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Tokenized Art: A New Alternative Investment?

July 3, 2019 by Eric C. Jansen, ChFC®

Tokenized Art: A New Alternative Investment?

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.

ArtSquare

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.

Conclusion

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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Eric C. Jansen, ChFC

Fun Facts About Me

When he is not researching the next great stock to add to client portfolios, you can find him travelling frequently with his family to Jackson Hole Wyoming.

  • Hometown: Chicago, IL
  • Birth Month & Year: November, 1964
  • Favorite Hobby: Goldmining in Nome, AK
  • Favorite Food: Steak at Charley’s Steakhouse in Orlando FL
  • Can't be interrupted when: Watching the Discovery Channel
  • Hidden Talent: Finish Carpenter
  • Something on bucket list: Obtain Helicopter Pilot License
  • Family Pet: Goldfish

Steven C. Johnson, ChFC

Fun Facts About Me

Steve would tell you that one of the best parts of the day is spent talking to clients and relationships that result from it. When away from the office, he loves to travel the back roads of New England enjoying all the great sites that can be found off the beaten path.

  • Hometown: Townsend, MA
  • Birth Month & Year: December, 1967
  • Favorite Hobby: Playing Hockey
  • Favorite Food: Chicken Caesar Salad
  • Can't be interrupted when: Watching the Bruins
  • Hidden Talent: Cooking – Makes a great Thanksgiving turkey
  • Something on bucket list: Travel to Italy and Greece
  • Family Pet: Max – our Pomeranian

Frederick M. Lane, ChFC, CASL

Fun Facts About Me

When not managing client portfolios, Fred can be found relaxing with family and friends.

  • Hometown: Nutley, NJ
  • Birth Month & Year: July, 1954
  • Favorite Hobby: Dog Walking
  • Favorite Food: Italian
  • Can't be interrupted when: Listening to Pink Floyd
  • Hidden Talent: Landscaping
  • Something on bucket list: Space Flight - Tourism
  • Family Pet: None

Catherine M. Gareri

Fun Facts About Me

When not caring for her clients Cathy enjoys relaxing in her yard at home.

  • Hometown: Bellingham, MA
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  • Favorite Hobby: Cooking and Entertaining
  • Favorite Food: Steak at the Capital Grille
  • Can't be interrupted when: It's family time
  • Hidden Talent: Dog Whisperer
  • Something on bucket list: Spending a couple months on the Almalfi Coast
  • Family Pet: In Between Mastiffs now so a little blue fish “Willy”

Katie E. Moore, CLTC

Fun Facts About Me

When Katie is not busy taking care of her clients, she spends her time being a mom to her two little ones, Owen and Isla.

  • Hometown: Modesto, CA
  • Birth Month & Year: September, 1982
  • Favorite Hobby: Swimming
  • Favorite Food: Mexican Food
  • Can't be interrupted when: I'm cooking
  • Hidden Talent: Climbed Yosemite's Half Dome, twice - no fear :)
  • Something on bucket list: See the Northern Lights and Potty Train my 2 year old
  • Family Pet: Caddy and Sierra – our two cats

Hesper Duval

Fun Facts About Me

Loves spending time with 2 daughters and enjoys participating in 5k obstacle races throughout the year.

  • Hometown: Charlton, MA
  • Birth Month & Year: October, 1981
  • Favorite Hobby: Running
  • Favorite Food: Cheesecake
  • Can't be interrupted when: Reading a good book
  • Hidden Talent: Interior Design and furniture restoration
  • Something on bucket list: To travel cross-country in an RV
  • Family Pet: Charlie and Nora, both black labs from the same litter

Donna Fournier

Fun Facts About Me

When not cheering for the Patriots, Donna spends her free time travelling throughout the United States looking for new haunted places to explore. She loves to wear her cowboy hat and boots when travelling out west.

  • Hometown: Swansea, MA
  • Birth Month & Year: February, 1961
  • Favorite Hobby: Exploring haunted locations
  • Favorite Food: Pizza
  • Can't be interrupted when: Eating my pizza
  • Hidden Talent: Rollerblading
  • Something on bucket list: Travel to Australia
  • Family Pet:  Had a pet skunk

Danielle Drew

When Danielle does not have her head in a book studying to expanding her financial planning knowledge, she enjoys anything active and outdoors, including visits to the beach and hiking.  

  • Hometown: Dennis, MA
  • Birth Month & Year: November, 1985
  • Favorite Hobby: Working out, concerts, and exploring wineries
  • Favorite Food: Lobster pot pie, cheeseburgers, BBQ, the list goes on...
  • Can't be interrupted when: Working out 
  • Hidden Talent: Country line dancing
  • Something on bucket list: To hike the 48, 4000 footers of New Hampshire
  • Family Pet: none, hopefully a big dog someday

Jay Willwerth, ChFC

Fun Facts About Me

Jay’s days are spent helping clients achieve their financial goals, followed by nights and weekends typically watching his daughters play competitive volleyball.

  • Hometown: Melrose, MA
  • Birth Month & Year: September, 1959
  • Favorite Hobby: Golf
  • Favorite Food: Anything at a Patriot’s Tailgate
  • Can't be interrupted when: Watching the Patriot’s Game
  • Hidden Talent: Competitive Volleyball Watcher (Mostly his 2 daughters)
  • Something on bucket list: Play a round of Golf at Pebble Beach
  • Family Pet: Bella, our Shih-poo
 

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