There are more than 47 thousand art dealers and galleries in the US. Over the last century, fine art investments have proven to be a recession-proof investment vehicle.
Are you reading wealth management blogs about NFT art, wondering whether or not they’d be a good investment?
Whether you’re an investment bank or an art collector, NFT art financing has many benefits for everyone involved. Here is more information on NFT art and how it may build wealth.
What Is NFT Art?
NFTs are tokens with an ID that proves ownership of an actual or digital item. Non-fungible means these assets are unique, and although you can sell or exchange them, they don’t have the same value. Fungible assets such as a bitcoin token can be swapped one for one with no change in value for either party.
NFT art can be a GIF, an image, or an audio clip. If you create 1000 copies of the image, each has a unique ID. When buying NFT art, you may receive certain perks or rights with the token.
How Is Traditional Art Valued?
Traditional markets for artists have changed over the years with online marketing. In the past, they sold art in local galleries or at summer markets. Artists can now showcase their creations and sell them using Etsy or one of the many platforms available.
The value of an artist’s work depends on their market presence in traditional galleries. The work of famous artists was in high demand, which increased their value. That made their art more liquid, which drove the prices higher.
How Is NFT Art Valued?
Demand and liquidity play a big role in the valuation of any asset. In the NFT space, niche art can gain popularity if the artist is famous, the appearance of the art, and the influence of certain traders. The art can benefit from its sales history in the online marketplace and any pop culture or gaming references.
Scarcity and uniqueness are two factors. Copy #1 of an NFT may be worth more than the other copies. Creators add different traits such as colors or patterned backgrounds to increase scarcity, which affects the value of the NFT art.
Traditional Art Financing
Investing in art is a proven method of building wealth over the long term. Art represents a $1.7 trillion asset class that very wealthy investors could access. They have often used art as a way to diversify their investments.
Securitization of Traditional Art
Smaller investors are looking for alternative ways to invest. Traditional art, such as a painting, can now be securitized in the same way as real estate or other tangible assets.
Securitization occurs when shares are issued for the underwritten value of the painting. Individual investors purchase the shares as an investment in art.
Traditional Art as Collateral
You can use art as collateral for a loan from specific lenders. It’s a tangible asset and a non-fungible asset, similar to NFTs, because each piece of artwork is unique.
During times of risk and uncertainty, art is subject to fluctuation. But the swings are different than the stock market changes so the lender takes on a different level of risk.
The Economic Impact on Artists
NFTs will change our past perceptions of the concepts of art ownership and digital copyright. NFTs enable artists to sell their digital art to anyone in the world. Before NFTs, our digital world allowed people to screenshot and download any artwork or images, and it was impossible to authenticate ownership.
With NFTs, the artist can program royalty payments. That gives them a small amount every time the NFT art changes hands. The transaction data exists in a distributed ledger, so every sale of an art NFT is traceable.
NFT Art Finance Opportunities
Developers are creating the infrastructure to open up NFT art financing opportunities in a similar way to traditional art financing. This includes creating unique financial products and markets for them. These products will improve the liquidity and financing of NFT art.
Here are some examples of products that could exist in the NFT space.
Debt-Like Products
An investor could use their NFT art as collateral for a loan. The loan could be for fungible tokens such as bitcoin. That results in a fixed income instrument for the lender, generating a cash flow.
Equity-Like Products
NFT art could be securitized in the same way as traditional art. Shares of a valuable piece of NFT artwork would represent part ownership of the asset. Investors would trade these shares for fungible tokens.
Aggregation-Like Products
You could create a fund similar to an indexed fund. Instead of tracking a market index, it could track an NFT art marketplace. The fund would hold art collections from different artists, and investors could purchase fractional ownerships.
Managers could track artist portfolios and manage them on behalf of a group of investors. They would sell shares in these aggregate products for fungible assets.
Wealth Management Blogs and NFTs
When you take the time to research the NFT sector, you will discover that all three of these financial products are emerging in different ways. Centralized and decentralized, peer-to-contract, and peer-to-peer lending are four examples.
Wealth management news reports indicate that several fund structures are being offered to crypto investors by project teams. It’s best to contact your wealth management consultants before you invest in these new products.
Creditworthiness of Borrowers
One factor to resolve is how to determine if the borrower in the crypto space is credit-worthy. There’s a small group of well-established collectors in the traditional art world, and their creditworthiness can be easily established through a wealth management firm.
In the NFT space, the risk is much higher. A transparent process to establish a credit rating is being figured out. Right now, lenders use different protocols to piece together the reliability of a user from multiple perspectives.
There May Be Potential in NFT Art Financing
The potential economic impact of NFT art financing products is likely to develop over the next few years. Our wealth management blogs are a great resource.
For more information on NFTs and other investments, contact Bogart Wealth today to discuss your wealth management needs. Our financial planners will help you weigh the pros and cons of every investment you make.
