Why Digital Art Will Be Huge
Non-Fungible Tokens (NFTs) are all the rave right now.
This is relative. They’re “huge” in this small playpen we’re in. For the rest of the world, they’re tiny.
I’ve been interested in “alternative investments” for quite some time now, which led me originally down the crypto rabbit hole in 2016.
Like many others, I wish I would’ve taken crypto more seriously the first time I heard about it (Bitcoin in 2013). And obviously also wish I had invested more capital into the space over the past 4 years. Hindsight is always 20/20.
My hunch is that NFTs (think in-game items) are going to be huge.
In this article I’m going to dive a bit further into why NFTs, specifically Digital Art, might deserve a second look.
My Bias
First, let’s consider my bias as we always have one.
I know that collectibles in general are a gigantic market. It’s estimated to be >$400 Billion dollars in size.
Yes, I collected sports cards as a kid. At some point, I actually sold a few on ebay and could see the allure of collectibles, but never truly went down that path.
Ironically, I finally cleaned out the corner in my storage unit that was designated for childhood stuff earlier this year (thanks COVID) and found a mountain of old trading cards. Not wanting to go through it, I actually gave them all to my parents’ neighbor. I hope there are some gems in there.
I just never found myself viewing collectibles as an “investment.” I collected them for fun, not ever pursuing them for an “investment.”
Same with art. This is my bias.
Personally, I would find it very hard to “invest” in a piece of artwork for $50K and hang it on my wall.
But, Art IS an investment and IS viewed as an investment for a great many people.
Traditional Art Market
Let’s take a look at the traditional Art Market globally. These numbers are wild.
The Traditional Art Market is huge.
Here are some stats:
- The Private Art Market is estimated at $1.7T, according to deloitte
- 2019 Global Sales were estimated at $64.1B according to Art Basel & UBS
- Online art sales are only responsible for about $6 billion in global sale, according to Art Basel
- More than 50% of US art collectors are over the age of 50. Asia, particularly Singapore (46%) and Hong Kong (39%), have high percentages of millennials as art collectors, according to Art Basel
How has art performed as an investment?
From what I can find, art has performed pretty darn well. Actually, Art has been viewed as an asset class for a while now.
An early institutional art investor was the British Rail Pension Fund, which in 1974 invested 3% of their holdings into fine art and collectibles through1981. This was intended to avoid issues with inflation while diversifying the portfolio.
Sound familiar?
“Blue-chip artwork”, which is defined as paintings by the top 100 artists in terms of sales volume, has outperformed the S&P 500 by more than 250% from Jan 1, 2000–Dec 31, 2018, according to Artprice.
Additionally, Art only declined 26% during the financial crisis of 2008–2009, when the S&P 500 declined by 58%.
Outperforming on the upside, and then not going down as much during pullbacks? Low correlation with S&P 500? All great qualities.
Digital Art
Many people have been investing in Art over the past decades — for wealth preservation, diversification, capital appreciation, whatever. As the World’s traditional investment options get less and less appealing, and the alternatives to the traditional 60/40 Stock/Bond portfolio become more appealing — my bet is that this trend will likely continue to accelerate.
Traditional art can be hung on your wall and enjoyed, it’s a physical thing. This ensures that you don’t have to worry about trusting your asset in the hands of someone else — you can take complete control — and see it every day in your house if you’d prefer.
Hanging it in your house is great, but then also includes the responsibility of caring, preserving and securing the art. A piece could look fantastic on your wall, but that could lead to damage, which is going to hurt your investment.
Of course, if you are happily displaying it, then this provides another advantage. You obtain a sizable investment AS WELL as decoration and a talking piece for your place. A lot of art investors are also collectors and love the value pieces bring to their interior decor. This will depend on your interest in art as it’s certainly not for everyone.
With this physical thing comes plenty of limitations. The world is shifting to digital, is it not crazy to think that traditional / physical art investing will shift into a more digital form?
Another way to think about it…. Newspapers versus Digital News. These things are similar, but Digital News has many more advantages versus its physical equivalent. I believe the same thing about Bitcoin. Bitcoin is similar to gold in a number of ways (bring on the criticisms), but superior in many other ways. Perhaps you can view traditional and digital art through the same lens.
I can see “Digital Art” (NFTs) growing in popularity as the world shifts to digital equivalents of these more traditional versions.
Like the digital equivalents of many other things, this greatly increases the accessibility of digital art as an investment. How many friends do you have that invest in traditional art? This is typically reserved for the more wealthy elite. Digital art on the other hand…. many others can participate here.
NFTs in General
Can’t you just copy/paste it? Yes, but it’s not the original — even if it looks identical.
How do you prove the authenticity and scarcity of that item then can be copied a million times over?
Non-Fungible Tokens (NFTs) on Ethereum. ERC 721 is a standard interface for NFTs on Ethereum and allows you to have tokens with a unique identifier. Non-fungible tokens (NFTs) are unique, digital items with blockchain-managed ownership.
NFT’s are probably scarce, liquid, and usable across multiple applications. These are programmable and censor-resistant digital goods. Examples include collectibles (e.g. CryptoKitties), game items, digital art, virtual real estate, event tickets, domain names, and even ownership records for physical assets.
NFTs allow us to observe every address that’s ever held it, bid on it, or transferred it — allowing perfect provenance for that piece of Digital Art.
The NFT ecosystem continues to grow. OpenSea, the most popular secondary market for NFTs, is not showing any signs of slowing down.
OpenSea monthly volume remains consistently >$1M in 2020. In Sep-20, there were weeks where the volume exceeded $1M in a single week.
OpenSea Monthly Users has surpassed 29,000. Almost doubling and up from 15,000 in Jan-20.
The space is growing and gaining traction. Individual art pieces have sold for >$50K, and there are certain artists that are selling their digital art for >$100K in a single day.
OpenSea, Rarible, and SuperRare: Three platforms in the space combined had nearly $15M in monthly volume in October 2020 — and there are many other smaller platforms I haven’t included in this number.
On Sept. 23, auction-house giant Christie’s announced plans to sell its first NFT at an auction. Still sound silly? Sometimes it does.
The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a “toy.” — Chris Dixon, Andreeson Horowitz
Summary
At >$1.7 Trillion Dollars, the “Traditional Art” market is giant. However, the advantages offered by NFTs gives the “Digital Art” market amazing potential to not only be larger but actually potentially be significantly larger than its non-digital traditional art counterpart.
Thanks to blockchain, NFTs offer the undeniable true ownership and perfect provenance necessary to make Digital Art really a ‘thing’ and the upside is potentially unlimited.
As an investor, I typically think of these bets as call options. Technically (improbable in my mind, but not impossible) these things could go to 0. So your downside is limited to how much you’ve invested. However, the fun thing is that you have unlimited upside potential.
You have unlimited upside potential. In the same way that Bitcoin could be viewed as a call option on Bitcoin becoming a new “Digital Gold” / Store of Value / Global Reserve Currency, Digital Art can be viewed as a call option on Digital Art becoming a thing in the future.
I’d take these bets all day long.
