NFTs were never meant to be a competitor to fine art. Instead, the technology could very well bring about an evolution in fine art investing. Here’s what you need to know.
Non-fungible tokens (NFTs) have been inexorably linked to art investment, with enthusiasts spending significant sums of money building an investment portfolio of digital art pieces.
On the surface it sounds puzzling – why spend thousands or even millions of dollars on what is essentially a jpeg, when anyone can easily download a copy of the same artwork from the Internet?
Of course, that reductionist argument is missing the point – as often happens with a lot of new technology.
But while we were busy wrapping our heads around the concept, the art world has been not-so-slowly taking to NFTs as the next evolution of fine art investment.
To understand why, we must first understand what NFTs are.
Table of Contents
- NFTs explained simply
- How do NFTs compare to fine art?
- Pros and cons of investing in NFTs
- Pros and cons of investing in fine art
- NFTs – the evolution of fine art investment?
Prefer to invest in stocks? Webull Singapore's user-friendly platform lets you to trade in US and HK stocks with zero platform fees, with access to ETFs, ADRs, Options, Mutual Funds and many more! Fund any amount and stand to receive free shares.
SingSaver Exclusive Promotion: Get S$100 upsized cash via PayNow and a chance to win a Dyson Micro (worth S$599) when you open a Webull account and fund at least S$100 within 30 days of account opening. Valid till 31 May 2023. T&Cs apply.
Also, receive 5 free shares worth up to USD 500 and 0-commission trades, and a chance to win TSLA shares worth up to USD 888 and a Tesla Model 3 when you fund and maintain any amount in your Webull account. T&Cs apply.
NFTs explained simply
Something that is fungible is interchangeable with another equivalent unit of the same thing.
For example, a S$2 note is interchangeable with another S$2 note. A 500-gram gold bar is interchangeable with another 500-gram gold bar of the same purity. They are all fungible.
Something that is non-fungible is not interchangeable with another unit of the same thing.
Take diamonds for example. Each diamond is unique in terms of colour, cut, clarity and other properties, and are therefore non-interchangeable, even if they happen to be the same size. Hence diamonds are non-fungible, as are hand-crafted furniture, or autographed copies of a music album.
It is this non-fungibility of NFTs that make them ideal for proving copyright and ownership. And what enforces the veracity of NFTs is the blockchain, which is basically a public ledger that verifies transactions and records them in an immutable manner.
Hence, NFTs minted on the blockchain functions as a single source of truth that anyone can verify, and any changes (such as ownership, when one person sells an NFT to another) are recorded in perpetuity.
Related to this topic: Non-Fungible Tokens (NFT): What They Are And How People Are Making Money Off Them
How do NFTs compare to fine art?
Strictly speaking, NFTs can’t be compared to fine art; that’s not a comment on their inherent value.
Rather, NFTs aren’t an object the way a piece of art is. NFTs are simply a digital token on a blockchain that proves ownership of a particular item – in this case, a piece of fine art. Note that this art piece can be physical – like an original painting framed and hung on the wall, or digital – such as a unique photograph stored as a jpeg.
What gives an NFT its value is the item or asset it certifies; an NFT by itself doesn’t have any value. Say for example, the Vincent van Gogh Foundation one day decides to sell off van Gogh’s “Sunflowers”, and mints an NFT for auction.
If you successfully win the bid, the NFT will be transferred to your digital wallet, in the process making you the new bona fide owner of “Sunflowers”. However, you may not have the right to take physical possession of the painting itself, which remains under the care of the Foundation.
Now, let’s say “Sunflowers” unfortunately got destroyed. Your multi-billion dollar NFT is now worth nothing, as the asset it was attached to no longer exists.
The point is, it’s a misnomer to say that you’re investing in NFTs, as what you are really investing in is the artwork (or asset, or item, or object) – physical or digital – that the NFT points to.
Understanding this is important so as not to get swept up in the hype and lose 99% of your investment – like that guy who spent US$2.9 million on an NFT of Jack Dorsey’s first tweet.
Related to this topic: How These Singapore-based Creators Started Their NFT Projects
Looking for insights and guidance with your investment portfolio? Start a Priority Banking account with Citigold, and gain access to a dedicated Relationship Manager who’ll work with you to determine the ideal investment portfolio for you after discussing your current financial situation, needs, and goals.
SingSaver Exclusive Offer: Get S$1,500 Upsized Cash via PayNow or an Apple iPhone 14 128GB (worth S$1,311.10) or an Apple Watch Ultra GPS + Cellular 49mm (worth S$1,210.20) when you apply for a Citigold account and make a S$250,000 deposit by 31 July 2023. Valid till 31 May 2023. Receive your reward in as quickly as 2 months after fulfilling the promotion criteria by the end of Month 3. T&Cs apply.
