract, and buyers could acquire a stake in the artwork by paying in ETH, BTC, or Maecenas’s ART token. Of more than 800 bidders, 100 secured partial ownership of Warhol’s artwork. Interested parties can examine ART token transactions at Etherscan.io, although the information there is unlikely to make sense to users without a technical background.
While auction winners can trade their ART tokens on Maecenas’s exchange, the ART token is still in beta, which means it has limited users, and the value of each token is hard to ascertain. But in general, the value of any token backed by a real-world asset like art would be based on (1) the underlying asset’s value divided by the outstanding number of tokens and (2) the premium or discount the tokens are selling for in an open marketplace.
The art ownership stakes sold by Maecenas are minority stakes, and the majority stake remains held by a single collector. What happens if that collector wants to sell? Maecenas requires the majority owner to buy back the ownership stakes of all current investors at market price plus a discretionary premium. A minimum percentage of the minority investors must agree to the terms.
Art Tokenization and Trust
Before it agrees to sell an artwork, Maecenas conducts an in-house assessment of the work’s provenance and secures it in a storage vault, where it is insured. Art sellers pay Maecenas a fee of 6 percent and buyers pay 2 percent. These fees are much lower than what art auction houses and galleries typically charge.
An investor in ART or any other tokenized real-world asset needs to do their own due diligence or work with a trusted advisor to make sure the offering is not a scam. Investors will want to know, for example, if the artwork is authentic and if it is really being stored where the platform says it is.
A partial source of assurance lies in the blockchain. All pertinent information about the artwork Maecenas tokenizes, such as provenance, storage method, location, insurance, independent valuation, condition, and verification, is recorded on the blockchain in an immutable way for all to see.
The blockchain is decentralized, but doesn’t the presence of an auction house like Maecenas undercut the concept of decentralized asset ownership? Not really. While any tokenized asset needs first to be issued by some entity, once the tokens are issued, they can be bought and sold freely, worldwide, 24/7 on a variety of decentralized exchanges.
Tokenization of Digital Art: 89 Moments Atomized
Maecenas shows how tangible assets such as paintings can be tokenized. Tokens can also represent unique digital assets, the most well-known of which are CryptoKitties. Digital art, therefore, can also be tokenized.
This is what we’ve seen with a work called 89 Moments Atomized by Eve Sussman. Through a platform called Snark.art, patrons can purchase one of 2,304 atoms (pieces) of this work for $120 each. Sussman’s work is related to a more traditional work of hers, 89 Seconds at Alcázar, a video installation she based on Diego Velásquez’s famous Las Meninas oil painting from 1656.
A newer platform called ArtSquare, based in London is auctioning off 28,000 Digital Art Shares represented by Artwork Tokens (AWT) the provide ownership stakes in Andy Warhol’s “Kiku.” AWT will be tradeable on ArtSquare’s exchange, and the owners of the underlying art will have the right to buy back all the associated shares at a predetermined price.
The Value of Art as an Investment
Even with traditional art, it’s challenging to guess what will be valuable in the future. Should you buy what’s popular? Should you try to find the next big thing? Investing in art can be highly speculative.
Further, traditional estimates of the return on art investment may be overstated. A Stanford working paper released in 2013, “Does It Pay to Invest in Art?” pointed out that “paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns.”
In other words, you need to look at the entire art market, not just the market of art that actually sells, to understand your potential return on investment. The study finds that a more realistic estimate of the returns from art investing is 6.5 percent, not the 10 percent found by uncorrected repeat sales regressions.
The tokenized art market has been around for such a short time that we don’t yet have enough data about its performance. One might expect it to run somewhere between the 6.5 percent returns of traditional art investments and the all-over-the-map returns of cryptographic tokens, meaning that you could lose everything or make a fortune. We just don’t know.
Risks of Owning Art Tokens
If you’re already a crypto enthusiast, you might think tokenized art sounds really cool. You probably also realize there are risks involved if you buy in.
Like all digital tokens and cryptocurrencies, art tokens are vulnerable to loss, theft, and hacking. You must understand how to securely store these assets to avoid losing your investment.
Owning an art token is not the same as owning a complete artwork. You can’t hang an art token on your wall and admire it. If you own tokenized digital art, though, this is less of a problem, as digital art can be easily accessible.
Financial advisors don’t typically recommend art or other alternative investments such as private equity, wine, or bitcoin for the average investor. But investors who have a higher tolerance for risk, have money they can afford to lose, and who understand that tokenized art’s value is not guaranteed to increase or even hold steady may want to consider adding tokenized art as an alternative investment to a well diversified portfolio. Keep in mind, certain offerings are only available to accredited investors.
Buying and selling cryptocurrencies and cryptographic tokens also comes with its own set of income tax challenges. Investors should be aware of the tax implications before buying and selling art tokens.
Fine art has long been an inaccessible and illiquid asset. It’s been exchanged mainly among the ultrawealthy through auction houses. And while it’s easy to buy a share of a company even if you can’t buy the whole thing, a comparable mechanism hasn’t existed for art until now. While small investors can purchase shares of real estate through REITs, you won’t find any art mutual funds or ETFs to analyze on Morningstar. Art funds, like individual works, are exclusively marketed to very wealthy investors and may even be closed to new investors.
With the historical challenges to art investment, tokenized art has become a new alternative investment for individuals’ portfolios. More people will be able to access art as an asset class since they can buy a fraction of a valuable artwork by purchasing a blockchain-secured token instead of having to purchase an entire artwork. Tokenization could also increase liquidity in art investing since tokens are easier to buy, sell, and store than paintings.
Still, as with any alternative investment, it’s important to moderate your expectations for how much you might earn and only invest money that you can afford to lose. The concept of tokenized art might not take off. Or it might turn out to be the next big thing.
The information in this article is for informational and educational purposes only. Investing in ICOs, cryptocurrencies, or tokens is highly speculative, and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.
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