The NFT market has been a century in the making: A primer in art as an investment

In recent years, the growing interest in NFTs has sparked discussions surrounding art as an investment, prompting one to consider: How did art become valued and traded as a financial asset?

May 18, 2022 Art

7 months ago

Art has always had an inevitable relationship with money. As far back as the Renaissance, one can see the development of the modern banking system alongside the flourishing of arts and culture. In the last century, however, the commodification of art has accelerated dramatically, with the 2021 global art market valued at an estimated $65.1 billion. As NFTs further accelerate this trend, it’s worth asking, what led to art becoming such a valued and traded investment?

Thomas Rowlandson, Christie’s Auction Room (1808). Image courtesy of The Metropolitan Museum of Art (link).

The contemporary foundations of art as investment are often linked with an enterprising art fund that began in 1904. Andre Level–a lawyer and financier–created La Peau de l’Ours, a syndicate that brought together eleven people to purchase affordable artworks by emerging artists with the goal of selling them for a profit in the future. Over the next ten years, the fund acquired over a hundred paintings and drawings from Impressionist artists. In 1914, the fund held a public auction in Paris and managed to quadruple their investments. The auction paved the way for another generation of artists, such as Picasso, to gain wider attention in the art market. It also provided a model that later ventures would follow, like the British Railways Pension Fund in the 1970s.

Art speculation skyrocketed in the second-half of the twentieth century. In 1955 and 1956, Fortune published a two-part essay by Eric Hodgins and Parker Lesley triumphantly titled “The Great International Art Market.” Citing numerous examples of successful investments with high return–e.g., Johannes Vermeer’s “Portrait of a Young Girl,” which, in 1916, sold for 3 florins (the equivalent of $1.80 in the 1950s), a few decades later, was bought by a pair of private collectors for $350,000–the essays outlined the lucrative potential of investing in great art. Hodgins and Lesley attributed the growth of the art market to an increasingly more competitive global economy.

Johannes Vermeer, Study of a Young Woman (circa 1665 – 67). Image courtesy of The Metropolitan Museum of Art (link).

In 1973, Robert and Ethel Scull orchestrated a landmark auction of fifty works from their collection that further solidified the profit opportunities of investing in art. The couple had been collecting contemporary art since the 1950s, purchasing many works by young artists who would later have very successful careers. They were quick to recognise artists such as Jasper Johns, from whom they acquired over twenty major works, at a time when the American art market had yet to take off. The auction was widely marketed and accompanied by parties, an exhibition, and a heavy sales catalog. It drew in new buyers and collectors for the American art market, including Japanese and European buyers who, until then, had paid scant attention to contemporary American artists. The auction was a great success, setting several records for the American market. Robert Rauschenberg’s “Thaw” (1958), for example, which the couple had  purchased for $900 from the artist, was sold for $85,000 (a price point that would be deemed very affordable for an artist like Rauschenberg today). The curator Barbaka Haskell said that the Scull auction “established the idea that modern art could be a really effective money-making tool.”

Robert Rauschenberg’s “Winter Pool” (1959)

Fast forward to the 21st century, where the global art market has averaged between fifty to sixty-eight billion dollars in trading volume between the years of 2010 and 2021, according to “Art Basel and UBS The Art Market 2022”. The rising prices of blue-chip artworks have prompted financial industries to develop new products linked to artworks. Since 1979, Citibank, for instance, has provided art advisory as part of their wealth management services. In Deloitte Private and ArtTactic Art & Finance Report 2014, 53% of wealth managers believed that art should be a part of a wealth management service; in 2021, this number rose to 85%. The Financial Times reported that in 2018, private banks had begun  offering loans against high net worth individuals’ art collections. In their marketing materials,  J.P. Morgan describes fine-art financing as a process designed to “find liquidity in your artwork – while keeping every piece in your possession.” Clearly, art is now fully embraced as an asset class, a tangible and real commodity with low liquidity but relatively stable returns that allows for the diversification of investment portfolios. 

The financialization of art has led to a number of changes in the global art market’s infrastructure. For example, many of the world’s most prized artworks are now stored in high-security storage facilities like the Freeports, where they can be privately traded without incurring taxation. Banks similarly make use of such storage solutions to safekeep the artworks they hold as collateral. Indeed, Georgina Adam, Art Market Editor-at-Large at The Art Newspaper, attributes the boom of the global art storage business to the rising number of art investors. In her book, “Dark Side of the Boom: The Excess of the Art Market in the 21st Century,” she quotes an anonymous New York dealer and appraiser who noted that, “in the last year, I only physically saw one piece of art that I negotiated. Everything else was bought and sold via jpegs and remained in storage.” Accordingly, investors and collectors have come to develop a comfort with owning an artwork that they don’t have immediate physical access to, or have ever seen at all–a phenomenon that has paved the way for art funds such as Masterworks that offer fractional shares in blue-chip artworks as securities.

Hiscox Online Art Trade Report 2014 (Hiscox, 2014)

During the first decade-and-a-half of this century, most investors prioritized physical artworks, while, conversely, the digital art market remained limited. The Hiscox Online Art Trade Report 2014 found that only 11% of online buyers had purchased new media or digital art, and of those works that were acquired at least half were bought for less than a hundred pounds. Although some innovative galleries–like TRANSFER by Kelani Nichole–began focusing solely on digital and new media works, the majority of primary sales continued to be driven by physical artworks. Even as a growing number of collectors developed comfort and fluency in collecting new media works, it remained difficult to build a robust secondary market for such works due to the challenges surrounding authentication and maintaining digital scarcity. 

The introduction of blockchain verification and NFTs changed the prospects for digital artworks by introducing artificial scarcity. Collectors and investors are now able to trade artworks that are much more liquid without having to fret over shipping and handling fees. DAOs like Flamingo DAO offer an evolved, crypto-native structure that is not too far from Andre Level’s original idea of a shared collection. Flamingo describes itself as an “NFT-focused DAO that aims to explore emerging investment opportunities for ownable, blockchain-based assets,” allowing members to develop and deploy NFT-focused investment strategies. 

NFTs may accelerate the rate at which art will be traded as a financial asset, especially for digital works, but it is hardly the key culprit behind the hyper commodification of artworks that some make it out to be. Since the twentieth century, art has gained traction as an asset class and NFTs are the next frontier for it. While it is uncertain what the art market will look like in the future, one thing is certain–the deep coupling of art and financial speculation will continue to impact both the production and consumption of art. When treated like any other commodity, art will flow where the money is.

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Clara Peh

Clara Peh is the Founder of NFT Asia and Art Lead, Curator at Appetite Singapore. She lectures on visual culture at LASALLE College of the Arts, and is an independent arts writer and researcher. She graduated from the Courtauld Institute of Art with a Master’s in Art History.

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