Traditionally, stocks and mutual funds have been the primary financial products that retail investors put significant sums of money into. But as people increasingly look to diversify their portfolios with alternative asset classes, the art market has been attracting a great deal of attention among investors in recent years. Welcome in the world of alternative investing on art investment platforms.
Financial industry insiders have begun to refer to artwork – both physical and digital, in the form of NFTs – as an alternative asset class that’s likely to balloon in value, even as the development of disruptive technologies changes how buyers do business. Judging by recent reports, individuals who are dissatisfied with the current state of their portfolio may be more likely to look into artwork than money markets or exchange-traded funds.
Art investment platforms
One study found that all forms of art investment represent $60 billion worth of total transaction volume per year, with a healthy portion of this coming from smaller investors who pool their money with others.
Because they are often available in series of iterations, NFT-based digital art has emerged in recent years as a major draw for art investors with smaller budgets. NFT marketplaces like BakerySwap are clearly benefiting from this trend. Meanwhile, investment platforms like Masterworks have enabled everyday investors to purchase a small portion of a multimillion-dollar painting, which they can then profit from the sale of later on.
People who in the past might have only thought of buying shares of publicly traded stocks are quickly finding they can instead buy shares in something far more tangible.
The Attractiveness of Physical Financial Assets
Gold and silver have long attracted their fair share of admirers in the financial markets, largely because they could always be used as a medium of exchange, even during a period of extreme inflationary pressure. Paintings are like precious metals in this respect, because their resale prices are highly resilient to sudden changes in market dynamics.
While it’s possible that a piece of art could get destroyed or suddenly drop in value for whatever reason, it’s not going to vanish in the way that a startup company could theoretically go bankrupt as a result of bad decision-making.
According to data analyses published by Masterworks, pieces from well-known historical artists like Claude Monet and Pierre Soulages are likely to enjoy returns on investment approaching 10% if not more. Works from modern artists that have the benefit of media attention sometimes boast annualized net return rates of more than 25%. Few mainstream securities could ever put up these kinds of returns over a reasonable period of time, unless they were highly speculative.
Fractional art investment enables investors to buy shares in a painting in much the same way they would in a company. These shares entitle them to a portion of the proceeds once the painting goes up at auction. By increasing the numbers of shares one owns in a painting, it’s possible to earn more money during the sales phase.
Institutional investors like Bank of America and Goldman Sachs are also entering the market, which is driving up valuations to the point where some are using artwork as loan collateral.
Art Lending as an Investment Vehicle
Art lending organizations were financing around $20 billion in transactions as early as 2018, and they’re likely to continue to grow in size over the next several years. Many of these loan out money to growing businesses that invest it in more conventional types of assets. If the sentiment index of stocks continues to fall as it has been, then these lenders would still have physical collateral to fall back on.
While almost all forms of investment have at least some risk associated with them, leveraging collateral as part of the loan process does help to reduce the risk of growing a business. Representatives of larger institutions who offer virtual financial products can easily integrate artwork lending procedures into their current workflows.
Nevertheless, most of the attention seems to be on fractional art investing as a way for retail buyers to store money that wouldn’t otherwise be productive. Savings accounts and deposit certificates have performed somewhat sluggishly over the last decade. Some investors have even found that the paltry rates they receive are actually lower than the rate of inflation, which means their money could lose value even while it’s technically growing.
Fine art investors have, at times, enjoyed real gains of 7.5% or more on relatively small sums of money. Perhaps more importantly, they have the backing of a regulatory framework that makes their investments more stable than non-fungible tokens and other forms of art investment that rely on disruptive technologies to add value.
A great deal of controversy has arisen over the fact that the creators of a work can hold onto the intellectual property of it long after NFTs related to that work have been sold on the open market. As a result, even those who may have previously gravitated toward NFTs are now taking a closer look at new developments in the conventional fine art market.
Fine Art Markets Remain Relatively Stable
Conventional fine art markets have existed for several centuries, which means that an established legal framework is already in place to protect it. Since NFTs have only been around as long as the blockchain-based technological solutions they run on, these kinds of investment products remain somewhat unstable.
Major news stories, such as the release of NFT-related trading documents, could potentially make otherwise steady securities unnecessarily volatile. Private stockholders who can’t tolerate much risk would normally be reluctant to purchase shares of anything that fluctuates more than a few points each fiscal quarter.
A fractional art investment is functionally no different from a share of an ETF, even though it’s not the same from a regulatory standpoint. Most retail investors wouldn’t even have to sacrifice any portion of their existing portfolios just so they can add one of these new alternative assets to it. All it takes is the willingness to purchase a few shares in the latest evolution of a long-lived marketplace. That’s a small enough barrier to entry that even more buyers may soon climb on board.