The Complex World of Art Investment

Buying art has never been easier with galleries, auction houses, online databases, churning out art at a variety of different price levels. Whether you want to buy a print by a local artist for $20 or bid on a high-profile painting at Sotheby’s for hundreds of millions, you have the ability to do so as long as you can procure the necessary funds. However, selling and reselling art is a complicated crap shoot plagued by high insider knowledge, ill-defined price appraisal, and a top-heavy market controlled by wealthy collectors. If one decides to use art as a way of diversifying their investment portfolio, they will likely have a much trickier time yielding returns than with traditional stocks and bonds. Nonetheless, more and more collectors are becoming interesting in art’s investment potential. According to the Trusts Insights Wealth and Worth Study in 2018, 33% of millennial collectors see art as an investment asset rather than a collection item.

Galleries, auction houses, and dealers try to purchase the biggest art by the biggest names. For contemporary artists, most galleries and dealers are looking for their newest works because it will yield the most profit. They will likely turn away a resale of an artist’s older pieces. Auction houses will only go for established artists that have a proven track record for sales. If you are trying to resell an artwork by an artist who is not well known, it is very unlikely that you will be able to make the sale. For some auction houses consigners will have to pay fees for photography, listing the artworks in an auction booklet, bidding fees, and generally 1–1.5% of auction price for insurance purposes. If a work is not sold, most auction houses will include a buyback fee that encompasses all of the expenditures that went into listing the piece for auction.

When reselling a high-profile piece, it is almost certain that an auction house or gallery will want the work’s provenance and guarantee of authenticity. In order for a work to be properly appraised, it is very important that it has a verifiable history. Unfortunately, guarantees of authenticity and recording of provenance is not an industry standard. It is much more common for an object to have an incomplete history than a complete one or even no verifiable history at all. Verification of provenance is often a long and painstaking process. If a work does not have a verifiable history, it will likely be turned down.

An unfortunately plausible scenario is that the artwork is a fake or a forgery. If discovered, this renders the valuation of the piece almost worthless. With the valuation of high-profile artwork going into the hundreds of millions, there is a lot of incentive for forgers to attempt to get a cut of that sweet profit. It is estimated that over 50% of artwork is forged. When purchasing a piece, especially one you intend to resell, it is important to verify the provenance and authenticity yourself. Be sure to make purchases from reputable sellers and when in doubt, enlist the help of an art advisor for guidance.

Valuation of artwork is not an exact science and is not as well publicized as the constant fluctuation of the stock market. Those with insider information into the market have advantage over those who don’t and can even use their knowledge to control the valuations themselves. For example, if a dealer is privy to knowledge that a museum is looking to purchase a Warhol or a well-known collector is looking to buy a Degas, they could use that insider knowledge to hike up the prices of Warhol’s and Degas’. Accurate appraisals are rare and there are few valuation standards throughout the industry. One of the most popular standards is the Mei Moses Index, recently purchased by Sotheby’s. Utilizing data points from resold works over time, the Mei Moses Index attempts to give an accurate valuation of price if that work was to come up for auction again. The problem with the Mei Moses index and most art valuation strategies is that only high-profile artwork, that has been to auction multiple times, has a chance of receiving an accurate valuation.

Experimental Blockchain projects are changing the way that people can invest in art. The most promising use of the technology lies simply in making information on provenance and authenticity accessible to the general public. Utilizing the immutable nature behind Blockchain’s core consensus-based algorithms, it is possible to create a distributed ledger of an artworks history that cannot be altered or corrupted by a foreign entity. This creates a more open and transparent market where both buyers and sellers have more confidence in the authenticity of the artworks. There still is the issue of verifying an artworks provenance and authenticity before it was entered on the Blockchain, but distributed ledger technology makes a promising case for provenance moving forward.

Another interesting development in the word of art investment and Blockchain is the ability to divide artworks into shares, much like conventional stocks. Blockchain based art platforms, such as Macenas, are experimenting with allowing users to purchase fractional percentages of famous artworks and resell their shares to other users. Instead of relying of the influence of collectors with endless pockets or dealers with insider information to dictate prices, the shares adjust according to demand, much like conventional cryptocurrencies. Auction houses, such as Christies, have taken to using Blockchain to record their sales, forever immortalizing their records to help with provenance determination.

Art is worthwhile investment purely for the joy and aesthetic pleasures it can deliver, but if you are seeking to utilize artwork to yield returns, you are probably better off with a more conventional investment. The valuations of artworks are dictated by insiders who can both understand and manipulate them. Resale of an artwork is almost entirely determined by how well established an artist is. If you do manage to have a piece that has resale value, there are still the hurdles of provenance and authenticity to grapple with. Investing in art for returns is difficult because of the confusing minefield that is the art market. However, Blockchain technologies offer tantalizing visions of a future where provenance is democratized and easily verifiable, shares allow investors to purchase fractional portions of an artwork instead of the whole thing, and demand-based valuations eradicate insider manipulation. Investing in art is getting more and more popular, it is up to the evolving art market to make it more viable.

— Article by: Christopher Rahmeh