Masterworks, NFTs and the growing allure of community-driven artwork investments

Masterworks, NFTs and the growing allure of community-driven artwork investments

Time Stamp: June 16, 2023 2:40 AM
Source Node: 2731115

The past few years have seen the world of art being taken by storm. White fine art sales have continued to be as strong as ever, two new types of investment platforms have shaken up the industry and spawned new discussions around the place of art as an alternative asset class. 

The Masterworks app, used to access an innovative factional blue-chip art platform, launched in 2017, and the company has since overseen the sale of 13 paintings. Then, world’s top-tier auction houses started selling NFT art in 2021

NFTs (Non-Fungible Tokens), a blockchain-enabled digital art technology, power a market that is today worth over $22 billion, with NFT sales seeing over $1.8 billion in transfers every single month. While this is an impressive market, this is only a small portion compared to the fine art industry’s $67.8 billion sales value each year. 

Although the fine art industry has a higher market cap and yearly sales volume, the NFT industry is one that’s evolving more quickly. In this article, we’ll dive into the case for fractionally investing in both of these mediums, exploring the particular benefits and disadvantages of each financial investment stream.

Why fractional investments work for art

The best investments in both fine art and the NFT industry have reached jaw-dropping sums. A singular 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, much of the world is shut off from million-dollar investments at any one time.

Instead, a new strategy for investing in high-ticket art items is continually becoming more popular: fractional investing. Fractional investing allows users to get involved in an asset that’s likely to go up in value while not having to put down millions of dollars at once. Fractional NFT trading platforms like Ommniverse, and services like Masterworks and Artory that allow for fractional investment in fine art, are rapidly becoming the best ways to diversify a portfolio into the world of art.

Fractional investing in the wider world of art has a number of benefits:

  • Diverse Investment: Diversifying an investment portfolio with different sectors offers increased strength against the market, security against industry lulls, and boosted returns despite market conditions.

  • Market-Proof Investing: When traditional sectors and markets go down, alternative investments like art remain strong. 

  • Flexibility: Fractional investment allows investors to put in absolutely any amount of money. This could be as low as $5 or as high as the investor wants, offering complete flexibility in their investments.

Given how well the art world has performed, maintaining an average of 7.5% per year despite market fluctuations, this is a wonderful industry to focus additional investments on. With the added flexibility of fractional investments in both NFTs and fine art, investors are able to precisely and meticulously build a corpus of alternative fractional investments.

Yet, for investors, which is the better decision: digital or physical art; NFTs or fine art? 

The case for fractional NFTs

Since the height of the NFT craze, the case has been strong for adopting fractional NFTs into an investor’s portfolio. Across 2020, NFTs were one of the strongest asset classes in the market, with trading in the NFT market spiking over 21,000%. People fractionally invested in this asset class were exposed to some of the best returns of that year.

When a company fractionalizes an NFT, they offer segments of it on separate ERC-20 tokens. By storing information about the owner on a smart contract, owners are validated as controlling their 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 at liberty.

Fractional NFTs come with a range of benefits, including increased liquidity within the market, accessible prices, and better incentives for curators. While the financial draw of the NFT market seems strong, they’re not nearly as established as the fine art market.

What’s more, basing the entire ownership principle on a smart contract seems effective until we look at the larger history of the NFT market. Smart contract errors have cost creators millions of dollars, with the novelty of this technology meaning that all of the potential vulnerabilities have not yet been ironed out.

Equally, global interest in NFTs and the fractional NFT market has fallen greatly over the past year. Trading volume is currently down 97%, demonstrating market instability. The lack of interest in the market combined with the potential tech and governance issues make this a difficult sell for most investors – despite the added flexibility that fractional NFTs bring. 

The case for fractional physical art

The world of fine art has been an established market for hundreds of years, with the secondary art market having traces all the way back to the 16th century. Although the market has been active, thriving, and stable for many years, the biggest barrier to adoption within fine art is its price. The investments with the highest rate of return come from established, legacy artists, with their artwork often sold for millions of dollars.

For most investors, the high price of fine art is a barrier that they simply cannot overcome. With this in mind, the case for fractional investment in fine art is much stronger than that of NFTs. If the major barrier to adoption is cost, fractional investment essentially remedies this market affliction, increasing accessibility.

Services like Masterworks, which offer fractional investment in some of the most renowned artists in history and their artwork, effectively change the dynamic of investment in the world of fine art. At present, Masterworks offers SEC-secured shares in 250 pieces of art from famous artists like Monet, Warhol, and Banksy. 

By increasing accessibility, investors are able to gain a share of highly-valued artwork that has historically demonstrated impressive returns. For example, Banksy’s artwork boasts a 32.0% annualized return. Purchasing shares in an asset like this allows investors to diversify their portfolios without needing to invest millions of dollars at once.

As we continue to experience market downturns, the ability to invest in fine art through Masterworks has become an extremely attractive opportunity.

The verdict

Fractional investment removes the financial barriers to investment, providing an accessible point of entry for investors around the globe. While this is certainly the case in both the NFT and fine art markets, one has the history, structure, and legal governance to support its industry in the long run.

Both digital and physical art make impactful alternative investments, especially considering the added accessibility that fractional investment provides. However, due to the instability in the NFT market, fine art resounds as a more stable choice for those looking to enter the world of art.

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