Masterworks, NFTs and the Growing Allure of Community-Driven Artwork Investments
In recent years, the world of art has been taken by storm. White art sales have continued to be as strong as ever, two new types of investment platforms have shaken up the industry and created new discussions around art’s place as an alternative asset class.
The Masterworks app, which is used to access an innovative, blue-chip art platform, was launched in 2017 and the company has since overseen the sale of 13 paintings. Then the world’s top auction house started selling NFT art in 2021
NFTs (Non-Fungible Tokens), a blockchain-enabled digital art technology, drive a market currently worth over $22 billion, with NFT sales accounting for over $1.8 billion in transfers every single month. While this is an impressive market, this is only a small fraction compared to the art industry’s $67.8 billion in sales each year.
Although the art industry has a higher market value and annual sales volume, the NFT industry is one that develops faster. In this article, we’ll delve into the case for sub-investment in both of these mediums, exploring the particular advantages and disadvantages of each financial investment stream.
Why fractional investing works for art
The best investments in both art and the NFT industry have reached jaw-dropping sums. An outstanding NFT, The Merge, sold for $91.8 million, while Salvator Mundi by Leonardo da Vinci sold for $450.3 million. Although a very small selection of investors have access to figures like these, large parts of the world are closed off from million dollar investments at all times.
Instead, a new strategy for investing in high-ticket art objects is gaining popularity: fractional investing. Fractional investing allows users to get involved in an asset that is likely to increase in value without having to put down millions of dollars all at once. Fractional NFT trading platforms like Ommniverse, and services like Masterworks and Artory that allow fractional investments in art, are fast becoming the best ways to diversify a portfolio into the world of art.
Partially investing in the wider world of art has a number of advantages:
Diverse investments: Diversifying an investment portfolio with different sectors provides increased strength against the market, security against industry shutdowns and increased returns despite market conditions.
Market safe investment: When traditional sectors and markets decline, alternative investments such as art remain strong.
Flexibility: Fractional investing allows investors to deposit absolutely any amount. This can be as low as $5 or as high as the investor wishes, offering full flexibility in their investments.
Given how well the art world has performed, averaging 7.5% per year despite market fluctuations, this is a fantastic industry to focus further investment on. With the added flexibility of fractional investments in both NFTs and art, investors are able to accurately and meticulously build a corpus of alternative fractional investments.
Still, for investors, which is the best decision: digital or physical art; NFTs or art?
The case for fractional NFTs
Since the peak of the NFT craze, the case has been strong for adopting fractional NFTs in an investor’s portfolio. Throughout 2020, NFTs were one of the strongest asset classes in the market, with trading in the NFT market exceeding 21,000%. Individuals who invested fractionally in this asset class were exposed to some of the best returns that year.
When a company fractionalizes an NFT, they offer segments of it on separate ERC-20 tokens. By storing owner information on a smart contract, owners are validated as controlling the segment of the original NFT. Some of these fractional contracts contain information about how long a user must hold before selling. Others are much more flexible, allowing users to buy and sell freely.
Fractionated NFTs come with a number of advantages, including increased liquidity in the market, accessible prices and better incentives for curators. Although the financial appeal of the NFT market seems strong, they are nowhere near as established as the art market.
Also, basing the entire ownership principle on a smart contract seems efficient until we look at the larger story of the NFT market. Smart contract flaws have cost creators millions of dollars, with the newness of this technology meaning all potential vulnerabilities have yet to be patched.
Similarly, global interest in NFTs and the shared NFT market has fallen sharply over the past year. Trading volume is currently down 97%, which shows instability in the market. The lack of interest in the market combined with potential technology and governance issues make this a tough sell for most investors – despite the added flexibility offered by fractional NFTs.
The case for fractional physical art
The art world has been an established market for hundreds of years, with the secondary art market dating back to the 16th century. Although the market has been active, thriving and stable for many years, the biggest barrier to adoption in art is price. The investments with the highest returns come from established, older artists, with their artwork often selling for millions of dollars.
For most investors, the high price of art is a barrier that they simply cannot overcome. With this in mind, the argument for fractional investments in art is much stronger than NFTs. If the biggest barrier to adoption is cost, fractional investing essentially remedies this market pain, increasing accessibility.
Services such as Masterworks, which offer partial investments in some of the most recognized artists in history and their artworks, are effectively changing the investment dynamic in the art world. Currently, Masterworks offers SEC-backed shares in 250 works of art from famous artists such as Monet, Warhol and Banksy.
By increasing availability, investors can gain a share of highly valued artwork that has historically shown impressive returns. Banksy’s artwork, for example, has an annual return of 32.0%. By buying shares in an asset like this, investors can diversify their portfolios without having to invest millions of dollars at once.
As we continue to experience market downturns, the opportunity to invest in art through Masterworks has become an extremely attractive opportunity.
Fractional investing removes the financial barriers to investment, providing an accessible entry point for investors worldwide. While this is certainly the case in both the NFT and art markets, one has the history, structure and legal governance to support one’s industry in the long run.
Both digital and physical art make effective alternative investments, especially considering the added accessibility that fractional investments provide. However, due to the volatility of the NFT market, art resonates as a more stable choice for those looking to enter the world of art.