Enjoy up to 7.51% p.a. interest on your savings when you open a Citi Wealth First account. T&Cs apply.
Also, receive a welcome booster of up to S$1,000 Cash when you join Citigold by 31 May 2023. T&Cs apply.
Pros and cons of investing in NFTs
Helps artists preserve their rights
Highly speculative asset class
Democratise art ownership
Vulnerable to cyber crime
Potential for capital appreciation
NFTs are useful in helping artists to preserve their rights, given the immutability and verifiability of the blockchain. By minting an NFT of their work, an artist creates a permanent record of their creator status, helping to prove intellectual property rights.
Also, NFTs can trigger a royalty payment to the artist each time the underlying artwork changes hands. The payment is preordained, and executed instantly and automatically.
Not only do NFTs help safeguard artists rights and improve access to what they are rightfully owed, they can also help democratise art ownership among collectors, through tokenization.
Here’s an example of how this works. Firstly, understand that there is no limit to how many NFTs can be minted for one particular piece of artwork. So for example, if you publish an original photograph that has been edited using digital art techniques, you can mint, say, 100 NFTs for the piece.
These NFTs are not copies of each other, rather they represent shared ownership in the artpiece. So for instance, NFT 1-of-100, NFT 2-of-100… NFT 100-of-100. This allows more collectors to own the artpiece without having to outbid 99 other enthusiasts, helping to lower the price for all involved.
At the same time, the artist can potentially receive higher total payment from 100 collectors, instead of just the highest bid from the winning bidder.
One other benefit of investing in NFTs is the potential for capital appreciation.
Sure, the entire NFT market has suffered a spectacular crash after the initial mania of 2020, but the sector is far from dead. But just because NFTs are overall trading at a 90% discount, bear in mind that this is still a highly speculative asset class and discernment is warranted.
Remember – it’s the underlying piece of art, not the NFT itself.
Also, you need to educate yourself about how to safely and carefully store your NFTs. As with all things digital, NFTs are vulnerable to cyber crime. In 2022, US$100 million worth of NFTs were lost to theft.
Related to this topic: 3 Common NFT Scams (And How to Spot And Avoid Them)
Pros and cons of investing in fine art
Proven track record as asset class
High barrier to entry
Low correlation to conventional assets
Here’s something you may not know about fine art. Increasingly, fine art is being recognised as a worthy asset class, outperforming the S&P 500 by an impressive 250% over the past 25 years.
Furthermore, art has a low correlation to conventional assets, which means it is less affected by macroeconomic conditions and thus has a better potential to deliver outsized returns where other assets may fail.
On the other hand, investing in fine art traditionally has a high barrier to entry, making it difficult for the average person to participate. Art also differs from other assets such as stocks and shares in terms of liquidity, as it does not pay dividends, and finding a suitable buyer takes time.
Investing in an art piece often requires a willingness to hold the piece for a long time before any credible returns can be seen.
Related to this topic:
4 Best Ways to Invest S$1 million in Alternative Investments
A Guide To Investing In Art And The Best Platforms To Start With
NFTs – the evolution of fine art investment?
Perhaps trying to choose between NFTs and fine art is moot, as the line between NFTs and fine art is already blurring.
Remember tokenization, where you mint 100 NFTs instead of just one, so more collectors can jointly own the artpiece?
That’s already happening, with sites like Masterworks offering shares of art pieces from masters such as Picasso, Monet, Warhol and even Banksy, Basquiat and Yayoi Kusama!
While Masterworks does not use NFTs, the concept is similar. As an investor, you can buy shares in pieces of fine art offered on the site. When the artwork appreciates in price, you can sell your shares for a profit.
As the benefits of NFTs become more widely understood, it is not improbable that art traders and collectors will start turning to NFTs as the next evolution in fine art investment.
For a limited period only - Start investing and get a cash reward from Tiger Brokers.
SingSaver Exclusive: Get a S$25 Cash Reward when you open a Tiger Brokers account via SingSaver and fund any amount. Plus, snag a Sennheiser MOMENTUM True Wireless 2 Earpods (worth S$370) if you are one of the first 40 applicants to fund a minimum of USD 1,000. Valid till 17 June 2023. T&Cs apply.
Also, get 2.88 free stocks worth up to S$360 and 0-commission trades. Valid till 29 May 2023. T&Cs apply.