The digital art trade is not yet a mass market. But innovative artists and young buyers from Asia have at least sparked a small boom. But investors need a clear strategy, says Ruth Polleit Riechert, author of Springer, in an interview.
Springer Professional The art market is opening up to a wider audience thanks to the pandemic and digitization. What are the exact mechanisms behind this evolution?
Ruth Polleit Riechert: As the galleries had to close, they were forced to publish what they had to offer online. Access to the art market is now becoming easier for everyone, and young people in particular are already benefiting from it. Since it has been shown that works of art sell better when prices are displayed online, more and more prices are published – which was unthinkable before. Click & buy, which has long been customary in other sectors, is finally possible.
Moreover, the street art artist Banksy appeals to a wide and young audience with his actions. He pursues what Keith Haring wanted in the 1980s: art is for everyone. art for all. Another aspect is the technical innovation with the NFT (Non-Fungible Token), which makes digital art tamper-proof and negotiable. This attracted particularly interested young Asian art buyers.
Until now, art as an investment has tended to be exotic, which particularly appealed to wealthy collectors. The media are increasingly reporting on auctions in which digitized art objects are exchanged for NFTs for huge sums. Is art thus becoming a digital asset that will be used tomorrow for speculation and the diversification of wealth?
Auction records, whether for analog or digital art, are of course great news for the press and great marketing for sellers, buyers, artists and auction houses. However, they only represent a very small part of what is happening on the art market. Interested parties should not be impressed by this. Art as an investment is becoming attractive again due to rising inflation and low interest rates as people look for alternative investments in real assets. However, very few works of art are suitable as an investment. To find them, it is important to be well informed or to call on experts. In my book, I present seven rules inspired by Warren Buffett that make sense when investing in art.
What is really important here?
It is important to distinguish between speculation and investment. A wise investment requires clear analyzes and strategies. In principle, only high-priced one-off pieces of the classics come into question on the art market, in some cases edition works by well-known artists. Everything else, like buying works by lesser-known artists who don’t yet have a market, is mostly speculative. Ultimately, value is in the eye of the beholder. And so the most important thing is to only buy something you like.
Digitalization offers many new and different opportunities for investors. What does this mean concretely for digital art and its analogue counterpart?
Digital art becomes tamper-proof thanks to NFT certification on the blockchain. Until now, it could easily be copied and was therefore of no interest for trade and as an investment. Artists can also issue an NFT as a representation of a physical work. Museums have also used this technique and issued NFTs of masterpieces, the sale of which has generated new revenue. Artists can also develop pure NFTs. NFTs are therefore a new tool for exhibiting and selling art – similar to the invention of the printing press by Gutenberg in the Renaissance. However, the value of NFTs is difficult to predict. Rules similar to those of the classic art market apply: the more recognized the artist and the rarer the work of art, the more expensive the NFT. This will likely make analog art even more expensive.
In the end, it’s always the return that counts when it comes to investing. For which target groups are these investments currently worthwhile?
Thanks to new technologies, the art market 2.0 can effectively become part of the financial market. Because recently it has been possible to symbolize classic masterpieces and offer market share of them. Therefore, even small investors can become shareholders of masterpieces. Here, however, it is important to be able to estimate the purchase price of the work. Because like everywhere else: the return lies in the purchase.
It will not always be easy to correctly assess the quality and price of art under the guise of crypto. What should investors know about the art market and its digital characteristics, and where are the greatest dangers?
As with analog art, similar rules apply: only a few works of art are suitable as an investment. As the market is still very young, most pure NFT artists still have little history. It is important to find out as much as possible and get to know the artist. It is also important to consider not only certain quality criteria, but also the marketing aspects, which are even more important with NFTs. Being able to distinguish short-term trends from long-term values is just as important here as it is in the classical art market.
Could a mass phenomenon also develop from this – similar to the T-Share in the 1990s?
It has already become a phenomenon in the community, especially among young people and people from Asia. But there have always been break-ins. This is why most people are cautious. Warren Buffett says: Only invest in something you know!
Whether a classic oil painting is digitized as an NFT or the art itself is on the blockchain, i.e. the artwork is not physically available , does it make a fundamental difference when you invest money?
It depends on the individual case. I can’t say that in general. NFTs from the “CryptoPunks” and “Bored Ape Yacht Club” collections do not exist as analog works; however, some are traded at high prices. However, there was no long-lasting performance here, as is the case with the work of Picasso, for example. In this regard, an investment in NFTs is associated with a much greater risk than with a well-known oil painting.
Have any particular investment strategies already been implemented in the digital art market – for example by banks or large investors – on which you can report?
No, I don’t know of any. There is usually hardly any strategy in the art market – amazing or scary. As one of my first stops in the art market was Christie’s auction house and I saw many disappointed faces there who expected much more from the sale of a work of art or from their parents’ collection, my advice and work, also at McKinsey & Company, was and is characterized by always thinking of a strategy, not a hodgepodge, but building a collection with a theme.
When it comes to art as an investment, you must first do an analysis, formulate the goal, and then develop a strategy. In fact, some applications, like applying Warren Buffett’s principles of financial markets to the art market, are something completely new that I’ve never seen before.