Dr. Heidelinde GutowskiIn 2020, the art market slumped by 22 percent due to the pandemic. Global art market sales were $50.1 billion, around 32 billion euros. Online art sales, on the other hand, rose to a record high of $12.4 billion. They thus doubled compared to 2019, according to the Global Art Market Report 2021 by Art Basel and UBS. Art tokens, which are based on the blockchain, are also experiencing a surge.
Who are art tokens suitable for?
Artists or internet platforms in the United States, England and around the world sell art tokens to investors. The works can be traded and resold after purchase. Investors hope for a high return on their investment. If you too are thinking of buying art tokens, the following characteristics should apply to you:
- You are familiar with artists, artworks and their value.
- You are willing to bear the risk of this investment.
- You are comfortable with a multi-year investment horizon.
Worldwide providers of art tokens
There are now numerous platforms that offer art tokens. Before buying, it is worthwhile for investors to research carefully to keep the risk of counterfeiting or fraud low. Art providers use various elaborate procedures so that you can verify yourself as an artist or investor. When investing, make sure that operators perform ownership verification and value buyer protection.
Performance of tokenized art
The art market is considered stable in value and robust. The investment horizon can be described as long-term. Anyone investing in art tokens in England or America should plan on at least seven years. The risk of total loss is greatly minimized. Providers of tokenized art insure the artworks for at least their replacement value and keep them safe. The permanently high demand for artworks worldwide, the long-term investment horizon as well as the illiquidity of the art market have a positive effect on the performance. If a work of art is sold, you as the token holder benefit from the increase in value.
Annual value increase of more than 5%
The table shows how the token platform Finexity estimates the performance of three tokenized artworks. The financing phase of the paintings has ended.
Artist | Artwork | Investment period | Development* |
Keith Haring | Untitled (Free South Africa) | 10 years | 6,30% |
Christo | L’Arc de Triomphe, Wrapped | 8 years | 5,40% |
Heinz Mack | 12 hours | 8 years | 5,50% |
According to the table, the investment horizon is between eight and ten years, and the performance per year is over five percent. On this basis, the investment form can be described as thoroughly profitable. The total return of the art tokens is in the range of four to five percent. This is an alternative for investors, especially in times of negative interest rates for savings deposits in call money accounts.
Real return example Andy Warhol
We show the estimated return using the example of the artwork “Jack Nicklaus”, painted by the artist Andy Warhol (1977). The painting was tokenized in August 2021. The table shows the projected total return after deducting all incidental costs.
Selling price | Euro 125 805 |
Repayment of debenture capital | Euro 70 500 |
Repayment of equity investment Finexity AG | Euro 500 |
Equity share of proceeds from sale | Euro 386 |
Performance fee | Euro 10 884 |
Investor capital gain after 13 years (2034) | Euro 43 535 |
Projected payout | 161,75% |
Ø projected total return p.a. | 4,75% |
Value investment in NFT tokens
Tokenized works open up the art market to a wide audience. Art enthusiasts in American and English parts of the country are also targeted. In addition to lower prices, the advantage lies in the technology: each token is unique and directly linked to a work. It is secured by the blockchain and cannot be copied. In the case of NFT art, although anyone on the Internet can view the image, they can also download it. However, the buyer of a tokenized NFT image undoubtedly owns the original file. Investors purchase the art tokens in order to resell them at a profit after a certain period of time. Tokenization transforms digital works into originals. Owners can collect them, trade them and sell them for a profit.
Consumer advocate warns of risks
Legal, financial, and technological issues related to non-fungible tokens (NFTs) often remain unresolved in the arts and culture industry. The crypto market currently appears largely unregulated. Access to tokenized art is therefore fraught with various hurdles. “Both artists and collectors are still proving uncertain in their handling of tokens,” comments Eva Traupe, a lawyer at VerbraucherService Bayern im KDFB e.V. (VSB) in Regensburg. Forecasted returns are to be taken with caution under the magnifying glass. “Legally, we tend to advise caution when investing in new technologies such as the tokenization of artworks.”
Risks, in addition to returns, are also an issue with tokenized art. Expensively sold artworks can later turn out to be fakes.
Eva Traupe, a lawyer at VerbraucherService Bayern im KDFB e.V. (VSB) in Regensburg.
Losses when prices fall
Art tokens represent a new form of investment. Therefore, as with all novel investment opportunities, there is a certain amount of risk associated with investing in crypto art. If you want to invest in tokenized art, Traupe advises “to consider in advance whether you would do what you are doing in the analog world.”
Those who purchase art tokens hope that interest in trading them will continue. If prices fall, investors suffer losses. “Fraud is also definitely an issue with tokenized art. Expensively sold artworks can turn out to be fakes after the fact,” the expert warns. Tokens are also not safe from thieves, depending on their type and storage location. Before investing in art tokens, consumers should definitely check “whether the providers are really reputable.” To avoid falling into a trap, “take a close look at the websites, the expertise as well as the imprint.”
Inform yourself and assess the risks
Digital artwork can suffer quality degradation over time. Formats can become outdated, websites shut down, or passwords lost. In these cases, the artwork is no longer worth anything. “In any case, before investing in art tokens, also deal with the technology behind it. Only those who understand what they are investing in will be able to assess the associated risks,” says Traupe.
Art tokens: tips for investors
To ensure that you as an investor do not fall into a trap with art tokens, you should inform yourself well in advance. The following questions need to be answered:
- Is the platform offering the artworks reputable?
- Are there experts behind the selected works?
- Are the providers reachable, can you ask questions?
- Are the art tokens created and offered by authorized persons?
- Which works of the artist have been sold so far and for what price?
- Do I receive only the art tokens or also the linked digital work?
- Can I access the artwork permanently?
- Do I need specific usage rights?
FAQ – Frequently Asked Questions
As an investor in tokenized art, you should be familiar with the art market. At least some interest in learning about it is advisable. It helps if you know an artist and their works: The price can be better classified. The decision for or against an investment will be easier for you.
As an investor, you have to prepare for a multi-year investment with tokenized art. The investment horizon is between eight and ten years for most providers. The total return on art tokens is about four to five percent annually. The return is forecast, so it is only estimated by the provider. There is no certainty of a profit distribution.
As with all other investments, there are risks associated with tokenized art. However, in the case of art tokens, the risk of total loss is very low, as sellers always keep the works highly insured and professionally stored. If investors are not deterred by a long-term investment horizon, they can benefit from a good return.
A tokenized work of art is fragmented into many individual parts. For example, if you purchase ten percent of a work, you own that ten percent. The rest belongs to the other investors. If the work is sold at a later date for a profit, you receive the corresponding proportionate profit.
